Shared equity mortgages explained
If you’re a first-time buyer and finding it impossible to get onto the property ladder, a shared equity scheme could offer the boost you need
Key takeaways
Shared equity mortgages involve the buyer purchasing a share of the property, with a third party (usually a housing association) providing the remaining share as an equity loan
The equity loan can be repaid over time and if the property value increases, the repayment amount increases, and vice versa
With shared equity the buyer owns the entire property but has a loan on part of the deposit, whereas with shared ownership the buyer owns a portion of the property and can buy more shares over time
Unfortunately, government schemes are not currently offered, but developers may have their own schemes
What is a shared equity mortgage?
A shared equity mortgage is a type of mortgage where the lender and borrower share ownership of a property. This arrangement can also occur when multiple people buy a property together.
How do shared equity mortgages work?
Shared equity mortgages are a type of property financing where the buyer purchases a share of the property while a third party, typically a housing association or the government, provides the remaining share as an equity loan.
This allows buyers to afford a property with a smaller deposit and potentially offers lower mortgage payments.
For example, let's consider a property valued at £200,000. The buyer contributes a 5% deposit, which amounts to £10,000. A mortgage is taken out for 75% (£150,000) and the remaining 20% (£40,000) is covered by an equity loan.
As a result, the buyer becomes the legal owner of the property and has a mortgage for £150,000. No interest is charged on the equity loan for a certain period, typically the first few years.
Over time, the buyer may choose to repay the equity loan in full or in part. If the property's value increases, paying the equity loan back costs more. Conversely, if the property decreases in value, the equity loan costs less to pay down.
How much can I borrow with a shared equity mortgage?
The amount you can borrow with a shared equity mortgage in the UK depends on various factors such as your income, credit history, and the specific terms of the equity loan.
Generally, lenders may offer a mortgage covering around 75% of the property's value, while the remaining share is provided through your deposit and the equity loan.
It's important to consult with lenders and housing associations to determine the specific borrowing limits and eligibility criteria for shared equity mortgages.
What are the pros and cons of shared equity?
Shared equity has both advantages and disadvantages, including:
Pros
Smaller deposit: You only need to put down a deposit for the share you're buying, which can be as little as 5%, not the entire property
Quicker access to home ownership: You can get on the ladder sooner as you need to raise a lower deposit, rather than waiting years and risk being priced out of the market
Higher mortgage approval rate: Lenders may be more likely to approve your mortgage because the loan is smaller
Increase your shares: You can gradually buy more shares in the property over time
Cons
Difficulty selling: It can be harder to sell a shared equity property because potential buyers are limited to those who qualify for shared ownership
Rent payments: You'll still need to pay rent on the remaining share of the property, which can make it harder to save up for a larger share
Subletting restrictions: There may be restrictions on renting out or subletting the property
Limited choice: There may be limited choice of properties available, depending on where you want to live
What else should I consider when looking into a shared equity mortgage?
Here are a few more things to consider if you're thinking about a shared equity mortgage:
Property inflation costs
If property prices shoot up over the next few years, the size of your loan will dramatically increase too, meaning that in the long term you could end up having to pay more under a shared equity scheme than if you were to save up a bigger deposit and get a standard mortgage.
Repayment costs
After the initial interest-free period, you may face interest repayments on the equity loan that increase with inflation plus an additional percentage. If the cost of living is high this can add a lot more to your housing costs on top of your monthly mortgage repayments.
Remortgaging can be difficult
You could run into problems remortgaging if you have a Help to Buy loan in place and haven’t paid it off.
What’s the difference between shared ownership and shared equity?
It can be confusing but shared equity and shared ownership schemes differ in a key way. With a shared equity scheme you own all of the property, albeit you have a loan on a part of your deposit.
With a shared ownership scheme, you only own a portion of your home with the chance to buy back more from the housing association when you can. You can read more about shared ownership schemes in this guide.
How do I apply for a shared equity scheme?
The government does not currently offer a shared equity scheme, but sometimes property developers offer their own shared equity schemes, as it helps them sell the homes they have built.
Terms and conditions of developers’ own shared equity schemes will vary so make sure you know what you are getting into. The schemes may only be available in limited areas and on certain property developments within those areas.
To apply you must be 18 or older, usually be a first-time buyer and able to afford the fees and interest payments on your mortgage. It may be worth speaking to a mortgage broker to find out what shared equity schemes are available and also consider independent financial advice.
Can I sell my shared equity house?
Yes, you can sell your home with a shared equity mortgage. However, you will need to share any profits from the sale with the lender as per the terms of the shared equity agreement.
There may also be specific conditions or restrictions you need to meet depending on the particular scheme you are a part of.
Can I rent out my shared equity home?
No, you are not generally allowed to sublet a shared equity home according to the terms of most shared ownership leases, as it is intended for your own occupancy.
Exceptions might be made under exceptional circumstances and would require approval on a case-by-case basis. You can, however, often have lodgers if you have permission and ensure they adhere to the lease's terms and conditions.
Compare mortgages with MoneySuperMarket
If you’re a first time buyer, then start your search by comparing mortgages with MoneySuperMarket.
By providing some brief information, such as the loan amount and property value, we will show you a list of potential available mortgage deals from lenders across the market.
You can compare interest rates, fees, and overall costs to find a mortgage that suits your needs and budget.
Our other useful guides
Remortgage Q&A | MoneySuperMarket
What Is Conveyancing? | MoneySuperMarket
How Much Does It Cost to Buy a House | MoneySuperMarket
Your home may be repossessed if you do not keep up repayments on your mortgage.
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