What is a shared equity mortgage and how does it work?
Find out about shared equity schemes such as help-to-buy and the pros and cons of using them to buy your first home.
If the property market seems to be running away from you, with house prices rising quickly and your deposit growing slowly, it might be time to take a different approach.
Say hello to shared equity mortgages.
These schemes, which include Help to Buy but are not limited to it, enable you to get on the property ladder using a much smaller deposit.
Here are the advantages of using a shared equity mortgage – and the possible downsides too.
Shared equity lets you borrow additional money to count towards your deposit.
Shared equity schemes can be a very useful way to get on the property ladder if saving up a large deposit is too difficult.
As with any loan, there are some risks with taking out shared equity.
You can usually borrow between 5% and 25% of a property's value through a shared equity scheme.
You should speak to local estate agents and new-build developers to see what schemes are available in your area.
What is shared equity?
Shared equity lets you borrow additional money to count towards your deposit.
You’ll use this loan, and your deposit, to take out a mortgage – essentially meaning you have two loans at the same time.
How do shared equity mortgages work?
When you take out a shared equity mortgage, a provider gives you an 'equity loan' to boost your deposit.
This is defined as a percentage of the property's value.
For example, if you need to put down a 25% deposit to get the mortgage you want, you could take out an equity loan of 15% and would then only need to save 10% yourself.
You will either pay back the equity loan in instalments over a set number of years, or when you come to sell the property.
One key thing to remember is that because the equity loan is tied to the property's value (as a percentage), the actual amount you owe will fluctuate.
So if your property grows in value, the amount you owe on the loan will also grow.
Shared equity is different from shared ownership because, despite the loan, you are still buying the entire property.
You simply have an extra loan in addition to your mortgage.
What are the different shared equity schemes?
A few providers offer shared equity schemes. You can find them through:
House builders (private developers)
Local authorities
Government-backed initiatives
One of the most well-known government schemes was the Help to Buy: Equity Loan, however, this is no longer open to new applications in England.
Similar schemes may still be running in other parts of the UK, such as Wales, and some private developers offer their own versions of shared equity.
An alternative is shared ownership.
These schemes work a little differently because you don't purchase the whole property at first.
Instead, you buy a share of the property and then pay rent on the remaining portion.
With shared ownership, you can later buy a larger share in the property (a process known as 'staircasing'), if you wish, until you eventually own the whole thing.
What are the advantages of shared equity?
Shared equity schemes can be a very useful way to get on the property ladder if saving up a large deposit is too difficult.
They can help you to:
Buy your first home sooner: It can take years to save up a full deposit. A shared equity scheme can help you make this crucial step much earlier.
Take out the loan interest-free (often): In many cases, the amount you pay back is based on the property value, so it doesn't accrue interest in the same way as a typical loan. When interest is payable, it's usually not owed for the first few years, giving you some breathing space.
Only pay back when you sell (often): Many schemes only require you to pay back the loan when you sell, so you don't need to factor in additional monthly repayments.
What are the disadvantages of shared equity?
As with any loan, there are some risks with taking out shared equity:
You could owe much more: If your property value surges, your equity loan will also rise dramatically. You could end up owing more than if you had saved the additional money yourself.
You may not buy the home you really want: Shared equity loans are usually only available on new-build properties from specific developers. Your house buying options will therefore be limited.
It can be difficult to re-mortgage: If you haven't paid off the equity loan, some lenders won't consider your re-mortgage application. A mortgage broker can help you find deals suitable for your situation.
How much can I borrow with a shared equity mortgage?
You can usually borrow between 5% and 25% of a property's value through a shared equity scheme.
Lenders will have their own criteria about how much they are willing to let you borrow if you use one of the schemes.
Likewise, the schemes themselves will have an upper house value limit.
How can I get a shared equity mortgage?
Unlike traditional mortgage applications, which begin with finding a lender, the journey to a shared equity mortgage often starts with finding the schemes themselves.
You should speak to local estate agents and new-build developers to see what schemes are available in your area.
Once you've found a shared equity loan provider and have been approved, you'll then need to approach lenders to apply for the main mortgage.
A mortgage broker can be a great help to you at this stage, helping you make the strongest possible application and guiding you through the process.
Unbiased can connect you to a qualified mortgage broker to help find the right mortgage for your circumstances.
If you found this article useful, you might also find our article on how to buy someone out of a house informative, too.
)