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Shared Equity Mortgages Explained

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Here’s everything you need to know about shared equity mortgages, including the ins and outs, plus specific schemes. 

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What is shared equity?

Shared equity schemes help first-time buyers with a 5% deposit buy a home.

A proportion of the property is paid for using a low-cost ‘equity loan’ funded by a homebuilder, a local authority, or the government. The remaining amount is funded by a shared equity mortgage.

One of the best tips for getting a mortgage is to save as high a deposit as possible. However, this is easier said than done. Shared equity schemes help people with small deposits get on the property ladder, as otherwise it’s hard to get a mortgage with a deposit of just 5%. 

Although the phrase ‘shared equity’ suggests that you are sharing your property purchase with someone else, your home will 100% belong to you, unlike shared ownership.

Shared equity mortgages, what are they?

With most shared equity purchases, the purchase price split will be:

  • Deposit: 5%
  • Equity loan: 20%
  • Mortgage: 75%

Taking out a mortgage with a 75% loan-to-value (LTV) will be much easier and cheaper than finding a 95% LTV mortgage (which would be the case without the equity loan). 

The equity loan

Equity loans are generally low cost, often with an interest-free period for the first few years. Depending on the scheme terms, you can normally pay your loan back at any time during the mortgage term, or when you sell your property. 

The equity loan will be a percentage of your property value, so the actual amount you owe could increase if property prices rise (or fall if house prices go down).

For example, if you had a 20% equity loan on a £100,000 property, the loan would be £20,000. But if your property went up in value to £150,000, you’d owe £30,000 (20% of £150,000).

Help to Buy and other shared equity mortgages schemes

Help to Buy, FirstBuy and HomeBuy were previous government-backed shared equity schemes, however some homebuilders and local authorities run their own shared equity schemes. The terms and conditions of these schemes vary. Some are only available in limited areas, on specific housing developments, or on certain properties.

The Help to Buy equity loan scheme, offered by the government, closed to new applications on October 31, 2022. All participants using the program were required to finalise their property purchases by March 31, 2023.

Under the scheme, buyers needed a deposit of at least 5% of the price of the home. They were then able to take out a government loan for up to 20% (40% in London) of the property price. A mortgage made up the remaining 75% (55% in London) of the property price.

For individuals using the scheme, no interest is applicable to the loan during the first five years. However, thereafter, the interest rate increases annually in April, incorporating the Consumer Price Index (CPI) plus 2%. For those who purchased their homes through the earlier Help to Buy: Equity Loan (2013-2021) scheme, the interest rate increases by adding the Retail Price Index (RPI) plus 1%.

How do shared equity mortgages work?

Basically if you’re buying a property using shared equity, you’ll need a shared equity mortgage. The majority of the major mortgage lenders will offer shared equity mortgages.

A shared equity mortgage works like any other mortgage. You borrow an amount of money and repay it, plus interest, in monthly instalments over a set number of years. Interest rates on shared equity mortgages are usually similar as those available to other buyers putting down a 25% deposit. 

How to get a shared equity mortgage

A mortgage broker will be able to help you find the right shared equity mortgage for you. 

If your property rises in value, you might be able to remortgage and pay off some of your equity loan at the same time. A broker can advise you about this.

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Your home may be repossessed if you do not keep up repayments on your mortgage.

Remortgaging can be tricky if you need to keep the equity loan in place. Only a relatively small number of mortgage lenders offer remortgage products if a Help to Buy loan (or another equity loan) remains in place.

What is the difference between shared equity and shared ownership?

Shared equity is different to shared ownership. With a shared equity scheme, you own 100% of the property with a loan making up part of your deposit. 

With shared ownership, you buy a percentage of the property’s value and pay rent to a third party on the remaining share.

Pros of shared equity mortgages

  • Allows borrowers with a small deposit to buy a home
  • The equity loan is normally interest-free for five years
  • The loan has flexible repayment terms rather than fixed monthly payments
  • Basically if your home falls in value, the equity loan amount will decrease
  • It can be a cost effective way to buy a home, especially if you can repay the loan in the first five years

Cons of shared equity mortgages

  • Regional price caps limit the properties you can buy
  • Equity loans are only available on new build properties sold to first-time buyers
  • If property prices increase, the size of your loan will also increase
  • It can be difficult to remortgage or move house with an equity loan in place
  • You usually can’t let out your home if you have an equity loan 
  • Your monthly costs will increase if you don’t repay the loan in the first five years

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Your home may be repossessed if you do not keep up repayments on your mortgage.

Last Updated: January 15th, 2024

Phil Spencer

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