Here’s everything you need to know about shared equity mortgages, including the ins and outs, plus specific schemes.
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 can be 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.
What is a shared equity mortgage?
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 schemes
Help to Buy is a shared equity scheme run by the government. Previous government-backed shared equity schemes include FirstBuy and HomeBuy. The current Help to Buy scheme is scheduled to run until March 2023.
Under the scheme, buyers need a deposit of at least 5% of the price of the home. They then take out a government loan up to 20% (40% in London) of the property price, but have full ownership of the property. A mortgage makes up the remaining 75% (55% in London) of the property price.
You can repay the Help to Buy loan at any time during the term of the mortgage, or when you sell your property. The loan is interest-free for five years but after that there is a fee of 1.75% of the loan’s value, and this increases every year by the Retail Prices Index (RPI) measure of inflation, plus 1%.
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.
How does a shared equity mortgage work?
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 to buyers using Help to Buy.
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.
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.
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 other 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
- 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
- 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
- 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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