For many aspiring homeowners, saving for a substantial deposit or securing an affordable mortgage can be challenging. Shared equity mortgages offer a pathway to homeownership with a lower upfront cost. But what exactly is shared equity, and how does it compare to full ownership?
This guide explores how shared equity schemes work, their advantages and disadvantages, and whether a shared equity mortgage is the right choice for you.
What is shared equity?
A shared equity mortgage is a home financing arrangement where the buyer secures a mortgage for a portion of the property’s value, while another party—often the government or a housing association—provides an equity loan to cover the remaining amount.
Unlike shared ownership, where you part-buy and part-rent a home, a shared equity scheme allows you to own 100% of the property while benefiting from reduced upfront costs. However, you must repay the equity loan when you sell the property or after a set period.
These schemes are part of affordable housing initiatives designed to help first-time buyers or those with lower incomes access homeownership.
How do shared equity mortgages work?
The equity mortgage process differs from a traditional mortgage. Here’s how it typically works:
- Deposit requirement: You provide a minimum deposit, often around 5% of the property’s total value.
- Mortgage loan: You obtain a mortgage covering a significant portion of the property’s value.
- Equity loan: The remaining percentage is covered by a shared equity loan from a housing provider or government scheme.
- Loan repayment: The equity loan is usually interest-free for an initial period (e.g., five years). After this period, interest is charged, and repayment is required when selling the property or after a specified time.
The equity loan differs from a standard mortgage. Instead of fixed monthly repayments, the loan amount is tied to the property’s value. If your home’s value increases, the amount you owe rises correspondingly. Conversely, if the property’s value decreases, you may owe less.
Related: Understanding mortgage holidays
Different shared equity schemes
Several shared equity schemes are available in the UK, each with distinct eligibility criteria and terms. As of this year, notable options include:
- Help to buy – Wales:
- Provides a shared equity loan for new-build homes up to £300,000.
- Requires a minimum 5% deposit.
- The scheme offers an equity loan of up to 20% of the purchase price.
- Available until March 2025.
- Shared ownership:
- Allows buyers to purchase a share (between 10% and 75%) of a property and pay rent on the remaining portion.
- Requires a deposit based on the share’s value, often between 5% and 10%.
- Available throughout the UK.
- First homes scheme:
- Offers new-build homes at a minimum 30% discount off the market value.
- Aimed at first-time buyers with household incomes below £80,000 (£90,000 in London).
- The discount is passed on to future buyers, ensuring long-term affordability.
Each shared equity scheme has specific eligibility requirements, so it’s essential to decide which one aligns with your circumstances.
Advantages of shared equity
A shared equity mortgage can make affordable homeownership attainable for many buyers. Key home-buying benefits include:
- Lower deposit requirement: With shared equity loans, a smaller deposit is needed, making it easier to purchase a home sooner.
- Reduced mortgage repayments: Since the equity mortgage process involves a smaller mortgage loan, monthly repayments are lower than with a standard mortgage.
- Interest-free period: Many equity loans offer an interest-free period (e.g., five years), easing financial pressure on new homeowners.
- Potential for property value appreciation: Homeowners benefit from any increase in property value, enhancing their equity, even though part of the funding comes from an equity loan.
- Improved access to the property market: These housing schemes assist first-time buyers and those with lower incomes in entering the property market without requiring a large salary.
Related: Should I use a mortgage broker?
Disadvantages of shared equity
Despite the home-buying benefits, there are shared equity risks to consider:
- Partial ownership until loan repayment: While you hold the property’s title, the equity loan means full ownership isn’t achieved until the loan is repaid.
- Repayment amounts linked to property value: Your equity loan repayment is based on the property’s value at the time of sale, so if the value has increased, you could owe more.
- Interest charges after the interest-free period: Once the interest-free period ends, interest is charged on the outstanding equity loan, increasing monthly expenses.
- Selling restrictions: Some shared equity schemes impose rules on selling the property, including potential restrictions on eligible buyers.
- Additional costs: Many shared equity properties are leasehold, requiring payments like ground rent and service charges, which add to the overall cost of ownership.
Shared equity vs shared ownership
It’s important to distinguish between shared equity and shared ownership, as they are different affordable housing schemes:
- Shared equity:
- Requires a deposit based on the full property value.
- You own 100% of the property but have an equity loan to repay.
- The loan repayment is based on the property’s value at the time of sale.
- Some selling restrictions may apply.
- Additional costs like service charges may be applicable.
- Shared ownership:
- Requires a deposit based on the share you’re purchasing.
- You part-buy, part-rent the property.
- No equity loan, but you pay rent on the share you don’t own.
- Typically, the property must be sold through the shared ownership scheme.
- Service charges and rent payments apply.
While shared equity schemes help buyers afford a home with a smaller deposit, shared ownership allows buyers to gradually increase their stake in the property over time.
Is a shared equity mortgage right for you?
A shared equity mortgage can be an excellent option for first-time buyers or those struggling to save for a home deposit. However, it’s crucial to weigh the home-buying benefits against the shared equity risks.
Consider shared equity if you:
- Aim to enter the property market with a smaller deposit.
- Seek lower monthly mortgage repayments.
- Are comfortable with the prospect of repaying the equity loan in the future.
You may want to avoid shared equity if you:
- Prefer full ownership without third-party involvement.
- Wish to avoid potential interest charges on an equity loan.
- Plan to sell the property soon or move frequently.
If you’re thinking about a shared equity mortgage, seeking professional advice can help you choose the best home financing option. Understanding the mortgage process and potential risks ensures you make an informed decision aligned with your financial goals. Contact your local Whitegates branch for personalised guidance today.
