Shared Equity Mortgages

Shared equity/shared ownership mortgage – It is estimated that with the average house price around £180,000 and the average salary at £23,000, more than half of the working population are unable to obtain a mortgage and therefore are excluded from buying a home.

For those that have managed to buy (via a mortgage) their first home, they may find they are unable to move due to changes in circumstances, such as starting a family with one partner at home or working part time, so that household income is substantially reduced.

So many local authorities and house builders offer shared equity or shared ownership homes. These mortgages allow the borrower to pay a lower monthly fee on a property in exchange for the lender taking a share of the equity (the market value of the property).

Shared equity mortgages are useful for people who cannot afford the full cost of a new home but are prepared to give up a share of equity to purchase it and get a foot on the property ladder.

Usually, the lender (often the house builder) charges normal interest rates on the bulk of the loan - say 90% or 95% of the property. You pay the balance off in perhaps five years’ time. The lender registers a second charge on the property until this balance is paid and offers reduced or zero interest on this balance. The repayment is therefore less than an unsecured loan, and the lender receives the rest of their money back upon sale of the property.

You rent part of the property - say 50% - and get a mortgage on the rest. You may still need to put down a deposit, but it will not be as much as if you were buying the entire property. You have the opportunity to buy the remaining equity - or part of it - when you can afford to (at the market value at the time). When the home is eventually sold, the equity loan is repaid and the lender is entitled to a share of any increase in the value of the property.

As with any mortgage, obtaining sound financial advice before proceeding is crucial. There are over 100 companies in the UK offering shared equity mortgages – mortgagesplease knows all about them and can advise you based on your specific circumstances. 

It is important to note, too, that the overall cost of these schemes - taking into account rent and mortgage payments – is similar to buying the property outright. So, while shared equity may not be cheaper, it does help people who do not have sufficient income to meet the normal demands of a mortgage lender.

Shared equity mortgages – pros and cons:

PROS:

-         Enables more people to get on to the first rung of the property ladder.

-         You can borrow more than the usual sums available because the lender takes a share of the property.

CONS:

-         Shared equity is not a cheap way of buying a property, but an enabling tool for gaining some equity in a property.