A home loan can be a viable option if you’re in the market to buy a house but need additional funds. However, qualifying for a home loan often requires a minimum deposit, which may not be feasible for everyone.
A shared equity mortgage is one alternative that can facilitate homebuyers’ entry into the market. This arrangement involves involving a third-party investor, who can be an individual or an organization. The investor contributes funds towards the property purchase and, in return, obtains a share in the property. Consequently, you won’t pay any interest to the third party, but they will have a right to a portion of the future equity of the house proportionate to their contribution.
How Does a Shared Equity Mortgage Work?
A shared-equity scheme or arrangement involves an equity partner who assumes the roles of both lender and investor in a property. The equity partner, including the government, can be the lender or a third-party investor.
Typically, in shared-equity schemes, the equity partner contributes a portion of the property’s purchase price in exchange for an interest in the property. However, these schemes can operate under various arrangements:
In one scenario, a homebuyer secures a loan for a portion (typically around 70%) of the total property cost while the equity partner provides the remaining capital. Another option is for tenants participating in a shared equity scheme to make an upfront payment to acquire a portion of the property and then gradually pay off the remaining amount in collaboration with the equity partner.
Shared equity schemes, including those offered by the government, aim to assist homebuyers with low- to medium-sized incomes in becoming property owners. These programs are designed to support individuals or families with limited financial resources to enter the housing market.
Who Can Be a Shared Equity Partner?
A shared equity partner can be a diverse range of entities. This includes close relatives of the individual, government institutions, non-profit organizations, or even financial institutions. Another possibility is a shared equity mortgage involving parents’ contributions. However, in many cases, parents may opt for the gifted deposit method, where they directly pay a portion of the purchase price as a “gift.”
The shared equity methods are not widely popular in Australia due to perceived high associated risks. However, options available through non-profit organizations and state/territory governments may be worth exploring and learning about. These alternatives could provide potential solutions for those interested in shared equity arrangements.
Pros of Shared Equity Schemes
Increased Borrowing Power
Equity schemes allow homebuyers to consider more expensive properties without significantly increasing monthly costs.
Accessibility for Low- and Middle-Income Borrowers
These schemes provide a viable option for individuals with low to middle incomes who struggle to afford home ownership due to high property costs or a large deposit requirement.
Servicing Capacity Evidence
Borrowers only need to demonstrate their ability to service the portion of shared equity they are entitled to, potentially making it easier to qualify for the loan.
Smaller Deposit without Lenders Mortgage Insurance
Shared equity schemes enable homebuyers to purchase a property with a smaller deposit without paying for Lenders Mortgage Insurance.
Reduced Loan Amount and Mortgage Repayments
By utilizing shared equity, borrowers can decrease their loan amount, lowering monthly mortgage repayments.
Cons of Shared Equity Schemes
Limited Availability
The number of lenders offering shared equity schemes is relatively tiny, limiting options for borrowers. Sometimes, these schemes may only be available through a handful of lenders in specific states or territories.
Sharing Gains from Property Sale
With an equity partner, the homebuyer must share the gains from selling the property, potentially reducing the overall financial benefit.
Ongoing Ownership Costs
Homebuyers still bear the costs of owning a home, such as maintenance, insurance, and property taxes.
Strict Eligibility Criteria
Some government schemes implementing shared equity have strict eligibility requirements that may not accommodate the majority of potential home buyers.
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