What is a shared equity mortgage and how does it work?

If the property market seems to be running away from you, with house prices rising quickly and your deposit growing slowly, it might be time to take a different approach.

Say hello to shared equity mortgages.

These schemes, which include Help to Buy but are not limited to it, enable you to get on the property ladder using a much smaller deposit.

Here are the advantages of using a shared equity mortgage – and the possible downsides too.

What is shared equity?

Shared equity lets you borrow additional money to count towards your deposit. You’ll use this loan, and your deposit, to take out a mortgage – essentially meaning you have two loans at the same time.

How do shared equity mortgages work?

When you take out a shared equity mortgage, a provider gives you an ‘equity loan’ to boost your deposit. This is defined as a portion of the property value. For example, if you need to put down a 25% deposit to get the mortgage, you could take out an equity loan of say 15% and only need save 10% yourself.

You will either pay back the equity loan in instalments over a set number of years, or when you come to sell. One key thing to remember is that because the equity loan is tied to the property (as a percentage), the actual amount will fluctuate. So if your property grows in value, the amount you owe will also grow.

Shared equity is different from shared ownership because despite the loan, you are still buying the entire property. You simply have an extra loan in addition to your mortgage loan.

What are the different shared equity schemes?

A few providers offer shared equity schemes. You can find them through:

• House builders
• Local authorities
• The government (e.g. Help to Buy)

Help to Buy offers one of the most common shared equity programmes. It is available to both first-time buyers and home movers, and on new build properties up to certain values based on where you’re buying. It enables you to take out an equity loan of up to 20% to supplement a deposit as low as 5%.

An alternative to shared equity is shared ownership. These schemes work a little differently because you don’t purchase the whole property (at least, not at first). Instead, you buy a share of the property, and then you pay rent on the other portion. With shared ownership you can later buy a larger share in the property (known as ‘staircasing’), if you wish, until you eventually own the whole thing.

What are the advantages of shared equity?

Shared equity schemes can be a very useful way to get on the property ladder, if saving up a large deposit is too difficult. They can help you to:

• Buy your first home sooner – It can take years to save up a full deposit, which can leave you in limbo. The scheme can help you make this crucial step much earlier.
• Take out the loan interest-free (often) – In many cases, the amount you pay back is based on the property value, so it doesn’t accrue interest as such. When interest is payable, it’s usually not owed for the first few years (five for Help to Buy), giving you some breathing space.
• Only pay back when you sell (often) – Lots of the schemes only require you to pay back the loan when you sell, so you don’t need to factor in additional monthly spend on repayments.

What are the disadvantages of shared equity?

As with any loan, there are some risks with taking out shared equity:

• You could owe much more – If your property value surges, your equity loan will also rise dramatically. You could end up owing more than if you had saved the additional money. But if this is the case, it would have also been much more difficult to save the full amount (because property prices would still be higher by the time you came to buy).
• You may not buy the home you really want – Shared equity loans are usually available on new builds. Your house buying options will be limited, so you may not live where you ideally want to. That said, any home you own is arguably better than renting.
• It can be difficult to re-mortgage – If you haven’t paid off the equity loan, some lenders won’t consider your re-mortgage application. But a broker can help you find deals suitable for your situation.

How much can I borrow with a shared equity mortgage?

You can usually borrow between five and 25% of a property’s value through shared equity. Lenders will have their own criteria about how much they are willing to let you borrow if you use one of the schemes. Likewise, schemes may have an upper house value limit, meaning they’re only available on properties under that level. For instance, the government’s Help to Buy scheme is limited to new build homes up to £600,000, and this upper limit only applies to London properties. The cap is much lower in other areas, such as the North East.

How can I get a shared equity mortgage?

Unlike traditional mortgage applications, which begin with finding lenders, shared equity starts with finding housebuilders. If you want to use Help to Buy, you can find agents who can connect you to local developers through the website. For other schemes, you should speak to your local estate agents who can point you in the direction of developments that currently offer equity loans or are soon to become available.

Once you’ve found your shared equity loan provider, you’ll then need to approach lenders to apply for a mortgage. A mortgage broker can be a great help to you at this stage, helping you make the strongest possible application and guiding you through the process.

If you found this article useful, you might also find our article on how to buy someone out of a house informative, too.