Shared Equity and Shared Ownership
Not having a big enough deposit continues to be the main barrier stopping people from buying their first home. Both Shared Equity and Shared Ownership schemes aim to make home ownership more affordable for people without substantial savings.
These schemes are an alternative for people who aren’t able to get first time buyer help from parents or able to access 95% or 100% mortgages.
Shared equity schemes work by you receiving an equity loan to put towards buying a property. It can be a quick way to boost the size of your deposit and increase your chances of getting a good mortgage deal. There are both government-backed schemes and also private sector schemes.
With a government-backed scheme the equity loan comes from the government and house builders and they will lend up to 20% of the purchase price, depending on the particular scheme you apply through. But you must already have a deposit of at least 5%, so it is not suitable for anyone with no savings at all. Read more about the government’s help to buy scheme.
Although you would legally own 100% of your home you would still be obliged repay the loan at some stage. Unlike a mortgage, you would not need to make regular repayments but you would need to repay it in full after 25 years or if you sell your home before then, the value of the loan would be deducted from the sale price. You can also opt to repay the loan early by making repayments in chunks of 10% or more at a time.
When you repay the loan you will repay the market value at the time, not a fixed cash amount. For example if you borrowed £30,000 to buy a house worth £150,000, but when you came to sell the house it was worth £200,000 you would repay 20% of the property’s current value, so you would repay £40,000. Similarly if the property dropped in value you would repay less than you initially borrowed.
For the first five years the loan is interest free, but from year six onwards you have to pay monthly fees which start at 1.75% and then increase every year by inflation +1%. These fees do not count towards what you owe on the equity loan so it’s important to factor in this additional cost when weighing up whether shared equity is right for you.
Private sector equity loan schemes work in a very similar way but there will be differences such as who legally owns the home, when you have to pay the loan back and how big a share the lender gets when you sell the home. If you are thinking of taking an equity loan with make sure you do research and shop around to make sure you are getting a good deal.
With shared ownership, you part-buy and part-rent a home from a housing association, allowing you to take out a much smaller mortgage than if you were buying the whole property.
Using shared ownership, you purchase a share of between 25% and 75% of a property from a housing association. You then pay rent of up to 3% on the remaining share. So for example, if you bought 50% of a £100,000 flat, the housing association could charge you up to £155 a month on their share.
If you wish, you can then gradually increase your share of the property until you own it outright – a process called staircasing. You can either pay for the extra share in cash or arrange additional mortgage lending to cover the cost.
To buy a shared ownership home you currently need to have a household income of up to£80,000, or £90,000 in London. With private sector equity loans you will need to check with the individual lender.
You should also compare these schemes with typical first time buyer mortgage rates to see if you are getting a good deal. Our expert mortgage advisers can provide you with tailored advice based on your personal circumstances, call us on 0800 316 4071 to speak directly to one of our team today.