What Is a Shared Equity Mortgage?
A shared equity mortgage represents an arrangement under which a mortgage lender and a borrower share ownership of a property. Shared equity mortgages can also occur in cases where multiple buyers purchase a single property. The borrower must occupy the property.
When the property is sold, the allocation of the proceeds depends on the equity contribution of each party. In other words, each party shares in any gains or losses resulting from the sale of the property. Discover the advantages and disadvantages of shared equity mortgages.
Key Takeaways
- Shared equity mortgages are financial arrangements in which lenders and borrowers share ownership of equity in a property.
- The lender enjoys tax advantages, including depreciation and the mortgage interest deduction.
- These programs can benefit those who live in high-cost real estate markets.
- When the property is sold, the allocation of profits gets split according to each party’s equity contribution, but they also share losses from the sale of the property.
- A shared equity mortgage can be a good solution for homebuyers.
Get personalized, AI-powered answers built on 27+ years of trusted expertise.
How a Shared Equity Mortgage Works
A shared equity mortgage is an attractive option for homebuyers who plan to be owner-occupants. This shared mortgage grants them access to properties whose values might otherwise be beyond their means. Typically, owner-occupants must also pay a fair market rent to the co-investor proportional to the share of equity not owned by the owner-occupant.
However, in some cases, the owner-occupant might not pay a mortgage payment on the investment. For example, if an investor helped with the down payment, the owner-occupant may not owe any money until the loan is refinanced. In other words, the investor would receive a percentage or the full amount following the refinancing, depending on how much the property’s value had increased.
Since the equity contribution represents an investment, the lender or owner-investor will take a proportional stake in any gains over the lifetime of the mortgage. Typically, if the owner-investor contributed to mortgage interest, they can deduct that interest from their taxable income. The owner-investor can also apply depreciation of the property to their taxes.
Important
Shared equity mortgages enable occupants to share in potential equity gains for properties that they cannot afford to purchase outright.
Advantages and Disadvantages of a Shared Equity Mortgage
Shared equity mortgages have many advantages for both owner-occupants and investors, but it’s also important to understand their disadvantages.
Advantages
For many years, affordable housing associations and municipalities have offered shared equity programs to help low-income individuals and first-time buyers achieve homeownership. The programs provide funds for the shared equity investment or connect potential buyers with private lenders willing to co-invest.
Urban Institute research has demonstrated that these programs effectively increase homeownership among the targeted communities, with the added benefit of helping potential buyers assess their readiness to purchase a home.
Another commonly shared equity arrangement is between a parent and a younger or first-time buyer family member. This type of mortgage can benefit the lending family member because it allows them to avoid the tax consequences of a substantial financial gift while potentially earning a return on that capital. High-income adult children can also use this financing option to contribute to a retirement property for aging parents.
Disadvantages
Disadvantages of shared equity mortgages include paying rent to the other investor or lender. You must negotiate the rent payment and fees, and you may pay more if you have a low equity share. You might also face restrictions on the extent of home improvements you can make on the property.
Also, the investor shares in any price appreciation, meaning the owner-occupant builds less equity, which can reduce your ability to build wealth.
Who Does Shared Equity Mortgages?
Housing associations and municipalities may offer programs that provide shared equity to low-income and first-time buyers. Private lenders or even family members may also participate in a shared-equity mortgage.
Can I Share an Equity Mortgage With My Family Member?
Yes. You can share an equity mortgage with a family member. Taking out a shared equity mortgage with your adult children who are first-time home buyers or financing a mortgage with your aging parents are both ways to take part in a shared equity mortgage.
How Does Shared Equity Mortgage Work?
How Do I Sell My Shared Equity Mortgaged Home?
You can sell your house if you own it with a shared equity mortgage, but depending on the amount of equity you have in the home, you may or may not make a profit on it. When you sell, you must share any profits with the lender.
The Bottom Line
Shared equity mortgages can help finance the purchase of a home for those who cannot afford it on their own. Shared equity mortgages work for family members and first-time homebuyers. Since lenders and borrowers share equity ownership, the arrangement can help the lender or investor if property values in the area are on the rise. When the owners sell the property, the profits from the sale get divided based on each member’s equity contribution.