Is shared equity the best way into the property market?

As median house prices soar well above the $1m mark across capital cities and deposit sizes therefore rise, shared equity arrangements are being considered by a growing number of buyers.

Getting a foot on the property ladder has never been more challenging than right now. Trying to save a good deposit for a home – given that the cost of getting into the market – is a major challenge for today’s first-time buyer.

This is why first-home buyers are contemplating whether to enter a shared equity arrangement.

What is shared equity?

A shared equity arrangement is financial agreement in which lenders and borrowers share ownership of equity in a property.

This means a third party, known as an equity partner, contributes the funds to help you purchase a home. In exchange for their financial contribution, the equity partner secures the equivalent stake in your property.

This financial arrangement between a property buyer and an investment company that effectively buys into the property and owns a share without any further day-to-day involvement works as an investment for them. As the property buyer, just your name will be on the property title.

The arrangement could benefit buyers looking to purchase real estate in particularly expensive parts of the country.

Who owns what?

If you decide to look for a shared equity arrangement, your equity partner will ‘own’ a share of your home, which means that when it comes time to sell, you will need to pay back their share.

As the property owner, you are forgoing a portion of future capital growth instead of taking on debt, which may be worth contemplating, depending on your personal circumstances.

Do they work?

A shared equity partner can help reduce upfront costs and make it easier to get into a home sooner. As the buyer, you will need to take out a mortgage to cover the remaining costs of purchasing a home.

Your partner will take their share of the equity back in the form of financial repayment, along with their share of any profits you make upon the sale of the home. However, most schemes will include an option for you to buy back the shared equity over time.

So, if the government owns 20% of your home, you can buy that share back at current market value over time.

However, if you’ve lost money on the property when you come to sell the home, then your equity partner will not have made any money and therefore is only be entitled to their percentage stake back upon the sale of the home.

While having an equity partner is unlikely to impact your life day to day if you’re living in the home, it will be a major factor when it comes time to sell and you need to pay your equity partner back their stake if your home has risen in value.

For example:

Clare wants to purchase a home that costs $650,000 but has only managed to save up 5% of the deposit, which equates to $32,500.

It’s not a bad effort, but she’s a long way from the 20% deposit she needs with her lender to avoid having to pay Lenders’ Mortgage Insurance.

Clare starts looking for an equity partner able to stump up the 15% ($97,500) deposit she needs to get her over the line so she can get into the property she wants to make an offer on.

With the help of a mortgage broker, she is able to borrow the remaining 80% from a lender to get into the property market sooner.

After seven years in the home, Clare wants to sell and move closer to the city. Her home has risen in value to $795,000.

Upon sale, she needs to pay back the equity partners’ 15% contribution, which, given the rise in the value of the home, equates to $119,250.

Finding a partner

There are a range of government schemes, not-for-profit lenders and private individuals that offer shared equity schemes. For example, the Victorian Government’s Homebuyer Fund, or non-government organisation BuyAssist.

Founded in 2019, Bricklet is one of the independent players in the market offering a shared equity arrangement for pre-approved buyers for a fee.

Founder Darren Younger says the arrangement works well for those with a high income but don’t have the savings in place to purchase.

“Working with a mortgage broker, they work out the serviceability of the home loan, and Bricklet provides up to 20% of the deposit, he says.

“The homeowner is still the property owner and takes care of all the maintenance, so there’s no difference in that sense.”

Younger explains that under the Bricklet model, the homeowner can buy back the equity stake at any time down the track.

Pros and cons

Whether or not this arrangement works for you will depend entirely on your individual situation, including which property you buy, how much you have saved up and how much you intend to borrow from a lender.

There are some pros and cons to shared equity agreements, including:

Pros                                                                                    

• The ability to get into the market sooner                                            
• Owing less money to your lender
• Greater buying and borrowing power

Cons

• Even if you’re the only one living there, on paper, you don’t own a percentage of your home
• The equity partner may set permissions on what you can do to the home
• Eventually, you will need to repay the equity partner back

Make sure you are certain

It’s important to understand how it works and what rights it gives you, and more importantly, what rights this sort of arrangement takes away.

If you are considering a shared equity solution, seek professional advice before deciding whether this is the right arrangement for you.

You will need to check the specifics of your agreement and be sure you understand when you need to pay out your shared equity partner and to decide whether it’s the right move for you.

This article first appeared on Mortgage Choice and has been republished with permission.

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