What is a shared equity mortgage?

Simply put, a shared equity mortgage  is an arrangement in which both the lender as well as the borrower share ownership of a property. As discussed earlier, in such a scheme the lender is referred to as the third party. The third party will not pay the full purchase price. So  you may have to take a mortgage from a bank to arrange the remaining amount. The approval of the third party is essential while taking a shared equity home loan as they are named as co-guarantors. Hence, in case of non-repayment of the loan amount, both the individual and the third party will be liable.

You can also get a shared equity mortgage directly from the bank. In this case, the bank will act as a lender as well as a shared owner of the house. This process eliminates the requirement of a third party. The bank will recover the loan amount along with proportionate equity profit after the sale of your home. If you choose not to sell your house, then you will have to repay the loan amount along with accrued interest.

The shared equity partner can be anyone. It can either be the close relatives of the individual, government institutions, non-profit organisations, or even a financial institution. Shared equity mortgage with parents' contribution is also another possibility. However, most parents will choose the gifted deposit method, where they directly pay for a part of the purchase price as a “gift”. The shared equity method is not popular amongst Australians because the risks associated with this method are too high. However, there are some options offered by non-profit organisations and state and territory governments that could be worth learning about.

BuyAssist is a subsidiary of the National Affordable Housing Consortium (NAHC), a leading not for profit affordable housing provider. If you’re eligible under the scheme, you could receive up to 25 per cent of the purchase price of a new house to cover the deposit requirement. 

In return, BuyAssist typically receives a proportionate share of the property’s value when you decide to sell or refinance it. You may also be required to pay a monthly fee and an exit fee at the end of the ownership agreement with BuyAssist. You can find out more about the scheme on the BuyAssist website.

 A federal Help to Buy scheme was also proposed by the government last year to provide up to 40 per cent equity for new homes and 30 per cent equity for existing homes. This scheme was to be administered through the National Housing Finance and Investment Corporation (NHFIC). However, it is yet to see light. Nevertheless, some state and territory governments also offer shared equity schemes to help first home buyers purchase a house sooner. An example is NSW’s shared home equity scheme that provides assistance to eligible single parents of dependent children, older singles and key workers to purchase their first home.

If you’re in Western Australia, you may apply for a shared ownership loan with the Department of Communities through Keystart. There’s also Homestart Finance if you’re buying in South Australia. In Queensland, there’s Pathways shared equity loan for tenants in government-owned housing who want to buy the house they’re renting. 

Shared equity home loans are not very common in Australia as their arrangements are fairly complex. You usually have to navigate through piles of paperwork in order to apply for the shared equity mortgage. The scheme is also risky for the third party as they are automatically considered co-guarantors in the mortgage process. Therefore, they will be liable in case the homeowners happen to default on a payment. 

The third party gets to enjoy proportionate profits when the house is sold. But if there is a loss, they will have to bear it too. In addition, the money contributed towards the purchase price of the home stays locked in with the asset for the long term. Therefore, there will be no regular returns on this money. 

To safeguard against the above risks, the third party generally enforces a clause that lets them enjoy the profits of future equity and insures them from the loss. In such cases, the loss has to be borne entirely by you.

In a regular mortgage, the ownership of the house is transferred entirely to you after you repay the loan fully. But in the case of a shared equity mortgage, the entire ownership is not transferred to you. The third party or the equity partner will still own a part of the home equity even after the loan has been repaid fully. However, some schemes may allow you to pay out your equity partner in some situations or reduce your partner’s share in the property over time. These conditions are typically built into your contract and extra charges or fees may apply.