Understanding shared equity schemes

In addition to private lenders, non-profit organisations, for-profit lenders, and state governments may also offer shared equity loans in Australia.

To apply for a shared equity arrangement, you need to look for someone ready to be an equity partner. Once you’ve selected a property, you can apply for a shared equity mortgage loan. 

In years to come, when you’re more financially comfortable, you may want to return the contribution of the equity partner. You’ll need to check the terms of the shared equity arrangement (SEA) and confirm whether you can pay back the contribution.

When homebuyers enter into an SEA in Australia, they usually opt for the ‘individual equity’ model. With this, you can apply for a shared equity home loan of up to 70 per cent of the property’s current value while the equity partner provides the balance of capital required. If you want to gain 100 per cent property ownership, you can acquire more home equity from your partner, but it depends on the terms and conditions. However, if you don’t acquire 100 per cent ownership, the equity partner gets back the contribution and the share of capital gains when selling the property. 

The other model is called ‘community equity’. You can purchase a property with a contribution from a housing association, which becomes the equity partner. The housing association will then own a portion of the equity and have an ongoing interest in the property.

When your income is low, it may take many years to save sufficient money for the deposit on a home. Even if you’re able to save the money to pay for the deposit, you may not be able to buy a house as market values may significantly increase. However, if someone is willing to contribute towards the deposit, you’ll be able to purchase a property under the scheme. On the other hand, if the property’s value increases significantly over the years, you’ll not enjoy its full benefits as you'll have to share the capital gains with the equity partner. This is one of the drawbacks of a shared equity scheme.

If it’s difficult to buy a home with an equity partner, then one of your family members can act as a guarantor. The guarantor becomes responsible for paying off the mortgage if you’re unable to manage repayments.

Finding a lender that can offer a low deposit loan is another alternative to a shared equity scheme. For such a type of loan, however, you would have to purchase Lender’s Mortgage Insurance (LMI).

Another alternative is to rent a house in your preferred locality and purchase another property within your budget in a cheaper location. This is known as ‘rentvesting’. The investment property can be rented out while it appreciates in value, eventually making it possible for you to buy a home in your desired location.