Compare shared equity mortgages

Compare shared equity mortgages if you need help getting on the property ladder. You can use them to buy a home using either a shared equity or a property developer's scheme.

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What is shared equity?

Shared equity is when you borrow additional money aside from the mortgage itself, known as an equity loan, to help form part of your deposit for a new home.You will usually still need to provide some of the deposit yourself, typically at least 5%.

You then take out a shared equity mortgage to cover the remaining purchase price of the property you want to buy. This will leave you with two loans to repay at the same time, but as the equity loan is used to increase your deposit, the loan size you need to borrow with the mortgage is lower.

This reduces the LTV (loan to value) which gives you access to better interest rates on your mortgage. There are different equity loan schemes available, but the most well-known is the government Help to Buy scheme Equity Loan Scheme, which was previously available in England and is still open to applicants in Wales until December 2022.

How do shared equity mortgages work?

An equity loan is typically, but not always, offered by a different lender than the mortgage lender, and is used to top up your deposit funds, helping put you in a better decision to take out a mortgage. This can be especially helpful for first-time buyers that are struggling to save a large enough deposit to purchase the value of property that they want or need.

The role a deposit plays in a mortgage application is to provide the lender with confidence that you are personally investing in the purchase, reducing the amount that you need to borrow from them, and therefore the risk they take on in lending to you. This means that the larger your deposit is, the better mortgage interest rates a lender will be able to offer you.

Equity loans are usually paid back in monthly installments or when you sell your home, depending on the individual scheme. Some may have an initial interest-free period, such as the help to buy scheme, however, in the vast majority of schemes, you will eventually incur interest charges unless you repay the loan in a defined period.

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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

Shared equity mortgage example:

If you bought a home that cost £300,000 you could:

Pay a 5% deposit of £15,000 from your own savings
Get a 20% equity loan of £60,000
Apply for a mortgage for the remaining 75%, which would be £225,000

Most schemes allow you to pay back the equity loan as a lump sum, usually when you sell your home.

The amount you repay will be based on the market value at the time. So if your home has gone up in value to £400,000 when you want to pay back the loan, you would need to repay 20% of this amount, which would be £80,000.

Am I eligible for the shared equity scheme?

It depends on which scheme you apply for, as each will have different requirements to meet in order to qualify. The Help to Buy scheme is now only available in Wales and has the following criteria:

Help to Buy criteria for Wales

you must be buying an eligible home, with a maximum price of £250,000 from

a builder who is registered with the scheme
you must be able to fund at least 80% of the property price through a combination of a repayment mortgage and a minimum deposit of 5% of the purchase price
you must take out a first charge repayment mortgage with a qualifying lender
you must not sub-let any part of the house you are buying through the scheme
you must not be renting out your existing home and buying a second home through the scheme

How the loan is offered

It’s important to understand that an equity loan is lent based on a particular percentage of the total value of your property, rather than a specific amount. This means that the amount you owe can go up or down in line with the value of your home.

For example, if you borrow an equity loan of 25% of the cost of a £200,000 property, the loan value will be £50,000 to begin with. If the market value of your home increases by £50,000, however, making the total value of your home £250,000, then your equity loan will go up, so you will owe £62,500. Of course the same also applies if your home reduces in value.

How to get a shared equity loan

Equity loan schemes are offered by the following:

Property development companies
Local authorities
Government initiatives

Information about the Welsh Government’s shared equity scheme is here

Each scheme will have a set of eligibility criteria to meet and these will usually require that you earn below a certain minimum income, don’t own any other properties, and will only apply to the purchase of specific properties.

Each scheme will also have its own terms and conditions, so make sure you fully understand the benefits and downsides of each.

Are there any reasons to avoid using the scheme?

As with any financial agreement, there are both benefits and drawbacks to using a shared equity scheme. Using this type of scheme can be an excellent way to get your feet onto the property ladder, however, before making a decision, you should consider the following:

The amount you borrow can increase:

Because you borrow a percentage of the property's value rather than a monetary value, the loan size will fluctuate with the value of your home. This means that if you carry out considerable home improvements and/or the market sees an increase in house prices, you could end up owing more than you originally borrowed

Remortgaging can be difficult:

There are considerably fewer lenders willing to offer remortgages on shared equity properties with an outstanding equity loan, than there are willing to offer the initial mortgage. This means that you could be locked into the same rate of interest for a long time. Once you’ve repaid the equity loan, however, you will be able to remortgage as normal

You can’t typically choose any property:

Most schemes are set up for new build homes only, so your choice of home will be limited to those new builds available within the relevant scheme

Shared equity mortgage FAQs

Will I own 100% of my home?

Yes, you will legally own all of your property, but you will need to repay your equity loan as well as your mortgage.

Can I choose any mortgage with a shared equity scheme?

No, you need to get a mortgage designed to work with the scheme. The deals in this comparison can be used with shared equity schemes.

How do I repay my equity loan?

You can usually repay the loan in full at any time, but if you sell you must repay what you owe to the lender.

How much will I repay?

The amount is based on the market value of your home when you repay, e.g. If you sell for £200,000 with a 20% equity loan you would repay £40,000.

Can I remortgage if I used an equity mortgage?

Yes, some remortgage deals are available. Alternatively, a remortgage for up to 95% of the property's value could be used to repay the equity loan.

How and when should I pay back the loan?

If the shared equity scheme you’re using has an interest-free introductory period then it’s best to repay it within that timescale, if possible. If you’re planning to repay it in one lump sum and don’t have to wait until you sell the property to do so, then the best time to repay the equity loan would be if there are market changes that result in property values falling.

In this case, you would end up repaying less that you originally thought, as the value of your home would likely have reduced, meaning you would owe less than when you originally took out the loan.

What's the difference between shared equity and shared ownership?

Shared equity is a type of loan, whereas shared ownership is where the ownership of your home is literally split between you and a landlord (typically a local authority).

With a shared equity scheme, you own the entire property once you have repaid the equity loan and mortgage.

Can you use the shared equity scheme for a second home?

Usually not. The main purpose of shared equity schemes is to help those unable to afford their own home with a traditional mortgage to purchase one. If you already own a home, or even if you used to, you probably won’t meet the eligibility requirements.

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