Shared Equity vs Outright Ownership
As a result, there is often a lot of confusion as to the exact difference between the two. There are differences, however, and they are important to understand.
How Shared Equity Works
When you buy a house through a shared equity scheme, three elements cover the purchase price:
1. Your deposit which is normally a minimum of five percent
2. A mortgage which is typically 75 percent
3. An equity loan to cover the balance which is typically 20 percent
Here's an example of a house you buy for £200,000. You will need a five percent deposit which equals £10,000. You then get an equity loan for 20 percent of the purchase price, or £40,000. This means you need a mortgage of £150,000.
The crucial thing to remember about buying through shared equity is how the equity loan works. Normally, you don't have to pay off the equity loan although you can choose to if you want. Instead, it comes due for payment whenever you sell the property. Importantly, however, the calculation of the amount you must repay is based on the current value of the property.
Let's look again at the example above of a £200,000 property that you purchase using a shared equity scheme. In that example, the equity loan was 20 percent of the purchase price - £40,000. If you sell the property 12 years later for £300,000, the value of the equity loan that you must repay is 20 percent of £300,000, i.e. £60,000.
That said, the same applies if the property loses value, i.e. you still pay 20 percent of the market value at the time you sell it.
Benefits of Shared Equity
There are two main benefits of buying a house through shared equity:
1. Reduces the loan-to-value of your mortgage
2. Reduces the monthly payments you must make
Shared equity schemes are available from many sources including some developers. One of the most popular, however, is the Government's Help to Buy scheme. It offers equity loans to qualifying house buyers that are worth up to 20 percent of the cost of the property so long as the property costs less than £600,000. You pay no interest on this loan for the first five years but interest applies in subsequent years. You can repay the loan early, but if you do so you must pay at least 10 percent at a time.
How Outright Ownership Works
Outright ownership is a much simpler process. Firstly, when you buy the property, only two elements cover the purchase price:
1. Your deposit
2. A mortgage
So, in the example above where you have a five percent deposit on a £200,000 house, you will need a mortgage for £190,000.
Main Differences Between Shared Equity and Outright Ownership
There are two main differences between buying a property through a shared equity scheme and buying it outright:
• The size of your mortgage and the monthly repayments - with a shared equity purchase, the equity loan reduces by up to 20 percent the amount of mortgage you require. This, in turn, reduces your monthly mortgage payment. In addition, you don’t have to repay the equity loan until you choose to or until you sell the property. In other words, the equity loan doesn’t add to your monthly outgoings either. When you buy outright, however, you’ll need a larger mortgage so your monthly payments will be higher.
• Repaying the equity loan - if you buy a house through shared equity, you must repay the loan when you sell the property. As the loan calculation when you repay is based on current market value, you could end up paying considerably more than the original value of the loan. When you buy a house outright, however, you have no loans to repay so keep all the profits of the sale.
Which is Better?
In the short-term, shared equity will cost you less per month. If property prices go up, however, you could end up paying more overall than if you buy the property outright, particularly if the value of your house increases considerably. So, shared equity makes it easier to initially buy a property and afford the monthly repayments. However, unlike outright ownership, you don’t get the full benefit of any increase in the property’s value.
Of course, this assumes the value of your property goes up. If it doesn’t, or if the value falls, buying through a shared equity scheme may benefit you. This is because shared equity schemes not only share the rewards of increasing property values, they also share the risks of your home decreasing in value.
While most people buy their properties outright, shared equity might be the right option for you, depending on your circumstances.