With soaring home prices these days, buying a home can be a major financial challenge, especially with wages lagging far behind. Qualifying for a mortgage can be difficult, particularly for first-time homebuyers who don’t have the proceeds of a home sale to put toward a new home purchase.
If you’re a first-time buyer and need a little financial assistance to buy a home, then a shared equity mortgage is a unique loan type to consider. Let’s go into more detail about shared equity mortgages and whether this type of loan program is something that suits your financial situation.
A shared equity mortgage involves sharing the equity in a home with your lender. You take out a lower mortgage amount, and in exchange, your lender will own some equity in the home. In essence, both you and the lender become co-owners of the property.
You get to live in the home but can borrow much less than you would typically need with a traditional mortgage. When you sell the home, you take your share of the profits from the proceeds of the sale and the lender takes their share. Similarly, if you sell your home for a loss, you and your lender would share the losses.
Even if you eventually pay off your mortgage, the lender will still own a percentage of the home.
To help you understand how a shared equity mortgage works, let’s assume you’re buying a home for $650,000 with a 20% down payment ($130,000).
You take out a 25-year fixed-rate mortgage with a 5-year term and a rate of 3% to finance the purchase. Then, compare that to a shared equity mortgage scenario whereby the lender has a 10% share of the equity ($65,000). The following chart compares your mortgage amount and monthly payments:
| Mortgage Amount | Monthly Payments | |
| Traditional Mortgage | $520,000 | $2,461 |
| Shared Equity Mortgage | $455,000 | $$2,153 |
With a shared equity mortgage, you’ll be saving around $308 per month in mortgage payments, and your loan amount will be about $65,000 less than it would be with a traditional mortgage.
At first glance, a shared equity mortgage might sound great. After all, you can move into a home without having to pay the full price for it. That said, there are a few risks that you’ll want to get familiar with before you choose this unique type of loan arrangement.
Advantages Of Shared Equity Mortgages
- Lower Down Payment. You won’t have to come up with as much money upfront in the form of a down payment when buying a home using a shared equity mortgage. Your lender will be pitching in a portion of the down payment as part of their share of the property. Both your down payment shares will add up to a sizeable down payment amount, which may help you qualify for a more expensive home than you otherwise wouldn’t be able to afford on your own.
- Lower monthly mortgage payments. Since you are sharing the mortgage with the lender, your overall loan amount will be lower. In turn, this will reduce your monthly mortgage payments accordingly.
- More affordable. Having a smaller loan makes it easier to qualify for a mortgage that may have been out of reach for you without the added financial help.
- Easier to qualify for. All you need to do is qualify for a specific mortgage amount that your current financial and credit profile is eligible for. Your lender will top up the rest.
Disadvantages Of Shared Equity Mortgages
- Temptation to buy a more expensive house. Since you’ll have financial assistance when buying a home and taking out a mortgage, you might be tempted to buy a more expensive home that would otherwise be out of your budget.
- Shared equity must be repaid. Upon sale of the property, the loan must be ‘bought back’ or repaid.
- Profits are shared. When you sell the home, you’ll have to share the profits with the lender.
- Hard to find and secure. Shared equity mortgages are not common, so you could have a hard time finding a lender who offers them.
- May have extra costs to pay. Shared equity mortgages are considered long-term investments that may come with extra costs if you sell or refinance early.
In Canada, there is one shared equity mortgage option for potential homeowners, the First-Time Home Buyer Incentive. Borrowers can access 5% or 10% of the purchase price of a new home, interest-free, from the government to make home purchases more affordable. 5% or 10% of the property’s value must be paid back in 25 years or when the house is sold.
To take advantage of this program, you must meet certain criteria:
- Be a first-time homebuyer
- Make at least a 5% down payment on your own
- Have a household income of no more than $120,000
- The home cannot be worth any more than 4 times your income. Meaning you can’t buy a home that’s more than $480,000 ($120,000×4). This amount may vary slightly for more expensive cities like Vancouver and Toronto.
You can access a shared equity loan for up to 10% of the purchase price of a home, and the loan must be paid back when you sell the home, or after 25 years.
If you’re having trouble coming up with a decent-sized down payment, then a shared equity mortgage might come in handy. But it’s not always the best option.
Consider Your Income vs. The Price Of The House
For starters, it could limit the loan amount you can take out to buy a home. For instance, if you earn $80,000 per year, you’re only allowed to buy a home that’s worth no more than $320,000 (4x your household income), even though you may be able to afford a much more expensive home on your own.
Your Equity Is Shared
The equity that grows in the home must be shared with the lender. That means a portion of the home’s equity will eventually make its way back into the government’s hands at some point, rather than in yours. If you purchase the home on your own, any equity growth is 100% yours to keep.
Having said that, if you can’t afford a home any more than 4 times what you earn in a year and are comfortable with sharing a portion of the home’s equity with the lender, then a shared equity mortgage may be something worth considering.
Are there other programs to help me afford my home?
What is the 4-year rule?
Final Thoughts
If you’re a first-time homebuyer and are having trouble coming up with a sizeable down payment on your own to buy a home within a certain price range, then a shared equity mortgage might be a loan product worth considering. Be sure to speak with a mortgage professional to help you determine if this is the right loan program for you.
