With soaring home prices, 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 in Canada is a unique arrangement 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.
Key Points
- The First-Time Home Buyer Incentive was a type of shared equity program offered by the Canadian government, but it is no longer available.
- Other shared equity programs may still be available from some investment companies and builders such as Ourboro.
- Shared equity mortgages involve sharing the equity and costs of a home with another party.
- A shared equity program allows you to get into the housing market earlier by saving on down payment costs and monthly mortgage payments.
- Since the equity is shared, you’ll need to split the proceeds when you sell (assuming you sell for more than you bought for).
A shared equity mortgage in Canada involves sharing the equity in a home with another entity, (usually a builder, investment company, or lender). With a shared equity mortgage, you take out a lower mortgage amount, and in exchange, the other investor will own some equity in the home. In essence, you both 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 other investor takes their share. Similarly, if you sell your home for a loss, you both would share the losses.
Even if you eventually pay off your mortgage, the other party 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.
- 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’re sharing the mortgage with the lender, your overall loan amount will be lower. In turn, this will reduce your monthly mortgage payments accordingly.
- Easier to qualify for. 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. 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.
- Get into the housing market sooner. Since you don’t have to pay as much upfront, you can enter the real estate market sooner.
- Share the risks. By co-owning a home with another entity, you would be sharing potential risks in a possible reduction in property value. However, not all shared equity providers share this risk with buyers and will include such a clause in the agreement.
- Reduce mortgage default insurance premiums. A shared equity arrangement could lower or even eliminate the need to obtain and pay for mortgage default insurance, depending on how much of a down payment you can make.
- Temptation to spend more. 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.
- 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.
Shared equity mortgages are not widely available, though they are still available from a few lenders, investment firms, and builders, which contribute up to a certain amount of the purchase price of a home.
The federal government once offered the First-Tome Home Buyer Incentive plan, which allowed borrowers to access 5% or 10% of the purchase price of a new home, interest-free, to make home purchases more affordable. However, this plan is no longer offered.
Companies that offer shared equity programs, like Ourboro, typically pool funds from different investors and usually work with buyers in specific areas. These firms may own a stake in the future market value of the property, or take a percentage of the appreciation/depreciation. Each company will also contribute up to a maximum of the purchase price.
Ourboro
With Ourboro, homeowners share ownership with investors who provide financial assistance in coming up with a down payment. Ourboro will contribute anywhere from 5% to 15% of the purchase price as a down payment. The share in ownership depends on each party’s financial contribution.
Ourboro works with home buyers in the GTA and other cities in the vicinity, including Hamilton and London.
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.
Perhaps the most important factor is that any equity growth must be shared with the other party. That means a portion of the home’s equity will eventually come out of your hands at some point. On the other hand, If you purchase the home on your own, any equity growth is 100% yours to keep.
Other Programs To Help You Afford A Home
If you’re a first-time homebuyer, there are a handful of programs available that can make homebuying more affordable:
RRSP Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows first-time home buyers to use their RRSP savings for a down payment. You can take up to $60,000 from your RRSP for your down payment, which you must repay within 15 years.
Home Buyers’ Tax Credit
The Home Buyers’ Tax Credit offers buyers a $1,500 tax credit in the year they purchase their first home.
Rent-To-Own Ownership Programs
A rent-to-own program involves entering into an agreement with a rent-to-own company or landlord. With this arrangement, you rent a home from your landlord, and a portion of rent payments go toward the eventual purchase of the home you’re renting. Each payment you make helps increase your down payment and build good credit.
First Home Savings Account (FHSA)
The Canadian government established the First Home Savings Account to help young Canadians buy their first home. The program involves a savings account, within which you may save up to $40,000 to purchase your first home. The account is both tax-free and tax-deductible.
Land Transfer Tax Rebates
There may also be land transfer tax rebates for first-time buyers in your city or province, including Ontario, BC, PEI, and the City of Toronto. These taxes typically cost anywhere from 0.5% to 2.0% of the purchase price of the home.
Final Thoughts
If you’re a first-time homebuyer having trouble coming up with a sizeable down payment, a shared equity mortgage in Canada 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.
