Shared equity / Partnership mortgage
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A shared equity mortgage or partnership mortgage involves a lender agreeing to provide a loan alongside the main mortgage in return for a share of any profits when the house is sold or on repayment of the loan.
Shared equity schemes have been a feature of the mortgage market for several years, primarily offered by house builders, local authorities and as part of government initiatives to help first-time buyers onto the property ladder.
Typically, they allow a small deposit to be combined with a lower-than-average mortgage size by providing an ‘equity loan’ that covers a percentage of the property’s value.
The equity is repaid gradually after a set number of years, or in full, including when the property is sold. The value of the equity loan generally fluctuates with the value of the property, and so the amount to be paid depends on the value of the property at the time of repayment.
There is also a new type of shared equity mortgage called a partnership mortgage.
[edit] Partnership mortgage
The partnership mortgage, launched in October 2012, combines a traditional mortgage with an interest-free loan. However, there are some key differences:
- It is available for remortgages as well as for first-time buyers and home movers.
- It requires a significant deposit, usually 20%.
- When selling the home or on repayment of the loan, the interest-free loan must be repaid as well as a share of the increase in overall value of the home since taking out the mortgage (usually 40%).
Here is an example:
A home worth £200,000 is bought or remortgaged, and paid for as follows:
- Deposit of 20% = £40,000
- Repayment mortgage = £120,000
- Shared equity (partnership mortgage) loan on a 10-year term = £40,000
- Total = £200,000
After 10 years the home is worth £300,000 - an increase of £100,000.
If continuing to live in the house, £80,000 must be repaid to the partnership mortgage lender. This is calculated as the original loan plus a 40% share of the gain in value of the property.
If selling at this point, the loan must be repaid out of the sale proceeds, and the owner only gets to keep £60,000 of the £100,000 gain compared with entitlement to the full amount as with a traditional mortgage. This £40,000 is calculated as being 40% of the profit that is owed to the partnership mortgage lender.
[edit] Advantages
Monthly payments will be lower than if borrowing the same amount with a single traditional mortgage due to the interest-free loan element coupled with a smaller main mortgage.
It also offers a way to release capital at a low cost by remortgaging.
If the property is sold after 12 months and its value has fallen, the lender will share any loss meaning that less is paid back than was borrowed. This offers some protection against negative equity, however, it does not apply to remortgages.
[edit] Restrictions and risks
The main restriction is that it requires a high deposit of 20%.
If the property rises significantly in value and the occupants want to sell, trading up can be difficult as they will have to repay a high amount of the gain to the shared equity lender.
It is not possible to remortgage to raise additional funds without first repaying the partnership mortgage. Nor can the term of the main mortgage be extended or switched to an interest-only mortgage should the need arise.
If house prices have risen significantly by the time the partnership mortgage comes to an end, occupants could be forced to sell in order to repay the loan plus the share in the property gain.
It is also important to consider that legal fees could be higher than when taking out a single mortgage, and having two lenders may mean having to pay two sets of mortgage fees.
The key difficulty is that it is not known what the overall cost will be when the mortgage is taken out as this depends on future house price inflation, something that no one can predict with any degree of certainty.
Read about shared ownership here.
[edit] Find out more
[edit] Related articles on Designing Buildings Wiki
- Buy-to-let.
- Cohousing.
- Commonhold.
- Help to buy.
- Home ownership.
- Leasehold.
- Mortgage.
- Project-based funding.
- Property development finance.
- Property guardianship.
- Right to buy.
- Shared ownership.
- Social housing.
[edit] External references
Money Advice Service - Shared equity or partnership mortgages
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