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How a shared equity scheme could help you get a home

Updated: Monday 10 October, 2011

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If the idea of getting a mortgage and buying your own house is nothing but a fantasy, try a shared equity scheme to help you get on the property ladder.

The government runs two schemes to help people buy their own home, even if they're unable to raise a deposit yourself.

Easily confused, yet very different, these programmes are called shared equity and shared ownership schemes.

Both of these schemes are provided through “HomeBuy agents” - or housing associations - who will decide if you can buy a home this way.

This guide explains shared equity schemes. Click here to find out about shared ownership schemes.

A shared equity scheme, also known as HomeBuy Direct, is where both the homebuilding company and the government join forces to give you a loan which acts as a deposit for a new home.

How it works:

A first time purchaser who meets certain criteria, can buy the whole of a property but only has to pay a percentage of the market value - usually a minimum of 60%
This means the purchaser only needs a reduced mortgage for 60% of the property’s value
This reduces the amount of deposit required.
The remaining 40% of the market value (the “equity”) is paid by the government, housing association or housebuilder by way of a secured loan
The title to the property is owned 100% by the purchaser and only the equity is shared by the purchaser and the government.

With a shared equity scheme, the government and/or a house builder will give you an “equity loan” up to a maximum of 30% of the property price.

This loan comes with no fees for five years.

When you have found a property you want to buy, you then have to find at least 70% of its value yourself. This is done in the usual way by raising a deposit and getting a mortgage.

To find a lender that specialises in mortgages for these schemes, check out Sharetobuy.com.

The website also has a mortgage calculator so you can find out what sort of deals are available to you.

Equity loan

Now that you have secured funds for the first 70% of the cost of the home, the remaining 30% is paid for by the government and/or the house builder through an equity loan.

The loan is called an equity loan because its value changes based on how much your home is worth. This means the amount you owe will rise and fall with the value of your home.

Beware though, that although the loan has no fees for the first five years, from the sixth year of the term you will be charged 1.75% of the loan, with the loan’s value determined by how much the price of the property has changed over those five years. Every year after this, the fee will increase. The amount it increases by is worked out by using the Retail Price Index (RPI) plus 1%.

So, if after five years the price of your property has increased to £130,000 and the equity loan is £39,000, you’ll pay an annual fee of 1.75% of this, which is £682.50, or £58.88 a month. And remember - this fee is in addition to your mortgage payments and doesn’t count towards paying back the equity loan.

The following year and each year thereafter, the RPI factor kicks in. This means that if the RPI was 5% that year, the 1.75 per cent fee would increase by 6% (RPI plus 1%) to 1.86% which, if the equity loan was still £39,000, the annual fee would be £725.40. If RPI continues to rise over the years, so will the annual fee and it will increase further if property prices rise. This is how the equity loan provider earns a return on the money it lends you.

‘Staircasing’

However there is an option to pay back all or part of the equity loan early, saving on fees and getting more money when you sell your home. This is called ‘staircasing’.

Once you’ve owned your home for 12 months, you can pay back all or part of the equity loan, and in turn increase your share of the equity of your home.

However, to overpay on your equity loan, you must pay back a minimum 10% of the value of your home - and you will need to pay for a survey of your home to find out how much it is worth at the time.

As an example:

Your home’s value has increased from £100,000 to £110,000 since you bought it
The cost of paying back 10% would now be £11,000
This would increase your share of the home’s value from 70% to 80% (£88,000)
The amount owed on the equity loan would therefore drop from 30% to 20% of the home’s value (£22,000).

It will be your house to sell

The home's title deeds will be in your name, which means you can sell your home at any time.

The government and the house builder will then get back the same share of your home’s value when you sell it.

For example:

You buy a property for £100,000 and raise a loan for £70,000. You therefore have a 70% share, and the government or homebuilder owns the other 30% - £30,000.

When you wish to sell, if the property is now worth, for example £150,000, then you would receive 70% of the sale price - £105,000, and the government or homebuilder would be entitled to receive the remaining 30% - £45,000.

Payback

When you sell your home, the money that the buyer pays for your home is first used to pay off your mortgage, then the equity loan.

If your home has dropped in value, there may not be enough money left after your mortgage costs to pay back the equity loan.

If this happens, you won’t have to pay back the rest of the money owed on the equity loan.

But although you're not required to pay back the loan at first - only the fees that are applied after six years - it’s worth remembering that even if you don't sell your home, you will still have to pay back the equity loan after 25 years.

Who is eligible?

You can only buy a shared equity home if:

Your household earns £60,000 a year or less
You can’t otherwise afford to buy a home in your area.

The scheme is open to:

People who rent council or housing association properties, or
“Key workers” in the public sector, for example teachers or nurses, who work in the area, or
First-time buyers.

You can also get help if you used to own a home, but for various reasons can't afford to buy one now.

To see if you’re eligible for one of these schemes contact your local HomeBuy agent.