Pros and cons
The big selling point of buying this way is that the equity loan reduces the loan to value (what you have to borrow) of the conventional mortgage. This means that you will qualify for a much cheaper mortgage than if you were buying with a conventional mortgage alone. After all, a mortgage at 75% loan-to-value (LTV) is going to work out far cheaper than one at 95% LTV.
There are downsides though. The main one is the fact that generally with shared equity schemes, any increase in the value of your property will have to be shared with the provider of the equity loan provider when you choose to sell.
Buying with such a little equity stake of your own also means that you are far more vulnerable to a fall in house prices, trapping you in negative equity (where the property is worth less than when it was purchased).
Examples of shared equity schemes
The FirstBuy scheme offers buyers the assistance of an equity loan of up to 20% of the property’s value, funded by a local HomeBuy Agency and participating house builders. You will need a deposit of at least 5%, with a conventional mortgage to cover the rest.
For the first five years, the equity loan is interest free. After that an annual fee is charged of 1.75% of the outstanding loan. That fee rises each year by the RPI plus 1%.
After a year you are able to ‘staircase’. This means you can purchase a higher share of your property or make part repayments on your equity loan.
When you choose to sell, any change in the value of your property will be reflected in paying off the FirstBuy scheme. So if your equity loan was originally for 10% of the full market value of the property, you will have to pay 10% of the proceeds from selling the property to the scheme.
To be eligible for a FirstBuy property you must have a household income of less than £60,000, be unable to afford a suitable home in the local area without the help of the scheme, you can't already be homeowners or named on a mortgage and you must have a good credit history.
To find out more about the scheme, find a HomeBuy agent in your area.
Armed Forces Home Ownership Scheme (AFHOS)
With the Armed Forces Home Ownership Scheme serving members of the forces can qualify for an equity loan of between 15% and 50% of the value of the property. The equity loan is absolutely free, so long as you are a serving member.
The scheme allows you to rent out the property (so long as your mortgage lender agrees), meaning you don’t lose out if you are posted elsewhere.
Again, the value of the equity loan remains consistent. So if the original loan is for 50%, you will have to hand over 50% of the proceeds from the sale to repay it, whether the property’s value has increased or decreased.
To be eligible for AFHOS you muct be a regular member of the forces with no less than four years’ service, but no more than six years. You can find out more on the AFHOS website.
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