In a shared equity scenario, there is a mixture of debt and equity. A principal lender will provide debt for the mortgage in partnership with an equity provider, which will effectively be taking a stake in the house, rather than providing 100% debt to the borrower.

The principal lender will provide a loan for 80% of the value of the owner occupied residential property and, the borrower will enter into an amortising loan agreement; and the EFM partner (the equity provider) will provide up to 20% of the value of that owner occupied property.

No annual percentage rate applies to the EFM portion of the loan, unless the borrower is in default and no monthly repayments are required throughout the term of the loan.

In return, the borrower shares any increase in the value of the property with the Equity-Provider when the loan is repaid.

This is known as the “appreciation payment”. The Equity-Provider may also share any decrease in the value of the property with the borrower in certain circumstances. This is known as the “depreciation allowance”.

The EFM product is limited to UCCC regulated loans only.

Benefits

A shared equity mortgage enables the borrower to buy a more expensive property as they are not required to make principal and interest (P&I) repayments in the equity slice of the loan. Shared equity mortgages are designed to give people access to more expensive property, which would be out of their reach using a traditional mortgage.

Considerations

A shared equity mortgage could be right for you as long as you understand all the implications and are happy sharing the future capital appreciation from your property in return for lower monthly repayments throughout the term of the loan. The main products currently on the market will want around 40% of the capital appreciation in the property in exchange for a 20% equity investment.

Shared equity products offer a viable alternative for cash-strapped home buyers or owners.