A shared equity mortgage is an agreement between two parties, usually a homeowner and an investor, to split ownership of a property. The investor puts up a portion of the money to purchase the property while the homeowner makes payments on the rest. The investor is then entitled to a part of the return when the property is sold.
Shared equity mortgages are becoming increasingly popular due to their ability to offer access to homeownership to those who may not otherwise have the necessary funds to purchase a property. The arrangements often involve the borrower increasing their stake in the property over time, meaning that the investor’s share decreases and the borrower’s increases.
How Does It Work?
A shared equity mortgage is an agreement between two parties—a homeowner and an investor—who agree to split the ownership of a property. The investor puts up a portion of the money to purchase the property while the homeowner pays a monthly mortgage payment on the remaining balance. Upon sale of the property, the investor is then entitled to a part of the return.
The investor benefits from the transaction as they share in the future gains of the property, while the homeowner benefits from having access to a property they normally wouldn’t be able to afford. Additionally, the arrangement often allows for the borrower to increase their stake in the property over time, resulting in the investor’s ownership stake reducing.
Examples of Shared Equity Mortgages
Shared equity mortgages are becoming increasingly popular in the modern age. One example is living rent-free in exchange for a share of the equity in the property. This arrangement is more mutually beneficial than renting, as the homeowner would pay a monthly fee, but only a portion of whatever gain the homeowner makes when the house is eventually sold.
Another example would be shared home ownership, whereby the homeowner and investor agree to split the cost of mortgage payments on the property. The homeowner would then gradually purchase a larger share of the property as equity builds, resulting in smaller returns for the investor when the property is sold.
Conclusion
Shared equity mortgages are an important concept to understand, especially for those looking to purchase a property but don’t have the necessary funds. These arrangements offer access to homeownership and can be a great way for individuals to slowly increase their stake in a property without taking on more debt.