Shared equity schemes

Sharing the cost of buying a home

Owning a home is considered one of the great Australian dreams, but for some people that dream may feel out of reach.

However, if you are a low to middle income earner, then a shared equity arrangement may help you turn your dream into a reality. Here we explain what shared equity schemes are, who can get them, and how to find one.

What is a shared equity scheme

A shared equity scheme is a way to share the cost of buying a home with an equity partner, such as a private investor, not-for profit organisation or government housing authority.

The equity partner usually contributes around 20-25% of the property's purchase price, but could contribute more. In return, they are entitled to a share of the property's increase (or decrease) in value over time. The equity partner may own a percentage of the property, and/or may charge ongoing service fees.

Under a shared equity scheme, your deposit is much lower, or may not be required at all. Typically you won't need to pay lender's mortgage insurance (LMI) if the amount you borrow is 80% or less of the purchase price of the property.

Who can get a shared equity arrangement?

Shared equity schemes are designed to help people who find it especially hard to own a home, such as low to middle income earners, people with disability, Indigenous people and sole parent families.

If you are a lower income earner you may find it hard to save a deposit or find there's a gap between what a bank will lend you and what a property in your area actually costs.

These arrangements usually target first home buyers, although you may still be eligible if you've owned a home before.

Shared equity with co-ownership

In a co-ownership arrangement, the equity partner owns a percentage of the property, based on the amount they contribute to its purchase. For example if an equity partner pays 20% of the purchase price, they will own 20% of the property. They will then be entitled to 20% of the future value of the property.

Co-ownership eligibility

To be eligible for this type of arrangement, you will need to meet certain criteria, which may include:

  • A deposit or savings history - you might need to pay a small deposit, such as 2%, or be able to show evidence of genuine savings.
  • Income limits - because shared equity arrangements are usually designed for low to middle income earners, there may be limits on the amount of income you can earn.
  • Debt limits - your current level of debt may have to be less than a set amount, or your repayments less than a certain percentage of your income.

Co-ownership interest and fees

Interest rates on loans for shared equity borrowers may be higher than those offered on standard home loans.

You will only pay fees and interest on the loan for your share of the property; however, you will be responsible for all ongoing property expenses, such as council rates and maintenance.

Can I repurchase the shared equity portion?

You may be able to buy back your equity partner's share in the property if your circumstances change (for example, if you repay your principal and interest home loan, or receive a windfall). 

Some contracts may require you to start purchasing the shared portion at a set time in the future, for example 10 years after you enter into the original agreement.

Case study: Luke and Sarah buy their first home

Young family 2 girlsLuke works full-time, earning around $60,000 a year. Sarah works part-time and earns around $30,000 a year. They have two young children at school. They have been trying to save a 10% home deposit for several years, but rising house prices keep pushing this goal beyond their reach.

They hear about a shared equity scheme run by a non-profit organisation, and decide to take a look. Under the scheme, they only have to pay a 2% deposit and the equity partner will purchase 25% of the property they buy. This means that Luke and Sarah would only need to take out a loan for 75% of the purchase price.

As they meet all the criteria for the scheme, they decide to go ahead. They buy a home worth $400,000. The equity partner contributes $100,000 so Luke and Sarah's mortgage is $300,000.

The smaller deposit and relatively low repayments have made it possible for them to move their family into a home of their own.

Shared equity with full ownership

Some shared equity arrangements allow you to have full ownership of the property. As with a co-ownership arrangement, the equity partner contributes a portion of the purchase price (for example 25%), and you take a loan out for the balance. However, rather than co-owning the property, the equity partner just shares in the change in the property's value over time.

These types of shared equity arrangements may be limited to particular types of properties, such as new builds, or certain locations.

Full ownership interest and fees

Interest rates offered on this type of home loan may be higher than those on standard principal and interest home loans.

You may also be charged ongoing facility fees by the equity partner. These could be fixed or percentage-based. You'll need to take these fees into account when deciding whether you can afford to buy a property under this kind of arrangement.

Repurchasing the shared equity portion

You won't have to make repayments to the equity partner on the shared equity portion until you either sell the home or have repaid your principal and interest loan. However, you can make voluntary lump sum repayments.

The amount you will have to pay to buy back some or all of the equity partner's share of the property will be calculated according to a formula set out in your shared equity agreement.

If your income rises above the maximum qualifying level, making you ineligible for this arrangement under the contract, the agreement will end and you will have to buy back the shared equity portion within the timeframe specified in your agreement. 

The risks of shared equity schemes

A shared equity scheme may help you into your own home, but there are risks to consider:

  • Negative equity - If the value of your home decreases, you could owe more than what the property is worth.
  • Capital repayments - Some schemes require you to make capital repayments (on the equity partner's share) at set times in the future, you'll need to know how you will fund this.
  • Exceed income threshold - If, during the course of the loan, your income rises above the income threshold for the scheme, you may be required to buy back the shared equity portion of the property.
  • Repairs and maintenance - Typically the home owner is responsible for all repairs and maintenance on the property. If the property needed major repairs, consider how you would pay for them.
  • Higher interest - There may be a limited number of lenders willing to offer this type of loan. This could mean your interest rate is higher than other, more competitive, loans on offer.
  • Licensing of provider - Depending on the terms of your shared equity agreement, your equity partner may not need to be licensed as a credit provider under the National Credit Act. This means that they may not have to make sure the contract is suitable for you and that you can repay the loan without suffering hardship.

How to find a shared equity scheme

Shared equity schemes are offered by some state government housing authorities, not-for-profit organisations and other for-profit organisations. They are not currently available in all states; however, this is a developing area of home ownership and more schemes may become available in the future.

Examples of state government shared equity schemes include:

You can also search online for 'shared equity scheme' to find schemes available from other providers.

If you're a low or middle income earner who is finding it difficult to buy your own home, a shared equity scheme may help you. Make sure you understand how the scheme works and all the costs involved before you take the plunge.

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Last updated: 26 Mar 2018