A Guide To Shared Equity Schemes
Buying a home is a milestone many Australians hope to reach, but with prices so high it can be difficult for those earning a lower income to save for a deposit. This is where shared equity schemes can help. First, it’s important to understand what a shared equity scheme is, and if it’s right for you.
What Are Shared Equity Schemes?
A shared equity scheme is when the cost of buying a home is shared between the buyer and an equity partner. A few examples of equity partners include private investors, government housing, and not-for-profit organisations.
The equity partner will contribute usually at least 20% of the cost of the home, making it possible for low-income buyers to buy a home with the deposit covered by their equity partner. The equity partner can profit by owning a percentage of the property, being entitled to a share of the property’s increase in value, and by charging ongoing service fees.
Want to know more about equity in general? Check out our blog below.
Who Are Shared Equity Schemes For?
Shared Equity Schemes are a great way for lower-income earners to be able to afford a home. They are designed for people who find it difficult to save enough money for their deposit due to their income. Shared equity schemes can also bridge the gap between the cost of property in your area and what the bank is willing to lend you.
Co-Ownership vs Full Ownership
When it comes to equity, there are two arrangements, being co-ownership and full ownership. Co-ownership means that the equity partner owns a percentage of the property that equals the percentage of the cost they contributed. This means that the equity partner will be entitled to a percentage of the value of the property until the home is sold or the equity is repurchased.
Full ownership allows the buyer to have full ownership of the home, with the equity partner sharing in the property’s shifting value over time.
What Are The Risks?
While shared equity schemes can be a useful tool to help lower-income buyers invest in a home, they do come with risks. The biggest risk that comes with shared equity schemes is the possibility of negative equity. If your home decreases in value, you may owe more money than what the property is worth. Another thing to consider is that, if your income exceeds the threshold of your equity scheme, you may be required to buy back the shared equity.
Other risks involved include higher interest rates compared to more common loans, capital repayments may be required, and your equity partner does not legally need to be licenced which can impact your contract.
Looking for a shared equity model without the risk? Our partners at OPM Financial Solutions have teamed up with Move2Up to make sharing equity simpler. Click here to learn more.