Shared equity or partnership mortgages
With a shared equity mortgage or partnership mortgage a lender will agree to give you a loan alongside your main mortgage in return for a share of any profits when you sell your house or repay the loan. Find out how shared equity mortgages work, the different types and who they are suitable for.
Shared equity basics
Shared equity schemes have been a feature of the mortgage market for several years and have primarily been offered by house builders, local authorities and as part of government initiatives to help first time buyers onto the property ladder.
Typically, they allow you to combine a small deposit with a lower than average mortgage size by providing you with an ‘equity loan’ that covers a percentage of the property’s value.
You may start to repay the equity loan gradually after a set number of years - or in full, including when you come to sell the property. The value of your equity loan generally fluctuates with the value of your property, and so the amount you will pay depends on the value of the property at the time you repay.
If you’re a first-time buyer, a key worker or are on a low or moderate income and are looking to get on the property ladder find out more about the different schemes that may be suitable for you in our guide below.
The rest of this article looks at a newly launched type of shared equity mortgage called the Partnership Mortgage. At present this is the only product of its kind in the market and it is only available if you have a large deposit.
The Partnership Mortgage
As with the schemes described above, the ‘Partnership Mortgage’, launched in October 2012, combines a traditional mortgage with an interest-free loan. However, there are some key differences:
- It’s available for remortgages as well as for first time buyers and home movers
- It requires a significant deposit
- When you sell your home or repay the loan, you repay not only the interest free loan but also a share of the increase in overall value of your home since you took out the mortgage
Note that the term ‘partnership’ as used for this product does not have any business relationship connotations.
- Requires a 20% deposit (meaning you need at least 80% equity in your home if remortgaging)
- Two lenders are involved: you take out a 60% mortgage on a repayment basis as your main mortgage and a 20% interest-free loan – the Partnership Mortgage
- You repay the 20% Partnership Mortgage in full at the end of an agreed term or if you decide to sell or remortgage the property
- At the time of repaying the Partnership Mortgage you must also pay the lender 40% of any increase in value of your whole property since you took out the mortgage
You buy or remortgage a home worth £200,000.
You pay for this as follows:
- Deposit of 20% – £40,000
- Repayment mortgage – £120,000
- Shared equity (Partnership Mortgage) loan (10-year term) – £40,000
After 10 years your home is worth £300,000 - an increase of £100,000.
If you are staying where you are, you need to repay £80,000 to the Partnership Mortgage lender (the original loan plus a 40% share of the gain in value of the property).
If you decide to sell and move on at this point you repay the loan out of the sale proceeds, but only get to keep £60,000 of the £100,000 gain compared with the full amount had you had a traditional mortgage. This is because you need to pay £40,000 (40%) of the profit to the Partnership Mortgage lender.
Advantages, restrictions and risks of a Partnership Mortgage
- Your monthly payments will be lower than if you borrowed the same amount with a single traditional mortgage – due to the interest-free loan element coupled with a smaller main mortgage.
- Offers a way to release capital at a low cost by remortgaging (but see risks below).
- If you sell after 12 months, and the value of your home has fallen the lender will share any loss you make – meaning you pay back less than you borrowed – this offers some protection against negative equity, however it does not apply for remortgages.
Restrictions and risks:
- Requires a high deposit - 20%.
- If your home rises significantly in value and you want to move it could be difficult for you to trade up as you’ll be required to repay a high amount of the gain to the shared equity lender.
- You cannot remortgage to raise additional funds without first repaying your Partnership Mortgage – nor can you extend the term of your main mortgage or switch to an interest only mortgage should the need arise.
- If you want to keep your Partnership Mortgage but change your traditional mortgage in order to get a lower rate, the number of lenders available may be restricted and not be able to offer a full range of features or have the lowest rates available in the market.
- If house prices have risen significantly by the time the Partnership Mortgage comes to an end, you could be forced to sell in order to repay the loan plus the share in the property gain.
- As you will have two lenders you may have to pay two sets of mortgage fees – make sure you understand these costs before you proceed.
- Your legal fees could be higher than when taking out a single mortgage – again, check and compare the costs.
- If you decide to repay the Partnership Mortgage early in full or in part there are financial penalties.
Is a partnership mortgage right for you?
Unless you have a large deposit, a Partnership Mortgage is unlikely to be of interest if you’re a first-time buyer trying to get on the property ladder. And while it might appear an attractive option if you’re looking to move and trade up or are looking to cut costs or to release funds by remortgaging, it’s important to understand the potential longer-term costs and risks.
As seen above, the greater the increase in the value of your property, the greater the amount you will need to pay to the Partnership Mortgage lender on top of the original loan when you sell or come to repay the loan.
The key difficulty is that you don’t know what the overall cost will be when you take the mortgage out as this depends on future house price inflation – something that no one knows or can predict with any degree of certainty.
In order to understand if the Partnership Mortgage is right for you - and to fully understand how it works – you should get independent advice.
Not all advisers can sell the Partnership Mortgage so your adviser may only be able to discuss the general features, benefits and costs of the product compared to a non-shared equity mortgage.
Find out more about the importance of not overstretching yourself by following the links below.
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