A shared equity or partnership mortgage is where a lender gives you a loan alongside your mortgage in return for a share of profits when you sell the house or repay the loan.
In this brief guide we will explore hw shared mortgages work, the types of shared equity mortgage and who they are suitable for.
How do shared equity mortgages work?
Shared equity mortgages are where you get a main mortgage and an equity loan for the rest of your home. With this scheme you pay down a low mortgage deposit and usually get the rest of your deposit in form of an equity loan such as the help to buy equity loan.
You can start to repay the equity loan with interest usually after 5 years or you can repay it in full when you sell the property. You will have to pay the provider their share in the property when you sell and this might be significantly more than they loaned you if the property has risen in value since you first took out the mortgage and equity loan. If your property value has fallen since you got the mortgage and the share of the equity loan is now worth less than the equity loan you took out then this is what you will pay.
This scheme is particularly targeted towards first-time buyers who can not afford the full outlay of a 15% to 20% mortgage deposit.
You can usually find this scheme available with:
- Home builders
- Local councils and
- first-time buyer government schemes
The partnership mortgage scheme
The partnership mortgage is a form of shared equity mortgage but the equity loan is interest free.It still combines a typical mortgage with an interest free equity loan.
The partnership mortgage differs significantly from the shared equity mortgage and here are the differences:
When you repay the interest free equity loan you are still required to pay a share of any increase in the value of your home but not relative to the equity loan. You will usually pay 40% of any increase in the value of your house.
The partnerships mortgage requires a significant deposit to be put down. Usually a minimum of 20%
You can get the partnerships mortgage when you are remortgaging also but as it requires at least a 20% mortgage deposit, this means you will need 80% equity in your home when remortgaging
You will have to pay the equity loan at the end of an agreed term or when you sell the property based on your agreement with the mortgage lender
The partnerships mortgage involves two mortgage lenders. One gives you your main mortgage and the other gives you the equity loan.
Example of a partnership mortgage:
You buy or remortgage a home worth £2,000,000.
You pay a:
- Deposit of 20% – £400,000
- Repayment mortgage – £1,200,000
- Shared equity (Partnership Mortgage) loan (10-year term) – £400,000
- Total £2,000,000
After 10 years your home is worth £3,000,000 - an increase of £1,000,000.
If you plan on living in your home then you need to repay £800,000 back to the partnerships mortgage lender. This includes the original loan of £400,000 plus 40% of the increase in value which is £400,000.
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 £600,000 of the £1,000,000 gain compared with the full amount had you had a traditional mortgage.
This is because you need to pay £400,000 (40%) of the profit to the Partnership Mortgage lender.
Is a partnership mortgage right for you?
If you are a first time buyer then you are likely struggling to find the 5 or 10% mortgage deposit for your new home. With the partnerships mortgage the requirement is 20% and while there is some upside to that as you will have lower mortgage repayments you also have to consider the future loss off any equity gained and how restrictive partnership mortgages are when it's time for you to remortgage.
Don't forget, you will also need to repay the partnership mortgage too. The main issue with partnership kortgages is that you have no idea how much you will have to give to the partnership mortgage lender from your equity in the future as you can’t accurately predict your property price in a few years.
In some cases it might be a win for you if prices fall and a loss for you if they rise significantly.
You should get advice from a mortgage broker who can advise on partnership mortgages and give you a good idea if they are ideal for you or if traditional mortgages might be better for you.
Benefits of a partnership mortgage
After 12 months the mortgage lender will take any loss attributed to a fall in the homes value. This essentially means you will end up paying back less than you borrowed. If you have a regular repayment mortgage alongside your partnership mortgage this will mean you are now in negative equity
Partnerships mortgage are a better way to release capital in comparison to equity release schemes.
Monthly mortgage repayments with a partnership mortgage and traditional mortgage alongside it are lower in comparison to just a traditional mortgage on its own.
Disadvantages of a partnership mortgage
Partnership mortgages require large deposits. This is usually 20% of the property price and nothing lower
If you pay the partnership mortgage early in full or by installments there will be financial penalties
You will have to pay any rise in value to the partnerships mortgage lender. This means you will not benefit from any rise in your homes value and moving to a bigger house from the equity gained in the rise of your homes value is much more difficult.
You can't remortgage without first paying off your partnership mortgage.
You also cannot switch your mortgage to an interest only mortgage or extend the term of your existing mortgage without first paying off your partnership mortgage. This means you are less flexible and more restricted.
The partnerships mortgage lender could put pressure on you to sell your home if the house value rises significantly.
You will have to pay to sets of mortgage fees as you have to different mortgage lenders. This makes the whole process slightly more expensive than a traditional mortgage.
Switching your traditional mortgage because interest rates have fallen is a common thing we should all do by managing our mortgages but if you have an existing partnerships mortgage you will find that not too many traditional mortgage lenders are able to offer you a competitive rate or offer you a rate at all.
You will need legal advice before you take out a partnerships mortgage and this could be a considerable amount.