Shared Equity Mortgages – How do They Work?

Shared equity mortgages remain an important option for some buyers who are struggling to purchase a property using a traditional mortgage alone. While the government schemes available today differ from those that existed in the past, the basic principle remains the same: an additional loan helps bridge the affordability gap, allowing buyers to purchase a home with a smaller mortgage and, in some cases, a lower deposit.

Shared equity schemes have become particularly popular with first-time buyers and purchasers of new-build homes, helping people access the property market who may otherwise struggle to buy.

What Is a Shared Equity Mortgage?

A shared equity mortgage combines a standard mortgage with an equity loan provided by a third party, such as a government-backed scheme, housing association, local authority or property developer.

The buyer owns 100% of the property and is named on the title deeds. However, because part of the purchase price has been funded through an equity loan, the provider is entitled to recover its share when the property is sold or when the loan is repaid.

Unlike shared ownership schemes, you are not purchasing only a percentage of the property. You own the entire property from day one.

How Does a Shared Equity Mortgage Work?

The exact structure depends on the scheme involved, but a typical arrangement might look like this:

• You contribute a deposit.
• A mortgage lender provides part of the purchase price.
• An equity loan makes up the remaining balance.

For example, on a £300,000 property:

• £15,000 deposit (5%)
• £225,000 mortgage (75%)
• £60,000 equity loan (20%)

Because the mortgage lender is only financing part of the purchase price, affordability can often be improved.

Are Shared Equity Mortgages Still Available?

Yes. Although many of the older government schemes have been replaced or withdrawn, shared equity arrangements still exist in various forms.

Examples may include:

• Developer-backed equity loan schemes
• Regional affordable housing initiatives
• Housing association programmes
• First-time buyer assistance schemes
• Specialist shared equity products offered through local authorities and housing providers

Availability can vary significantly depending on where you live and the type of property you are buying.

Shared Equity vs Shared Ownership

The two terms are often confused, but they are very different.

Shared Equity

With shared equity:

• You own 100% of the property.
• You take out a mortgage and an equity loan.
• You repay a percentage of the property's future value when the loan is settled.

Shared Ownership

With shared ownership:

• You buy a percentage share of a property.
• You pay rent on the remaining share.
• You may have the option to buy additional shares over time through a process known as staircasing.

What Are the Advantages of a Shared Equity Mortgage?

Smaller Mortgage Required

Because part of the purchase price is funded through an equity loan, the amount borrowed from the mortgage lender is lower.

Improved Affordability

Monthly mortgage payments may be lower than purchasing the property using a standard mortgage alone.

Access to Higher Value Properties

Some buyers may be able to purchase a property that would otherwise be beyond their budget.

Helpful for First-Time Buyers

Shared equity schemes can make it easier for first-time buyers to get onto the property ladder with a smaller deposit.

Ownership of the Entire Property

Unlike shared ownership, you own the whole property rather than just a percentage of it.

What Are the Disadvantages of a Shared Equity Mortgage?

Sharing Future Property Growth

If your property increases in value, the equity loan provider benefits from that increase when the loan is repaid.

Additional Charges May Apply

Many schemes offer low-cost borrowing initially, but fees may become payable after a certain period.

Limited Availability

Shared equity schemes are often restricted to certain buyers, property types or geographical areas.

Selling Can Be More Complex

When the property is sold, the equity loan must usually be repaid as part of the transaction.

Not Suitable for Everyone

Although shared equity can improve affordability, it is important to understand the long-term cost of sharing a proportion of any future increase in property value.

Who Can Apply for a Shared Equity Mortgage?

Eligibility varies between schemes, but shared equity mortgages are often aimed at:

• First-time buyers
• Key workers
• Buyers with modest deposits
• Households struggling to meet standard affordability requirements
• Purchasers of qualifying new-build properties

Each scheme will have its own criteria regarding income, property value and location.

Is a Shared Equity Mortgage Right for You?

A shared equity mortgage can be an effective way of getting onto the property ladder when affordability is a challenge. By reducing the size of the mortgage required, these schemes can make home ownership more accessible.

However, it is important to understand how the equity loan works, what fees may apply in future, and how much of any increase in property value you may need to share when you come to sell.

As with any mortgage, independent advice can help you compare all available options and determine whether a shared equity arrangement is the most suitable solution for your circumstances.