04 May A Guide to Shared Equity Schemes
This is an innovative home finance solution that gives you greater choices in the homes you could buy.
This option is designed specifically to help make buying a home more affordable by increasing your borrowing capacity. This can be for as much as 33% without increasing your monthly repayments. It makes your dream of buying a quality home in a quality suburb a lot closer to your financial reach.
Potential purchasers of new homes could benefit from a shared equity option where a licenced Australian home loan provider offers this scheme, but first, it’s important to understand what a shared equity scheme is, and then if it’s the right option for you.
What is a Shared Equity Scheme?
A Shared Equity Scheme is commonly referred to as a shared appreciation loan. This means that when you sell your property, refinance your loan, or choose to pay out the Shared Equity option in your loan, some of the increased value of your property will be shared with your home lender. The amount of the Shared Equity option may be up to 25% of your total loan and it does not incur ongoing interest or fees.
How does a Shared Equity Scheme work?
There is no predetermined loan term. Adjustments for “appreciation” or “depreciation” are made when the Shared Equity option in your loan is repaid. There is no regular repayment required on the Shared Equity part of your loan but you are required to make regular payments on your Primary Loan being the balance of your home loan. You can also repay your Primary Loan without paying out your Shared Equity option.
What is “appreciation” and “depreciation”?
Appreciation is the increase in value of your property between the time of purchase and the time of repayment of the Shared Equity Option.
Depreciation is the decrease in value of your property between the time of purchase and the time of repayment of the Shared Equity Option. The value of your home will be determined at the start of your loan by the lesser of the purchase price and property valuation (conducted by a licensed valuer) and again when you are about to repay the Shared Equity Option (by the sale price or current valuation, whichever is higher). These values will be used as a base to determine how much your property value has increased or decreased.
Why should I share my home appreciation gain with the Home Lender?
Your home lender provides a Shared Equity option to you and they are required to cover the interest costs on that loan until you sell your property or refinance your loan. Your home lender borrows this money and they must pay the interest costs for an indefinite period of time. These costs compound over time – and so your home lender must eventually receive money to cover the costs that were incurred. Because you are not paying interest on the Shared Equity option, your home lender must recover these costs in some way. These costs are recovered when the Shared Equity option portion of your loan is repaid by taking a predetermined share in the appreciation of the property. Your home lender has no way of knowing how much the value of the property will increase or decrease at the time the Shared Equity option is taken out.
When does the Shared Equity Option have to be paid out?
The Shared Equity Option must be paid out when ownership of the property changes, you refinance your primary loan with another financial institutions, or the property is no longer your principal place of residence. You may pay out your Primary Loan without having to repay the Shared Equity Option until one of the events described above occurs.
Who owns the property?
You will be the registered owner of the property. The Home Lender will register a first mortgage for the Primary Loan and the Shared Equity Option.
Think it suits you and want to understand more about this option for you?
For more information on Shared Equity Schemes and how you may be able to access it, book an appointment with one of our Senior V Three Real Estate Partners today.