What Is a Shared Equity Mortgage?

A shared equity mortgage is an arrangement under which a lender and a borrower share ownership of a property. The borrower must occupy the property. When the property sells, the allocation of equity goes to each party according to their equity contribution. Each party also shares losses on the sold property. 

Shared equity mortgages allow occupants to share in potential equity gains for properties that may be otherwise outside their means. 

How a Shared Equity Mortgage Works

A shared equity mortgage is an attractive option for homebuyers who are planning on being an owner-occupant. This shared mortgage grants them access to properties whose values might otherwise be beyond their means. In most parts of the U.S. owner-occupants must also pay a fair market rent to the co-investor proportional to the share of equity not owned by the owner-occupant.

The lender, or owner-investor, also stands to gain from a shared equity mortgage. The equity contribution is an investment, and the lender will take a proportional stake in any gains over the lifetime of the mortgage. If the owner-investor is contributing to mortgage interest, they will likely be able to deduct that interest from their taxable income. The owner-investor can also apply depreciation of the property to their taxes.

Key Takeaways

  • Shared equity mortgages are arrangements where lenders and borrowers share equity ownership in a property.
  • The lender enjoys tax advantages, such as depreciation, as well as the mortgage interest deduction
  • These programs help boost homeownership and can be particularly helpful in high-cost real estate markets, such as San Francisco and New York City. 

Advantages and Disadvantages of a Shares Equity Mortgage 

For many years, shared equity programs have been offered by affordable housing associations and municipalities in order to facilitate homeownership among low-income individuals and first-time buyers. The programs either provide funds for the shared equity investment or connects potential buyers with private lenders willing to co-invest.

Urban Institute research shows that these programs are effective in increasing homeownership among the targeted communities, with the added benefit of assisting potential buyers in assessing their own readiness to purchase a home. More recently, private lenders have entered the shared equity mortgage market, especially in high-cost markets such as San Francisco and New York City.

Another commonly shared equity arrangement is between a parent and a younger, or first-time buyer family member. This type of mortgage is a beneficial arrangement for the lending family member because it allows them to avoid the tax consequences of a substantial financial gift, while potentially earning a return on that capital. High-income adult children can also take advantage of this financing option to contribute to a retirement property for aging parents.