Shared Equity Mortgage

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 part, according to their equity contribution. Each party also shares any losses accrued from the sold property. 

Key Takeaways

  • Shared equity mortgages are financial arrangements where lenders and borrowers share equity ownership in a property.
  • The lender enjoys tax advantages—such as depreciation—in addition to the mortgage interest deduction
  • These programs may be particularly helpful in high-cost real estate markets.
  • When the property sells, the allocation of equity goes to each part, according to their equity contribution; each party also shares any losses accrued from the sold property. 
  • A shared equity mortgage can be a good solution for homebuyers.

How a Shared Equity Mortgage Works

A shared equity mortgage is an attractive option for homebuyers planning on being owner-occupants. 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 gains 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.

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

Advantages and Disadvantages of a Shared Equity Mortgage 

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

Urban Institute research shows that these programs effectively increase homeownership among the targeted communities, with the added benefit of assisting potential buyers in assessing their readiness to purchase a home.

Private lenders have entered the shared equity mortgage market more recently, 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 can be beneficial 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.

Who Does Shared Equity Mortgages?

Housing associations and municipalities may offer programs that provide shared equity to low-income and first-time buyers. Private lenders or even family members may be willing to participate in a shared-equity mortgage as well.

Can I Share an Equity Mortgage With My Family Member?

Yes. You can share an equity mortgage with a family member and it may help you skirt owing a gift tax to the Internal Revenue Service. Taking out a shared equity mortgage with your adult children who are first-time home buyers, or financing a mortgage with your aging parents, are both ways to take part in a shared equity mortgage.

How Does Shared Equity Mortgage Work?

When you take out a shared equity mortgage, it means you share the equity with the lender. The homebuyer will live in the property but any equity that accrues, the buyer splits with the lender, also acts as an investor in the property.

How Do I Sell My Shared Equity Mortgaged Home?

You can sell your house if you own it with a shared equity mortgage, but depending on how much equity you have in the home, you may or may not make any money on it. When you sell, you have to share any profits with the lender.

Article Sources
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  1. Housing Matters. An Urban Institute Initative. "Shared-Equity Homeownership Offers an Alternative Path to Wealth Building for Renters with Low Incomes."

  2. Saporta Report. "Understanding the Housing Affordability Problem."

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