Shared Equity Mortgage

What is '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 financial contribution. Each party also shares losses on the sold property. 

BREAKING DOWN 'Shared Equity Mortgage'

A shared equity mortgage is an attractive option for home buyers 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.

A buyer seeking to extend their buying power can turn to products like adjustable rate mortgages (ARMs), interest-only loans, or interest buydown loans. However, each of these mortgage types involves a higher financial risk to the buyer than a shared equity mortgage. 

The Shared Equity Mortgage at Work

For many years, shared equity programs have been offered by affordable housing associations and municipalities in order to facilitate home ownership 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 home ownership 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.

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.