What Are Shared Equity Finance Agreements?
A shared equity finance agreement is a specific type of real estate purchase agreement in which a shared-equity partnership of two or more parties buys a residence together.
Sometimes, such an agreement will instead specify that a lender and a borrower share in the ownership of a property, where it is known as a shared equity mortgage.
- A shared equity finance agreement allows multiple parties to go in on the purchase of a property, splitting the equity ownership accordingly.
- This type of arrangement is often structured when one party on their own cannot afford to purchase a home—for instance, when a parent helps an adult child.
- Shared equity mortgages occur when the borrower and the lender both obtain an equity stake in the property.
Understanding Shared Equity Finance Agreements
A shared equity finance agreement is a financial agreement entered into by two parties who would like to purchase a piece of real estate together. Two parties typically choose to enter into a shared equity finance agreement and purchase a primary residence together because one party cannot purchase the residence on its own. It is a fairly uncommon mortgage type. In a shared equity finance agreement, the two parties fulfill different roles. The financially stronger party acts as the investing owner, while the other party is the occupying owner.
These agreements tend to be more or less charitable in nature and will often state explicitly that the latter party must pay a proportional share of the mortgage payment as well as expenses, such as homeowners' insurance and property taxes. In some shared equity finance agreements, in return for providing at least a portion of the down payment, the investing party also receives a portion of the profits when the occupying party chooses to sell the home.
The most common situation in which one sees a shared equity finance agreement is when parents want to help a child purchase a home. In some shared equity finance agreements, the occupant partner must pay the investor partner a monthly rental payment above and beyond the proportional share of expenses. The investing party is usually then able to deduct its share of expenses paid, including the depreciation of the property.
Real-World Example of a Shared Equity Finance Agreement
Say an individual wants to purchase a home, but they cannot afford to do it on their own. If a parent is willing to help the individual purchase the home, they may choose to help the individual by entering into a shared equity finance agreement. In the agreement, the two parties reach terms that vary from situation to situation.
For example, the parents may choose to enter into an agreement where, in addition to paying the down payment, they sign a mortgage as well. This means they will be fiscally obligated to pay half the mortgage until the entirety of the loan is paid. The child in this situation then pays their half of the mortgage to the bank, and then pays their parent’s half the house's market rate as rent. If the home rents for $1,000 a month, they would pay their parents an additional $500 after splitting the costs of the mortgage and other home costs.
Shared Equity Mortgages
A shared equity mortgage is another 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.