Shared Equity Schemes For First-Time Buyers
Shared equity schemes for first-time buyers have become increasingly popular over the past few years. With the prices of houses steadily climbing despite the pandemic and wages remaining stagnant, many are finding that it is the perfect in-road to getting a first step on the property ladder.
What Is A Shared Equity Scheme?
The name ‘shared equity scheme’ is a bit of a red herring as it implies that you don’t fully own the property. What it actually means is that you don’t ‘share’ the equity with anyone – the property is completely owned by you – but you will need to take out an equity loan in order to be able to purchase it.
The loan will help towards the deposit on your property, meaning that you can put a bigger lump sum down when you come to applying for a mortgage. It also means that you will get access to mortgage packages with better preferential terms that would previously have been unavailable to you.
Shared equity schemes often get confused with shared ownership schemes but that is a completely different form of home ownership. With shared ownership, you invest in a property with others and each owns a percentage of it based on your financial contribution.
Where Do I Get A Shared Equity Scheme Loan From?
The English, Scottish and Welsh Governments all offer similar variations of a Help to Buy equity scheme, but they are not the only ones offering them. Property developers sometimes offer shared equity loans to help sell the houses that they have built. It’s worth noting that the terms and conditions of these types of schemes vary wildly from developer to developer, so it’s worth doing your research before signing on the dotted line.
How Do The Equity Loan Schemes Work?
Using the English Help to Buy scheme as an example, first-time buyers would be required to have a 5% deposit saved up to put towards the cost of a new-build home and have a good credit history. The shared equity loan would then cover up to 20% of the value of the home (In London, the loan can cover up to 40% of the value of the home).
Obviously, as this is a loan then it will need to be repaid. In the case of the English Buy to Let scheme, no interest is added to the loan for the first five years. Once this time period has elapsed, a fee equivalent to 1.75% of the loan’s value is added, and this then increases year-on-year in line with the Consumer Prices Index measure of inflation, PLUS an additional 2%.
What Are The Pros And Cons Of A First-Time Buyer Shared Equity Scheme?
While the thought of owning your own home and gaining your freedom is massively appealing, you need to consider whether a shared equity scheme is the right way to do this. What are the pros and cons of entering into a shared equity scheme for a first-time buyer?
GETTING ON THE LADDER QUICKLY – This scheme lets you fulfill that dream of getting a place of your own sooner rather than later.
YOU ONLY NEED TO RAISE 5% OF THE HOME’S VALUE – Traditional mortgage lenders want anything from 10% to 25% deposit before they’ll even consider offering you a mortgage. If you’re on a low income then this could literally take years, even decades, to build up. By the time you’ve managed to raise that kind of money, you may find that the prices of houses have risen again, meaning that the amount you have raised still isn’t enough. Only having to raise a 5% deposit means that should happen much faster for you.
RISING HOUSING PRICES – If the prices of the property market increase or spike dramatically, then so will your loan repayments. Don’t forget, you have to pay for your loan alongside your regular monthly mortgage repayments, so if both of these numbers skyrocket all at once, then you could find yourself in financial hot water.
RE-MORTGAGING – If you have an equity scheme loan and come to remortgage, you may find that your options are limited as some mortgage lenders won’t entertain properties with Buy to Let loans attached to them. This is something to consider especially hard if you are on a repayment-only mortgage.
I’m A First-Time Buyer; How Do I Apply For A Shared Equity Loan?
Firstly, you must apply for the loan via a shared equity loan accredited expert who will go through your options with you and work out what you can realistically afford. Once the loan has been approved, either via a Government scheme or a building developer, you can seek advice about getting the best mortgage for you and your personal circumstances.
Will Having A Shared Equity Loan Affect My Ability To Get A Mortgage?
No. If anything, it may help you to get a mortgage because you’ll be putting a large deposit down and won’t have to lend as much from the mortgage broker. You’ll probably be offered the same mortgage packages afforded to those people that put down a 25% deposit, but it’s always best to get sound financial advice before making a big commitment like this.
First-Time Buyer Mortgage Advice
PBS Mortgage Solutions have lots of experience in advising first-time buyers on shared equity schemes and the mortgages that they can apply for once the loan is in place. If you have been thinking of taking advantage of a shared equity scheme but need further advice, get in touch and one of our experts will be happy to talk you through the different loan and mortgage options available to you.