Nowadays, the prospect of saving for a house can be daunting. This is especially true for first home owners and low income earners, with median house prices reaching over $1 million across the capital cities. For many, saving up 20% for a deposit might seem like an impossible task.
With the introduction of the Homebuyer Fund in Victoria, the idea of shared equity might be new to some. Before deciding it’s the way for you to achieve your dream of home ownership, it’s important to understand exactly how it works and what it will mean for you, now and into the future.
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What is shared equity?
A shared equity scheme involves a third party, known as an equity partner, contributing money to help you purchase a home. In exchange for their contribution, the equity partner secures the equivalent stake in your home. An equity partner essentially ‘owns’ a share of your home, so when it comes time to sell, you will need to pay back their share.
To give you an idea of how this would work in practice, let’s look at a hypothetical example.
Jenna wants to buy a home that’s worth $500,000, but she only has a deposit of 5% saved up ($25,000). To avoid paying lenders mortgage insurance (LMI) and owing $475,000 to the bank, she decides to look into finding an equity partner.
She finds one, and they agree to contribute an additional 15% ($75,000) to help her get over the 20% deposit mark. This way, she has a competitive enough deposit to negotiate a deal she’s happy with, and takes out a $400,000 mortgage.
After 10 years, Jenna’s home is worth $650,000. Now, the equity partner’s original 15% contribution of $75,000 is worth $97,500. This is because their 15% share has gone up by $22,500 along with her home’s increased value.
How do shared equity agreements work?
Shared equity agreements can work differently depending on who the equity partner is. Entities like state governments, non-profit organisations, for-profit lenders, and private individuals all offer shared equity schemes, and how this looks can differ between them all.
However, to give you a general idea of how an equity agreement works in practice, they usually look something like the following.
First, the home buyer finds their equity partner (e.g. the state government) to fund a portion of their purchase. Then, of course, they need to find a suitable property to purchase with the help of their equity partner.
Once their equity partner is ready to go and they find a suitable home, the home buyer applies for a mortgage to cover the remaining amount needed to buy the house. In some cases, the home buyer will need to go through a specific lender/bank to finance their mortgage. But in other cases, the home buyer applies for their mortgage as they would normally.
This is the general how-to for getting into an equity agreement; these types of agreements are typically only offered to owner-occupiers, meaning the buyer will need to be living in the property.
Can you get out of a shared equity agreement?
You might be wondering, can I just pay them out, or does the agreement end when I sell? The answer can be a little complicated, but generally, you can pay out your equity partner before you sell your property. But doing so might be difficult, and can come with a few strings attached.
Paying out your equity partner before you sell is allowed by some equity partners, but not others. You’ll need to double check the specifics of your agreement before jumping the gun. Otherwise, when it comes time to sell, you’ll need to pay your equity partner their share in the property: their original contribution plus their share of equity (in most cases).
If you can gradually pay back your equity partner before you sell, there will likely be a few restrictions in doing so. You’ll need to make sure that the amount you’re paying is reflective of the home’s current value, which might mean getting a valuation each time you decide to chip away at your equity partner’s share. Again, this will depend on your individual arrangement. But to use an example of what gradually paying back an equity partner’s share in your home would look like, let’s discuss the Victorian Government’s Homebuyer Fund.
There are quite a few ongoing obligations of the Homebuyer Fund, which we will get into later, but there are also terms surrounding how you can reduce the fund’s share in your property. To do so, each repayment must reduce the share by at least five percentage points, e.g. from 25% to 20%, and be at least $10,000. Additionally, you would need to ask for and be approved by the Homebuyer Fund to pay off the full amount or reduce the state’s equity below five percentage points in the first two years.
Pros and cons of using shared equity agreements
In order to weigh up whether it’s worth jumping onto a shared equity scheme, it’s important to understand both sides of the coin. There are benefits and drawbacks to using shared equity arrangements, some of which are outlined in the table below.
|
Pros |
Cons |
|---|---|
|
You could buy a home sooner |
Often times, you’ll be limited in what you can do with the property without permission |
|
You owe less money to the bank |
You essentially don’t own a portion of your home |
|
You have more borrowing power, which could mean you can buy a nicer/more expensive home |
You have to pay back equity earned on the property |
Whether the pros outweigh the cons or the cons outweigh the pros, the decision is up to you. Shared equity schemes are not considered inherently ‘risky’, and generally speaking, they’re not that common. But if you crunch the numbers and it ends up being worth your while, there are quite a few ways for you to source a shared equity agreement.
Where can I find a shared equity scheme?
As mentioned earlier, organisations/people like state governments, non-profit organisations, for-profit lenders, and private individuals can all offer shared equity schemes. Let’s briefly run over two possible avenues to choose from: Victoria’s Homebuyer Fund and BuyAssist.
Homebuyer Fund
The Victorian Government recently announced its $500 million Homebuyer Fund, which it estimates will support 3,000 people in buying a home across the state. Under this scheme, eligible home buyers must have at least a 5% deposit ready. The state government will then contribute up to 25% of the property price in exchange for an equal stake in the property. For Aboriginal and Torres Strait Islander homebuyers, they must have a 3.5% deposit for up to a 35% contribution.
To participate in the Homebuyer Fund, there’s a long list of eligibility criteria and ongoing obligations you would need to meet. To be eligible, you must earn no more than $125,000 (or $200,000 for joint applicants); the property must be your primary residence (i.e. you must be an owner occupier); and you can’t have any ties to the land or its owners before purchasing it.
For the property to be eligible, it must be located in one of the suburbs from the list provided. For properties in Metropolitan Melbourne and Geelong, it mustn’t cost more than $950,000. In other eligible locations, the property price is capped at $600,000. It must be a standard residential property (house, townhouse, unit, or apartment) and it must be vacant when you purchase it.
Ongoing obligations include:
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an annual review to ensure you’re still eligible to participate in the fund
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being adequately insured
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maintaining the property to make sure it is in good working order
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making all relevant repayments (mortgage, council rates, insurance, other bills, etc.) on time
BuyAssist
BuyAssist is a wholly owned subsidiary of the National Affordable Housing Consortium (NAHC), which allows eligible people to purchase a newly built property. BuyAssist and NAHC work closely with government, but are both non-government entities.
Labelled as ‘equity support’, eligible applicants don’t even need a deposit to purchase a BuyAssist property. However, eligibility requirements include:
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having steady employment
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meeting specific program criteria
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not currently owning a property
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being a permanent resident/citizen
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meeting general lending criteria
If you meet eligibility criteria, BuyAssist could then:
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assess your options to see what you can afford
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provide up to 25% of the purchase price
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match you to a property
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connect you to a lender
Alternatives to entering a shared equity agreement
If you’re desperate to own a home, but you’re struggling to get the funds together for a deposit, there are a few alternatives that might be suitable instead of shared equity.
Take advantage of government schemes
If you’re a first home buyer, there are a few government schemes that you might be able to take advantage of. Specifically, the First Home Loan Deposit Scheme (FHLDS), New Home Guarantee, and First Home Super Saver Scheme (FHSSS) are all government-run initiatives to support first home buyers.
Briefly, the FHLDS assists first home buyers in purchasing a home with a deposit of at least 5% without needing to pay LMI. The New Home Guarantee is similar to the FHLDS, however, the property being purchased must be brand new. Lastly, the FHSSS allows you to use your super fund as a tax-efficient vehicle for accelerating your first home deposit savings.
If you’re not a first home buyer, but you are a single parent, the Family Home Guarantee Scheme allows single parents with a deposit as low as 2% to secure a home loan without needing to pay LMI.
Find a low deposit home loan
Even if you don’t qualify for any of the schemes mentioned above, some lenders offer home loans for borrowers with a deposit as low as 5%. The main drawback of low deposit home loans is that you will need to tack on LMI as an additional expense, which can often amount to thousands of dollars.
Some positives are that there will be less time needed to save for your deposit and you can start building up equity in your home sooner. But in exchange, you’re likely going to need to make larger repayments and you might be charged a higher interest rate.
It can be helpful to shop around and investigate your options for low deposit home loans. Pay attention to things like interest rates (advertised rate and comparison rate), the loan type, fees and charges, helpful features, and who the lender is.
Joint property purchase
If you can’t buy a property on your own, you could consider buying a home with a spouse, family member, or close friend. Co-ownership can increase your collective borrowing power, allowing you to both own a property sooner. There are two ways you can own a property with another person: joint tenancy or tenants in common.
With a joint tenancy, you both act as a single entity and are both completely responsible for the property. Whereas with tenants in common, each party has a proportionate share in the property which can be sold at any time.
If a joint property purchase is on the cards, you could look into a ‘property share home loan’. A share home loan essentially allows you to both take out two home loans for your own share of the property - this can minimise some of the risks involved of buying with another person.
Consider rentvesting
If you can’t afford to buy where you want to live, you could look into rentvesting as a way to become a property owner quicker and at a lower cost. Rentvesting involves purchasing a property in an area where you can afford to buy, but don’t want to live in, and renting it out. Meanwhile, you yourself rent in an area you want to live in.
By rentvesting, you can often accumulate equity in your investment property which can become helpful when buying a second property. However, it’s important to consider that by rentvesting as a first home buyer, you’re no longer eligible for any first home buyer support from the government.
There are a few pros and cons to rentvesting that you should consider before deciding it’s right for you. Benefits include:
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being able to buy a home sooner
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your purchasing power won’t affect your lifestyle
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tax advantages as an investor
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the opportunity to ‘be smart’ about your property purchase
However, some drawbacks are:
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you’ll need to keep renting
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your home’s value won’t necessarily grow
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you have to cover rent and a mortgage
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you lose access to first home owner grants
Get a guarantor
Lastly, you could look into having a guarantor on your home loan. A guarantor will essentially secure a portion of your home loan by using the equity in their home as security for part/all of your mortgage. A guarantor kind of acts as a buffer between you and your lender, protecting you from LMI costs and improving your chances of loan approval if you’re not a very strong applicant.
While the mortgage will be in your name and your responsibility to cover, if anything goes wrong (i.e. you’re unable to make your repayments), the responsibility then falls onto your guarantor. So there is some risk involved for the guarantor, which is why they must be a close relative (typically a parent).
By agreeing to go guarantor on a mortgage, guarantors take on significant risks - they risk losing their property, damaging their credit, and even damaging the relationship between guarantor and guarantee if anything goes wrong.
Savings.com.au’s two cents
While it might seem like the prospect of home ownership is slipping away, there are still ways to get into the property market. Whether that’s through a shared equity scheme or otherwise - there’s no need to lose hope. Simply biding your time and saving for a little longer is always an option.
In any case, saving for a house deposit is always a difficult task. There’s nothing wrong with renting and saving until you’re comfortable to take the leap into home ownership. There’s no need to feel pressured to jump onto one of these schemes to quickly get into the housing market, because home ownership is a big decision and responsibility.
Consider your options, do your research, and if you’re not sure what the best route is for you, consider speaking to a financial adviser.
Image by Klara Kulikova on Unsplash
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