What it means
Buying a home usually requires a large deposit and a big mortgage. Under a shared equity arrangement, another party puts up part of the purchase price, for example 20%, and in return owns a matching share of the property's value.
The buyer needs a smaller mortgage and a smaller deposit, which makes the purchase more achievable. The other party can be a government scheme, a housing association, a developer or a private investor.
Some arrangements charge no rent on the investor's share for a period, while others charge a fee or interest-like cost. The details vary, so reading the contract is essential.
When the property is sold, or at a set date, the investor receives its percentage of the sale price. If the property has gained in value, the investor shares in the gain, and if it has fallen, the investor shares in the loss.
This is what separates shared equity from a simple loan, where the lender is repaid a fixed amount regardless of the property's price. The idea also appears in business.
Two investors may jointly own a building, or a founder may give an investor a share of ownership in a project. In each case, the accounting question is the same: who owns what percentage, who is entitled to what share of the income and gain, and what happens when one party wants to leave.
The nuance is that the investor's share often grows with the property price, so a buyer who sees large gains will hand over a large sum later. Buyers should compare the long-term cost with that of a larger mortgage, because the cheapest option today is not always the cheapest over the life of the loan.
In practice
Real-world examples.
Example
A young couple cannot save the deposit needed for a flat in their city. A shared equity scheme provides 25% of the price, and the couple take a smaller mortgage and agree that the scheme will receive 25% of the future sale price.
Example
A developer sells apartments with a shared equity option, keeping a 30% stake in each unit. The developer records its interest as an investment, and its return depends on how prices move in the area.
Example
Two business partners buy an office building together, with one holding 60% and the other 40%. When they sell, the proceeds are split in those proportions after repaying the loan on the property.
Formula
Calculation
Investor's payout = investor's ownership share % x sale price
Owner's equity = sale price - investor's payout - outstanding mortgage
Suppose a buyer purchases a home for $400,000. An investor contributes 20%, or $80,000, the buyer puts up a deposit and takes a mortgage for the rest. Later the home is sold for $500,000. The investor's payout is 20% x 500,000 = $100,000, a gain of $20,000 on the original $80,000, which is a 25% total return. The owner's side keeps 80% of the sale price, which is $400,000 before repaying the mortgage.Case study
Seen in the real world.
Linden Housing Partners is an illustrative, fictional organisation that helps first-time buyers. It provided 20% of the price of a $350,000 home, which was $70,000, in return for 20% of the eventual sale price.
Six years later the home was sold for $420,000. The organisation received 20% x 420,000 = $84,000, a gain of $14,000 on its $70,000 contribution, while the owners kept $336,000 before repaying their mortgage.
The owners were pleased to have bought earlier than they could have otherwise, but they noted that they had given up 20% of the gain. The illustrative lesson was that shared equity trades part of the future upside for a lower entry cost, and the best choice depends on how much appreciation the buyer expects.
Watch out
Common mistakes.
- Treating the investor's contribution as a loan with a fixed repayment, when the amount repaid moves with the property's value.
- Ignoring the long-term cost, which can be higher than a larger mortgage if the property rises sharply in value.
- Assuming the owner keeps all of the gain, when the investor is entitled to its share.
Questions
People also ask.
What is the difference between shared equity and shared ownership?
In shared equity the buyer owns the whole property and the investor holds a financial stake, while in shared ownership the buyer owns part of the property and usually pays rent on the rest.
Who provides shared equity?
Providers include government schemes, housing associations, developers and private investors, each with different terms.
What happens if the property price falls?
The investor typically shares in the loss, receiving its percentage of the lower sale price, although the contract may set different terms.
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