What it means
In an ordinary mortgage, the lender is paid back the money lent plus interest, whatever happens to the property price. In a shared equity finance agreement, the funder takes a different kind of return.
Instead of interest, the funder receives a share of the property's appreciation, and in some agreements also bears a share of any fall. The contract has to state several things clearly.
These include the size of the funder's contribution, the percentage of the change in value it will receive, the event that triggers payment such as a sale or a set number of years, and how the property will be valued. Disputes most often arise over the valuation and over what counts as an improvement paid for by the homeowner.
For the homeowner, the main attraction is a lower monthly payment, since there is often no interest or repayment on the funder's part until the end. For the funder, the attraction is the chance of a higher return than a normal loan if prices rise.
The funder also takes the risk of getting back less than it put in if prices fall. Agreements differ from country to country, and some are regulated as credit products while others are treated as investments.
Anyone entering one should read the terms about early repayment, renovation, renting out the property and what happens if the homeowner dies. Independent legal and financial advice is sensible before signing.
The nuance is that the cost of the agreement is not known in advance. If the property rises sharply, the amount owed to the funder can end up being far higher than the original contribution, and the effective annual cost can exceed that of a conventional loan.
In practice
Real-world examples.
Example
A family wants to renovate and extend their home but does not want a higher monthly payment. They sign a shared equity finance agreement that gives the funder 25% of future increases in value, and they use the money for the building work.
Example
An investment fund provides contributions to dozens of homeowners across a city under standard agreements. The fund treats the portfolio as an investment whose return depends on local house prices, and it reports the unrealised gains each year.
Example
A young professional uses an agreement to cover part of her deposit. When she sells the home four years later, the solicitor calculates the funder's share of the gain, deducts it from the proceeds and pays the balance to her.
Formula
Calculation
Funder's payout = original contribution + (agreed share % x (final value - starting value))
Suppose a funder contributes $50,000 towards a home valued at $500,000 and is entitled to 30% of any increase in value. After five years the home is sold for $600,000. The increase is 600,000 - 500,000 = $100,000. The funder's share of the gain is 30% x 100,000 = $30,000, so the payout is 50,000 + 30,000 = $80,000. The funder's annual return is (80,000 / 50,000) ^ (1 / 5) - 1 = 1.6 ^ 0.2 - 1, which is about 9.9% a year.Case study
Seen in the real world.
Meridian Home Fund is an illustrative, fictional investor that offers shared equity finance agreements to homeowners. It advanced $60,000 to a couple on a $400,000 home in return for 25% of any change in the value of the home over ten years.
At the end of the term the home was valued at $480,000, an increase of $80,000. The fund's share was 25% x 80,000 = $20,000, so the couple repaid 60,000 + 20,000 = $80,000, using a new conventional mortgage.
The couple had paid no monthly interest for ten years, which had eased their budget. The illustrative lesson was that the total cost was only known at the end, and had prices risen faster, the repayment could have been much higher.
Watch out
Common mistakes.
- Assuming the agreement costs nothing until the end, when the final repayment can be large if the property rises sharply in value.
- Overlooking how the property will be valued, which is a common source of disputes.
- Treating the funder's share as a fixed amount, when it moves with the market value of the property.
Questions
People also ask.
Is a shared equity finance agreement a loan?
Not in the usual sense, because the funder's return depends on the property's value instead of a fixed interest rate, although some laws treat it as a credit product.
Who bears the risk if house prices fall?
It depends on the contract, since some agreements share losses with the funder and others protect the funder's original contribution.
Can the agreement be repaid early?
Often yes, but the contract may require a fresh valuation and may set a minimum payment, so the terms should be checked.
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