Legal Definitions - Shared equity mortgage

A shared equity mortgage is a specific type of home loan where the lender not only provides funds for the purchase but also acquires an ownership stake, or 'equity share,' in the property itself. This means that when the home is eventually sold, the lender receives repayment of the original loan amount plus a predetermined percentage of any increase in the home's value. This arrangement can make homeownership more accessible for individuals who might otherwise struggle to qualify for a traditional mortgage, as the lender's shared equity reduces their risk. However, it also means the homeowner shares a portion of the property's appreciation with the lender and may face certain restrictions on selling the home or making significant alterations.

Here are a few examples to illustrate how a shared equity mortgage works:

• Supporting First-Time Homebuyers: Imagine a young couple, Maya and Ben, who earn a moderate income but struggle to save for a large down payment in a competitive housing market. A local non-profit housing organization offers them a shared equity mortgage. The non-profit provides a portion of the down payment and a favorable interest rate on their loan, in exchange for a 25% equity share in the home. Five years later, when Maya and Ben decide to sell, the home's value has increased significantly. After repaying their original loan amount, the non-profit receives 25% of the profit from the home's appreciation, allowing Maya and Ben to afford their first home while also ensuring the non-profit can reinvest funds to help other families.

  This example illustrates how a shared equity mortgage can lower the barrier to entry for first-time homebuyers by reducing their initial financial burden, with the lender participating in the home's future value growth.

• Government Program for Essential Workers: The city of Evergreen wants to help its essential workers, like teachers and firefighters, afford homes within city limits. They launch a program offering shared equity mortgages. Sarah, a public school teacher, qualifies for the program. The city provides a loan that covers a significant portion of her home's purchase price and retains a 30% equity share in the property. Ten years later, Sarah decides to retire and sell her home. The city receives the repayment of its original loan amount plus 30% of the profit generated by the home's increased market value over the decade. This allows the city to replenish its housing fund and continue assisting other essential workers.

  This example demonstrates how government entities can use shared equity mortgages to achieve social goals, such as retaining vital public service employees, by making housing more affordable while also recovering funds through property appreciation.

• Private Investor Partnership: David wants to purchase a home but has limited savings for a down payment, making it difficult to secure a traditional mortgage. A private investment firm specializes in shared equity arrangements. The firm agrees to contribute 35% of the home's purchase price as an equity investment, in exchange for a 35% share of the home's future appreciation. David secures a primary mortgage for the remaining amount and makes his monthly payments. When David sells the home fifteen years later, the private firm receives its initial 35% investment back, plus 35% of the profit from the home's increased value. This partnership allowed David to become a homeowner much sooner than he could have otherwise.

  This example highlights how private investors can act as shared equity lenders, providing capital to buyers who need assistance with down payments, and subsequently sharing in the property's financial growth.