It is a fine accomplishment to buy yourself a property. Regardless of the property type or the location, congratulations on an amazing achievement.
As the population increases, property becomes more scarce and in demand. In recent decades, Melbourne property has increased substantially making it very difficult for many people to achieve that dream.
Saving for a property deposit is one of the hardest objectives. In these circumstances, some are lucky to consult their parents or other family members to help. Many others don’t have this fortunate assistance.
This is where shared equity schemes can help. Its certainly not for everyone, but it is an interesting strategy that may suit you.
What are Shared Equity Schemes?
A shared equity scheme is when the cost of purchasing a home is shared between a buyer and an equity partner. An equity partner may come from a private investor or a not-for-profit organisation.
In general cases, a shared equity partner will provide 20% of the purchase price or possibly more. The property deposit will reduce the required loan allowing a lower income earner to purchase a property. As the property deposit is often the restriction to affording a home, a shared equity partner will fill that void.
Not only does it help a buyer purchase a property, it also provides the shared equity partner the potential to profit by owning a percentage of the property. The shared equity partner would be entitled to a share of the property’s increase in value and by charging ongoing service fees.
Overtime the buyers can purchase the shared equity partners ownership, but it will obviously be based on the percentage they contributed by the market value at the time the buyers want to take full ownership.
Shared Equity Scheme vs Full Ownership
Full ownership is of course when you own the property. Shared Equity Schemes are known as a co-ownership where the shared equity partner owns a percentage of the property that equals to the percentage of the cost they initially contributed. In a full ownership you are 100% fully entitled to all the potential capital gains it may generate over time. In a Shared Equity Scheme this capital growth is shared.
As mentioned earlier in this article, overtime the buyers can purchase the shared equity partners ownership to take full ownership.
Who suits a Shared Equity Schemes?
Shared Equity Schemes can be beneficial to lower-income earners as it helps them afford purchasing a property. Low income earners generally struggle with saving for the property deposit. This will also help low income earners with a better borrowing capacity.
Are there any risks?
With all strategies there are always associated risks involved. In the event the property purchased decreases in value below what was initially paid, a Shared Equity Schemes you may owe more money than what the property is worth. If your income exceeds the threshold of your Shared Equity Scheme, you may also be required to buy back the shared equity partners share. This may cause you to borrow more money from the bank, but if this is not approved and the repayments are not manageable, you’ll have to consider selling the property prematurely. If sold prematurely, you may unfortunately sell in a poor market, while sales fees and other costs may cause the sale to be below the cost price.
As most buyers will be borrowing to purchase the property, the interest rates will be higher than a traditional home loan/ownership.
Before proceeding with a strategy to escalate your purchase sooner, we recommend consulting various professional such as a solicitor, mortgage broker, financial planner and accountant. Each professional will provide different insights as to what is suited to you and what is not.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
Aug 2019
