Definition
A shared equity mortgage (SEM) is a type of home loan arrangement where the lender provides a portion of the down payment and, in return, is granted a share of the equity in the property. When the property is later sold, the proceeds are split between the homeowner and the lender after settling the unpaid mortgage balance. This kind of mortgage allows potential homeowners to afford higher-cost houses by lowering their initial financial burden.
Frequently Asked Questions (FAQs)
What are the main advantages of a shared equity mortgage?
- Lower Down Payment Requirement: It reduces the financial burden on the buyer by requiring a lower initial investment.
- Increased Purchasing Power: Buyers may be able to afford more expensive homes than they typically could without the help of the shared equity mortgage.
- Risk Sharing: Financial risks tied to the property’s value are shared between the borrower and the lender.
Are there any disadvantages to a shared equity mortgage?
- Reduced Ownership: Homeowners have to share a portion of their equity gain with the lender.
- Market Dependency: If the property value doesn’t appreciate as expected, the borrower might end up receiving little or no profit upon resale after splitting proceeds with the lender.
How is the equity split calculated in a shared equity mortgage?
The equity split is typically proportionate to the loan-to-value percentage that the lender and borrower initially agreed upon. For example, if the lender provided 20% of the down payment, they would receive 20% of the net proceeds from the property sale.
Can shared equity mortgages be used for refinancing?
Shared equity mortgages are typically used for purchasing properties rather than refinancing existing ones. However, specific programs and lenders may offer variations that accommodate refinancing.
Do all mortgage lenders offer shared equity mortgages?
No, not all lenders provide shared equity mortgages. They are more commonly offered by specific financial institutions, mortgage bankers, or government-backed programs aimed at affordable housing.
Examples
-
Example 1: Sarah buys a home priced at $400,000. She secures a shared equity mortgage from a lender who provides 25% of the $80,000 down payment. Years later, she sells the property for $500,000. After paying off the remaining mortgage balance, Sarah and the lender split the profits generated proportionately to the initially agreed-upon percentage.
-
Example 2: John obtains a shared equity mortgage where the lender contributes 30% of the needed $50,000 down payment for a home worth $300,000. John later sells the home for $360,000, and he and the lender split the proceeds after settling the outstanding loan balance, per their 30% and 70% initial equity contribution ratio.
- Equity Sharing: An agreement where two or more parties share ownership interest and investment returns of a property.
- Mortgage Banker: A financial professional or institution that specializes in originating and servicing mortgages.
- Down Payment: The portion of a property’s purchase price that the buyer pays upfront and is not financed as part of the mortgage.
- Loan-to-Value (LTV): A ratio comparing the amount of the loan to the appraised value of the property.
Online Resources
References
- Sharma, Milan. “Shared Equity Mortgages Explained” Financial Tribune, 2021.
- Johnson, Emma. “Pros and Cons of Shared Equity Mortgages” The Balance, 2022.
Suggested Books for Further Studies
- “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher.
- “The Complete Guide to Financing Real Estate Developments” by Jack Cummings.
- “Investing in Real Estate” by Gary W. Eldred.
Real Estate Basics: Shared Equity Mortgage Fundamentals Quiz
### What is a shared equity mortgage?
- [ ] A home loan where the entire loan is provided by the borrower.
- [x] A home loan where the lender is granted a share of the property’s equity.
- [ ] A mortgage that splits equal payment schedules between two borrowers.
- [ ] A type of mortgage that does not accrue interest.
> **Explanation:** A shared equity mortgage is a home loan in which the lender is granted a share of the equity, allowing the lender to participate in the proceeds from resale.
### Does the borrower share property ownership in a shared equity mortgage?
- [ ] No, the buyer holds full ownership.
- [ ] Yes, but the lender holds temporary title.
- [ ] No, only the lender has ownership.
- [x] Yes, the ownership is shared as defined in the mortgage agreement.
> **Explanation:** In a shared equity mortgage, the borrower and the lender share ownership of the property.
### How does a shared equity mortgage affect the down payment?
- [ ] It raises the down payment requirement.
- [ ] It requires the borrower to pay the total down payment outright.
- [x] It lowers the down payment requirement for the borrower.
- [ ] It has no effect on the down payment.
> **Explanation:** A shared equity mortgage typically lowers the down payment requirement for the borrower since part of it is funded by the lender.
### In a shared equity mortgage, how are the proceeds from a property sale divided?
- [x] Proportionate to each party's equity contribution.
- [ ] Equally between the borrower and lender.
- [ ] Entirely to the borrower after settling the mortgage balance.
- [ ] Entirely to the lender until full repayment.
> **Explanation:** The proceeds from a property sale are divided proportionate to each party's initial equity contribution in a shared equity mortgage.
### Is a shared equity mortgage typically used for refinancing properties?
- [ ] Yes, it is common for refinancing.
- [ ] No, it is exclusively for purchasing new properties.
- [x] No, it is mainly used for purchasing properties rather than refinancing.
- [ ] Yes, but only for properties over a certain value.
> **Explanation:** Shared equity mortgages are primarily used for purchasing properties and are not typically used for refinancing.
### Can shared equity mortgages boost a borrower's purchasing power?
- [x] Yes, by reducing initial financial burden and required down payment.
- [ ] No, they limit purchasing power significantly.
- [ ] Yes, but only in combination with other loans.
- [ ] No, they do not affect purchasing power.
> **Explanation:** Shared equity mortgages can boost a borrower's purchasing power by lowering the initial financial burden and required down payment.
### What is a key risk of a shared equity mortgage for the borrower?
- [ ] Increased monthly payments.
- [x] Sharing a portion of the property’s appreciation in value.
- [ ] Loss of legal ownership.
- [ ] Higher sale transaction fees.
> **Explanation:** A key risk of a shared equity mortgage for the borrower is that they must share a portion of the property's appreciation in value with the lender upon sale.
### Who typically offers shared equity mortgages?
- [ ] All traditional banks.
- [ ] Any individual lender.
- [x] Specific financial institutions and mortgage bankers.
- [ ] Real estate agents.
> **Explanation:** Shared equity mortgages are typically offered by specific financial institutions and mortgage bankers, not all traditional banks.
### What does ‘equity’ refer to in a shared equity mortgage?
- [ ] The mortgage interest rate.
- [ ] The property’s total value.
- [ ] Improved loan terms.
- [x] The ownership stake in the property.
> **Explanation:** In a shared equity mortgage, ‘equity’ refers to the ownership stake in the property held by both the lender and the borrower.
### Do shared equity mortgages typically have an effect on property tax calculations?
- [x] No, property tax is calculated based on the full property value.
- [ ] Yes, it reduces the taxable value.
- [ ] No, only mortgage payments influence tax.
- [ ] Yes, lender pays the tax.
> **Explanation:** Shared equity mortgages typically do not affect property tax calculations, which are based on the full property value.
