Shared equity agreements
A shared equity agreement allows someone to help you purchase a property by paying some of your costs. But they also get some of the property's equity when you sell.
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A shared equity agreement (SEA) makes it easier for you to buy a home by allowing a third party (called an equity partner) to contribute some of the deposit or purchase price. In exchange, this partner receives a portion of future equity when the home owner sells the property.
In other words, they help you buy the property and you owe them in the future, either by repaying them in full or by paying them a share of the equity when you sell.
Shared equity agreements can be a viable option for first home buyers on a low income, but they're quite rare in Australia.
How do shared equity agreements work?
SEAs vary depending on who is offering the agreement, but they generally work like this:
- A home buyer finds an equity partner to fund a portion of their property purchase.
- The home buyer finds a suitable property to purchase.
- The home buyer applies for a regular mortgage to cover the remaining purchase cost not covered by their deposit and the equity partner's contribution.
- Optional: As time passes, the home buyer can choose to repay some or all of the equity partner's costs (plus equity). However, not every SEA allows this.
- Finally, when the buyer sells the property, the equity partner receives their contribution back plus a proportionate amount of equity (if the property has risen in value).
As stated above, some SEAs allow you to repay the equity partner's contribution over time, rather than when selling. Regardless of when you repay the contribution, you will have to pay a matching portion of equity if your property has grown in value.
What are the risks of buying property with a shared equity agreement?
SEAs are unusual arrangements and not very common in Australia. While they are not inherently risky, there are a few things that potential borrowers need to be aware of. First of all, your equity partner has a stake in the future value of your property.
If your home rises in value they will receive a fair portion of that value. This is either when you sell the property, or sometime after buying the property.
If your property loses value (this is called negative equity) then you may end up owing the equity partner more than the property's value. But this depends on the specific details of your agreement. In some SEAs, negative equity simply means that the equity partner takes a loss when their contribution is repaid.
Who offers shared equity agreements?
The following organisations/people may offer SEAs:
- State governments
- Non-profit organisations
- For-profit lenders
- Private individuals
Some state governments have shared equity schemes that allow people in government housing to buy their properties from the government. Non-profits usually offer SEAs to home buyers on low incomes.
Other shared equity agreements are offered by for-profit banks but these are quite rare in Australia.
Bank First offers a shared equity agreement combined with a Bank First home loan. This agreement allows a home buyer's family member to contribute some of the property purchase price. This reduces the borrowing amount for the buyer. In exchange, the contributor receives a percentage of the equity when the property is sold (or the agreement term ends).
Are there any alternatives to an SEA?
If you're struggling to get a deposit together to buy a property there are a few alternatives to an SEA:
- Get a mortgage guarantor. If you have a willing family member who owns their own property, they can guarantee a portion of your deposit. There's some risk for the guarantor, but unlike an SEA, the home buyer doesn't lose any of their equity.
- Find a low deposit home loan. You can get a mortgage with just 5% of the price of the property. The main drawback of a low deposit mortgage is that you have to pay lenders mortgage insurance.
- Purchase a property jointly. You could buy a property with a partner, close friend or family member. It's not an option for everyone, and there are obvious downsides. But it is an option for the right borrower.
- Rentvesting. Keep renting in an area that you like living in, but purchase an investment property in an area that you can afford – then rent it out.
Read our in-depth deposit saving guide for more tips on building a mortgage deposit for yourself.
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