Shared Equity Home Loans
Equity finance mortgages (EFM), also known as shared equity loans, were available until recently. The information below provides an overview of an EFM loan but be aware these are not currently accessible to borrowers.
An EFM works by sharing part of the cost of your property purchase, usually, 10, 15 or 20 per cent, with a lender, enabling you to purchase a property to a value not covered by a traditional home loan. The other 80 per cent of the cost of the property is secured using a regular home loan. Mortgage holders who want to reduce their monthly repayments opt for EFM’s as you are not required to make any regular monthly interest repayments for the EFM portion for up to 25 years.
A shared equity home loan (EFM) can increase your borrowing capacity by up to 20% and reduce your monthly home loan repayments. However, EFM’s can be very complex with a number of fees, charges, terms, conditions and lending criteria.
To assess your home loan requirements and to negotiate a competitive deal, talk to your Loan Market mortgage broker.
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How do shared equity home (EFM) loans work?
The lender takes a portion of capital gains when the property is sold or your loan is finalised and in return, you are not charged interest, nor do you make any repayments on the portion of your loan that is shared with the lender.
The amount of capital gains the lender is entitled to can be as high as 40 per cent, and in the event of capital loss, the lender will also usually share a portion of this cost.
The remainder of the loan functions exactly the same as a more traditional home loan and will depend on the type of loan you have negotiated with your lender eg. fixed, variable, split etc.
What considerations should I be aware of?
Shared equity loans can be beneficial in terms of reducing upfront costs and repayments, but be aware that it may cost you more to pay out a portion of your capital gains at the end of the loan term than it would to have serviced a traditional mortgage over that period of time.
In addition, you may be limited to specific lenders and home loan products for the portion of your home loan functioning as a traditional mortgage. You may also only be able to access a shared equity loan in certain areas. Some first home buyers find that they are unable to borrow enough money to purchase their own home, in such instances, the First Start Shared Equity Home Loan Scheme can help make the dream of home ownership more attainable.
Western Australia’s first home buyers benefit from the scheme by sharing the ownership and cost of their first home with the Department of Housing and Works. Depending on your income and household size, the Department will co-own up to 40 per cent (conditions apply) of a property with you. Later when you can afford to, you can purchase all or part of the Department’s share.
First Start participants are also exempt from Stamp Duty on their home purchase saving families around $8,000 on the purchase of a $350,000 home.