A shared equity mortgage allows home buyers to enter the market sooner when they don’t have enough capital to pay for a down payment. The lender can provide 5% or more of the down payment to help you secure your dream home.
The lender or government entity can own 5% or more equity in your home, which can be cashed out upon sale based on the equity split. You would still need to put down a minimum of 5% as a down payment, which is required by Canadian law, to be eligible for this shared equity model.
Additionally, there is no added interest for the equity the lender takes, and generally no annual fees. Your lender or government entity will own the percentage of your home, allowing you to increase your total down payment.
With the higher down payment amount, you can potentially get a lower interest rate as well. This helps you potentially lower your monthly mortgage payments as well as get a more favourable interest rate long-term. When you decide to sell the property, the lender will be able to get back their investment in cash.
As you have two aspects of your home ownership, namely equity (down payment), and debt (mortgage payments), you can increase the equity amount without disrupting the debt amount through the shared equity model.
Let’s take an example of a $300,000 home.
You would generally have to put down around 20% as a down payment, which would be $60,000. You can choose a shared equity program and put down 10% ($30,000) and have the lender put down 10% ($30,000). Now you can buy your dream home for a $30,000 down payment using the program.
It is important that you consult with the brokers at sHelto to understand whether shared equity mortgage plans are right for you. We can help you calculate the total savings, appreciation, amortization, and interest payments for you as well as help you connect with the right lender based on your unique case.
Exploring the main benefits of a shared equity mortgage
These are some of the main benefit areas of a shared equity mortgage, which is why several Canadians opt for the program.
Lower the interest rate
With the higher down payment, through the shared equity, you can benefit from a lower interest rate. You can then lower your overall financial obligations, through the reduced interest rate via the shared equity plan.
Lowering monthly costs
You can potentially lower your monthly mortgage payment, through larger down payments within the shared mortgage loan. The shared mortgage lender will be able to provide more information on your specific monthly payments and costs.
Entering the housing market sooner
This is one of the main benefits of the shared equity mortgage, allowing for buyers to enter the home ownership market sooner. You can get your dream home and build up its equity over time, through the shared mortgage option.
Buying a larger home
You can potentially buy a larger home through the shared equity mortgage plan. With the down payment amount being based on the home’s purchase price, you can have a larger mortgage down payment through the shared equity solution.
Lower PMI insurance
You can pay mortgage insurance at a much lower rate, when your down payment is larger. The private mortgage insurance can help with protecting the lender, while the borrower can save money by having a larger down payment.
No additional payment to the lender
You would typically not have to pay any additional amount to the lender for investing in the down payment. Some lenders require payment at a set date, others opt for appreciation or depreciation along with the percentage of sale value upon selling the house.
Understanding the downsides of a shared equity mortgage
It is important to know the potential downsides of the shared equity program, so that you’re able to make an informed decision about the solution.
Restrictions for certain programs
There may be restrictions, in terms of home value and income levels, which may make you ineligible for the shared equity mortgage in some cases. You may have to opt for alternative programs, that may be more suited for your requirements.
Still need 5% down payment
Regardless of what mortgage program you opt for, you will still need to put down a 5% down payment with the lender or government agency providing the remaining 5%. This means that you can avoid the program altogether and opt for a smaller home with the 5% down payment.
Potential for higher costs
You could owe more upon selling the home, than the original additional shared equity provided by the lender. You would have to provide the remaining balance to the lender when selling so that they can acquire their equity value back.
Limited programs
There aren’t a large number of shared equity mortgage programs, which can make the plan more restrictive in terms of lender options, home value, etc. You may have to choose within a handful of solutions if you want a larger home.
Solely responsible for costs
As a home buyer, you will still be solely responsible for property taxes, repairs, maintenance, mortgage loan insurance, and other costs. The shared equity doesn’t include shared costs, which is why some buyers opt for a joint mortgage instead.
Should you opt for a shared equity mortgage?
Let’s understand the additional considerations that need to be captured when making a decision about the shared equity program. You can think about the shared equity mortgage in Canada through the following lenses.
Lower home ownership equity
When compared to a larger down payment and a single home ownership model, you get to keep more of your home equity long-term. If keeping your home equity is a priority for you, then waiting for a few years and acquiring enough of a down payment may be the better option.
Understanding your monthly costs
You would still have to understand your monthly mortgage payments, mortgage insurance costs, etc. along with the loan specifications and requirements. You would have to capture the change in value during appreciation and depreciation upon selling, so that you’re able to benefit from a growing market.
Higher maintenance on a larger property
You may have to pay more monthly on maintenance, taxes, and fees, when you procure a larger property through the shared mortgage plan. While the down payment on a house is lowered, you would still have to pay higher on a long-term monthly basis on a larger house.
Smaller mortgage may be ideal
For many Canadians, a more conservative mortgage may be ideal. Opting for a shared equity mortgage requires sharing of the risks as well as splitting the sale value, which can impact your selling decision. You can opt for a smaller down payment and choose lower monthly payments.
Opting for other programs
There are several incentives offered by the Canadian government, such as the first time homebuyers incentive, that can help finance your dream home. Similar to an FHA loan in the US, Canada offers multiple types of plans that may be more prudent for you than a conventional loan.
Getting the right lender
It is essential to get the right private or public lender who can understand your unique case and provide the right program. It is also vital to know the specifications and requirements of the plan offered so that you’re able to get a mortgage that works for you.
