Australian shared equity scheme: a potential key to unlock affordable housing

Australian shared equity scheme: a potential key to unlock affordable housing

shared equity schemes are an increasingly popular option for first home buyers, but what are they and how do they work?

Young and first time buyers face plenty of hurdles when it comes to entering the property market. It’s easy to see why when you consider the increasing inflation and interest rates alongside a national median dwelling price of $896,000.

One solution getting buyers into their homes sooner is shared equity - an arrangement that sees the government or a similar party buy a stake in your home.

Here’s everything you need to know about shared equity schemes, including how they work and their pros and cons.

What is a shared equity scheme? How do shared shared equity schemes work?

Shared equity schemes (arrangements) are when a party - like the government or a non-profit - buys a portion of a home while you own the rest.

The government buys a ‘share’ in your home in the form of a downpayment, helping reduce upfront costs and making home ownership easier. Buyers take out a mortgage to cover the remaining costs.

The government will take its share, including any profits, when you sell your home. Most shared equity schemes have an option to buy back equity over time. So if the government owns 30% of your home, you can buy this back at current market value gradually.

Disadvantages of shared equity

Reduce upfront costs - by lowering how much you personally pay.

Shared profits - The equity provider will take their share in profit if you sell your property.

Increase your buying power - potentially bridging the gap between where you want to buy and what you can afford to buy.

Criteria - Government shared equity schemes often have criteria such as income limits or occupancy requirements.

Flexibility - government schemes are often designed to provide flexibility for first home owners, including buy-back and interest-free options.

May need to make repayments sooner - If your circumstances change under some schemes, you need to start repaying the government’s share of the loan.

What are the advantages of shared equity?

Shared equity schemes bridge the gap between your budget and the cost of a property.

They can be a helpful hand-up for home owners seeking to enter the property market by lowering upfront costs.

Imagine you enter a shared equity arrangement for of a $600,000 property and your equity investor contributes $120,000 as a 30% downpayment.

With a shared equity option, your monthly repayments (on a 30-year $480,000 loan at 5.6%) are $2,756. Whereas, without the equity option your repayments would be $3,444 - about $172 extra a week.

Buying with shared equity effectively boosts your buying power which might help you buy a home in a more desirable (and often expensive) location.

What are the disadvantages of shared equity?

One key disadvantage is sharing your home with another party.

While this isn’t likely to impact your daily living, it is a big consideration if you decide to sell your home. If a portion of your home is owned by another party, you’ll need to pay their share, including any profits.

If you are entering shared equity via a government scheme, you will be subject to criteria like income limits.

Also, only a few lenders offer shared equity options. Thankfully, a UNO broker can help you compare deals from over 20 lenders to find the right option for you.

Is shared equity a good idea?

Shared equity can help you buy a property sooner by reducing the amount of deposit required and ongoing mortgage repayments.

It is important to consider the long-term implications, though. These might include sharing in your property’s profits and your personal plans. As with any financial decision, it is important to seek personal advice from a professional.

Help to Buy scheme: the government’s proposed shared equity scheme for first home buyers

Labor’s proposed Help to Buy scheme is a shared equity arrangement where the government will co-purchase 30 to 40% of a home with eligible buyers. The proposed scheme will have 10,000 places annually for eligible buyers who require a deposit as low as 2%.

Announced in 2022 as a part of the federal election campaign, the scheme is yet to be introduced.

Participants must earn less than $90,000 for individuals or $120,000 as a couple. They cannot currently own a home but don’t have to be first home buyers.

Help to Buy is similar to existing state equity schemes like Victoria’s Homebuyer Fund.

How do I apply for shared equity?

Talk to a mortgage broker about your options, including your eligibility for shared equity and any other support that might be available to you. A UNO broker can help you navigate the process of a applying for shared equity.

State-specific shared equity schemes

In addition to proposed federal shared equity, state governments administer their own schemes for first home buyers.

New South Wales - Shared Equity Home Buyer Helper

In this program, the New South Wales government invests a fraction of a homeowner's property value in return for a stake in their real estate.

Qualified individuals encompass single parents, individuals over 50 years old, and specific public servants such as nurses and educators. A minimum deposit of 2% is mandatory.

There are no rent or interest charges associated with the government's ownership share of the property. However, they will share in the profits when the property is sold.

You have the option to make voluntary payments to gradually repurchase your share of the property over time.

Victoria - Home Buyers Fund (VHF) shared equity

In Victoria, the state government will contribute up to 25% of a property's value provided you can show a 5% deposit of genuine savings.

Eligible buyers need to earn less than $130,000 for individuals or less than $208,000 for couples. No interest is payable on the government’s share of the property and buyers can buy back equity over time.

South Australia - shared equity loans with HomeStart

In South Australia, shared equity options of 5-25% are accessible through State Government lender HomeStart.

There is a co-contribution cap of $200,000 and HomeStart will take a share of profits if you sell your house without paying back the shared equity loan. UNO works with HomeStart and over 20 other lenders. Talk to a UNO broker about shared equity options today.

You can learn more about HomeStart here.

Western Australia - KeyStart shared equity loans

State-backed lender KeyStart assist buyers in WA enter the market with shared equity loans of up to 30%.

The Shared Ownership Home Loan requires a deposit as little as 2% and no Lender’s Mortgage Insurance (LMI). The Western Australian Housing Authroity will own a co-share of up to 30% of the property’s value. Criteria apply including income limits of $70,000 for singles and $90,000 for couples/families. There are also special criteria for groups, including Aboriginal and Torres Strait Islander Peoples and single parents.

Disclaimer: Information in this article is general in nature and does not constitute personal financial advice. You should always seek independent professional advice that considers your personal needs before making financial decisions.Sourceshttps://www.sro.vic.gov.au/homebuyerhttps://www.theguardian.com/australia-news/2023/may/14/going-halves-are-shared-equity-schemes-the-answer-in-australias-pricey-property-markethttps://www.keystart.com.au/loans/shared-ownership-home-loanhttps://www.sro.vic.gov.au/homebuyer/frequently-asked-questions-about-homebuyer-fund