Equity sharing

Equity sharing, also known as shared ownership or in the US as housing equity partnership (HEP), allows a person to purchase a share in their home even if they cannot afford a mortgage on the whole of the current value. It is generally used in affordable housing, providing a "third way" of land tenure between home ownership and renting.

The remaining equity share may be held by the housebuilder, by a private investor or by a landlord such as a housing association. In some models the resident pays rent on that share.

Types of equity sharing

Public sector equity sharing implies some form of taxpayer subsidy and is seen by government as a useful tool of social policy, for example in allowing more first time buyers to access property ownership.

Equity sharing in different countries

United States

Equity sharing programs in the US were championed by economists Andrew Caplin, Sewin Chan, Joseph Tracy and Charles Freedman in the late 1990s. The traditional example of equity share for the purchase of a home provides the buyer with a 20% down-payment. The total of the mortgage payments, taxes, insurance/association dues, and all other expenses must be less than the rent that the tenant pays on the property. If not, the investors will run into a negative cash flow situation, whereby they are paying more than they are getting from the property. This was very common in the era of high LTV (loan to value) loans on investment properties where in most cases they were viewed as risky by banks and therefore had high interest rates and even PMI (private mortgage insurance) in some cases.

United Kingdom

There are many uses of the term "Equity Sharing" in the UK. Often applied to different forms of Low Cost Home Ownership schemes. These include Equity Loans, sometimes referred to as Equity Sharing Loans and some forms of Shared Ownership (part buy/part let) leasehold schemes being referred to as an Equity Sharing Lease. Some local authorities may also refer to resale price restrictions under planning documentation as being Equity Sharing arrangements.

England

The UK government facilitates shared equity chiefly through the Homes and Communities Agency. As of 2009 this was under the banner of HomeBuy. This aims to help households earning up to £60,000 p.a.

New Build HomeBuy is where purchasers buy at least 25% of a newly built home, and pay rent on the remainder. The HCA generally subsidises housing associations or other providers to hold the remaining share. The rent is capped at 3% of the value of the unsold share, but typically set at 2.75%. Purchasers may buy additional shares whenever they can afford to do so; this is known as "staircasing".

HomeBuy Direct was introduced in 2009, under which the government and a housing developer jointly fund an equity loan of 30% of the valuation, so that the purchaser only needs to pay a mortgage on 70% of the value. If the purchaser buys an additional share, all three parties participate in any increase in value. The HCA allocated £300 million to the scheme for 2009—2011, and 10,000 homes are available under the initiative.

Open Market Homebuy allowed purchasers to buy at least 25% of a property on the open market, with a conventional mortgage on that part, and a low-interest loan on the remainder. This is not currently available as the funding for 2009-10 has already been fully committed.

Social Homebuy allows tenants of participating Councils and housing associations to buy their rented home on shared ownership terms, with a proportion of the usual Right to Acquire discount.

FirstBuy a scheme for first-time buyers announced in the 2011 Budget. Under it first-time buyers can get help to fund the difference between a 5% deposit and a 75% mortgage. It is only available on selected newbuild schemes. The top-up equity is provided in equal shares by the HCA and the developer.

Private sector shared equity

Private sector shared equity or, as it is sometimes known, investor shared equity, operates quite differently in that there is no element of taxpayer subsidy. Instead, third party investors provide the difference between the buyer's deposit and (typically) a 75% mortgage, in return for an equity stake in the property and a rent. These schemes are run over 5 or 10 years (sometimes with a 'hardship' extension), meaning that at the end of the relevant period, the owner has to buy out the equity stake at the relevant percentage of the then market value. There is generally no penalty on early redemption or partial buy-backs. Thus, equity sharing can be seen as a step up to full ownership of a property.

Although investor shared equity is, on the face of it, more expensive than public sector schemes, because of the need to pay rent on the non-owned portion, it nevertheless holds significant advantages:

• First, it is not confined to newbuild, or to any particular housing provider. Instead, the buyer can research the whole of the market for the best bargain. Some would say this avoids the peril of paying an inflated price to a housebuilder.
• Secondly, there is less in the way of form filling and waiting lists. Because investor shared equity is essentially a financing mechanism, it is as simple as applying for a mortgage.
• Thirdly, it is less likely to run out of funding than public sector schemes. So long as investors achieve their desired return, the resources are theoretically limitless.
• Fourthly, the buyer is put in the position of a cash buyer and is thus empowered to negotiate the best deal with the vendor.
• Finally, of course, an injection of cash gives the buyer the chance to access the better interest rates and lighter credit checks associated with 75% mortgages.

See also

• Housing cooperative
• Community land trust

Further reading

• Geltner, David M., Norman G. Miller and Jean Snavely. 1995. We Need a Fourth Asset Class: HEITs. Real Estate Finance: 71-81.
• Caplin, Andrew (1997). Housing Partnerships: A New Approach to a Market at a Crossroads. MIT Press. ISBN 0-262-03243-0.