What Does Shared Equity Really Cost?
Do you know how much it will cost you to buy your first home when you enter into a shared equity agreement?
With housing prices increasing year after year, it’s hard to save a 10% deposit (let alone 20%) to buy your first home.
There are alternatives to the traditional 10% deposit route.
Shared equity is one such arrangement, but there are some key considerations to take into account.
What Is A Shared Equity Arrangement?
A shared equity arrangement will allow you to buy your home with less upfront cost than a traditional 10% deposit home loan. And some private shared equity providers will allow you to buy your home with as little as a 2.5% deposit.
They contribute 15 – 20% of the purchase price, with the balance funded by an 80% home loan. A home loan of 80% or less will avoid the cost of Lenders’ Mortgage Insurance (LMI). LMI is an insurance policy taken out by the bank to protect them (not you) if you are unable to meet your home loan repayments.
What’s the Hidden Cost to Consider?
What you don’t know at the time of buying your home with a shared equity provider is how much you must repay in 5 years’ time (or more) when you refinance or sell the property. And, at some point, you will have to sell or refinance, because the private equity provider wants their contribution back plus a share of the increased value.
The first question to ask yourself is:
How much are you willing to pay in 5 years’ time to buy a home today?
| Purchase Price $800,000 | ||||
|---|---|---|---|---|
| % Per Annum | 3% pa | 5% pa | 7.5% pa | 10% pa |
| Value in 5 Years | $900,407 | $1,021,938 | $1,068,375 | $1,171,280 |
| Cost of 17.5% Shared Equity | $157,571 | $178,839 | $186,966 | $204,974 |
In year 5 (or later), you must either sell your home to repay the shared equity provider, or refinance your home, adding the inflated shared equity payment onto your existing home loan.
