What is a Shared Equity Mortgage?

By: Loans Canada

If you’re looking to purchase a home in the near future, you may have been discouraged by the sky-high prices of real estate these days, especially in certain metropolitan areas like Toronto or Vancouver. 

While your current finances may not support the purchase of a home right now, there may be a way to enter the housing market despite your income not being sufficient enough to secure a mortgage. One of your options is asharedequity mortgage. This type of arrangement involves both the buyer and the mortgage lender sharing ownership of a home. The owner must live in the property in order to take advantage of this arrangement, but it allows them the opportunity to buya home even if their finances aren’t adequate enough to do so on their own. 

Is a shared equity mortgage something you should consider when buying a home?

How Does a Shared Equity Mortgage Work?

As already mentioned, a shared equity mortgage may be a great option for those who can’t afford to buy a home on their own. These programs work by sharing the equity between the lender and the owner-occupant. 

Your equity is essentially any profit you make from owning your home and is the difference between the property value and any remaining mortgage principal owed. Equity increases when the value of the property increases and when the mortgage principal amount is reduced (for more information about building equity in Canada, click here).

When the home is sold, any profits from appreciation are split between the owner and lender appropriately based on the exact allocation of interest in the property. The same applies if the value of the home depreciates, resulting in a loss to both the owner and lender. 

Owners might also have to pay their lenders rent in proportion to the share of the equity that they don’t own. But owners might also be able to deduct any mortgage interest or property depreciation come tax time.

Pros and Cons of a Shared Equity Mortgage

Both owners and lenders can benefit from a shared equity mortgage, but they may also be faced with some risk as well.

Pros of a Shared Equity Mortgage

  • A home purchase is more affordable
  • Home buying is made possible for those who would otherwise be left out of the market
  • A smaller down payment may be made
  • The overall mortgage amount is lower
  • Monthly mortgage payments are lower
  • More equity can be accrued from paying the mortgage down faster
  • Lenders can also benefit from profits if the property appreciates in value

Cons of a Shared Equity Mortgage

  • The shared equity must be repaid or ‘bought back’ when the property is sold
  • There’s always a risk of taking a loss if the home depreciates in value
  • Your profits are reduced by having to share them with the lender
  • You may be tempted to buy a more expensive home that you may not be able to afford
  • If your home drastically increases in value, you may have to pay the lender much more than what you would with a conventional mortgage
  • Not all lenders offer shared equity mortgages

Situations Where a Shared Equity Mortgage is a Good Option

While a shared equity mortgage may be helpful for some, they may not be suitable for others. So, when is it the right time to consider a shared equity mortgage?

Generally speaking, you should only consider this type of arrangement if you are unable to afford the price tag of a home in your area. If that’s the case, you may want to seek out some help, and a shared equity mortgage may be able to help you afford a home purchase in the event that your current finances cannot support a conventional mortgage.

These programs are also helpful for those who are struggling to come up with a sizeable down payment for a home purchase. With the high cost of most single-family homes, it can be tough to come up with a decent down payment, and a shared equity mortgage may be able to help with that. 

This program can be a great option for anyone planning on being an owner-occupant and can give them access to homes with prices that are beyond their financial means.

Like any other type of mortgage, you need to make sure that you are fully capable of making your payments every month. While you are receiving financial assistance by sharing the equity in the home, you are still taking on a large amount of debt. 

Before you decide to go with a shared equity deal, make sure to go over all other options available to you. And if you do decide to proceed with this arrangement, do your due diligence on the shared equity investor first. 

Do Shared Equity Mortgages Affect Housing Affordability in Canada?

At first glance, it would seem as though a shared equity mortgage program would help to make buying a home more affordable. That’s true to a certain extent, but they’re not necessarily able to alleviate the entire housing affordability issue in more expensive real estate markets. More specifically, these programs won’t be able to resolve inventory issues in pricey markets. 

For many Canadians who struggle financially, saving a couple of hundred dollars every month on mortgage payments can really help. The lower loan amount can also help deal with the more stringent mortgage qualification criteria stemming from the recently introduced mortgage stress test, which requires borrowers to qualify for a home loan at a rate 200 basis points higher than the interest rate they are quoted.

But the issue of housing supply – which has a direct impact on housing prices – still needs to be addressed, especially in centres like Toronto and Vancouver, where inventory seems to be perpetually tight. At the end of the day, the most effective way to deal with housing affordability is to boost inventory. 

The Government of Canada’s First-Time Home Buyer Incentive (FTHBI)

First-time home buyers in Canada have a few programs that they can take advantage of in order to make buying a home a more realistic feat. And the most recent program introduced by the federal government is the First-Time Home Buyer Incentive (FTHBI), a shared equity program. 

Under this program, Canada Mortgage and Housing Corp. (CMHC) will advance first-time buyers with 5% to10% of the purchase price of a property in order to reduce the overall mortgage amount and therefore lower monthly mortgage payments. The FTHBI would only be available for mortgages that are insured by the CMHC, which means they would only apply to mortgages with less than 20% down, but at least 5%. 

In order to qualify, buyers must have a household income of no more than $120,000 a year. The amount of the mortgage plus the incentive also cannot exceed four times the buyers’ annual incomes, or to a maximum of $480,000. The incentive will need to be paid back to the CMHC when the home is sold.

The purpose of this incentive is to make homeownership more attainable for those who may otherwise not be able to qualify for a conventional mortgage or cover the cost of the purchase price of homes in their area. The incentive officially came into effect as of September 2, 2019.

Final Thoughts

Homeownership is a dream for many Canadians, but it is often unattainable for many who cannot afford the exorbitant prices for homes in many centers across the country. But with a shared equity mortgage program, buyers may be able to get the edge they need to become a homeowner.