Shared equity has become a very popular way of buying an affordable new home in the UK, with many housebuilders introducing their own schemes as well as or instead of making use of funds allocated by the Homes and Communities Agency (HCA) under the Government-backed HomeBuy Direct initiative, launched in September 2008. The Government has this year (2011) introduced a new scheme, called FirstBuy, which is similar to HomeBuy Direct in sharing the cost of assisting homebuyers betweent he housebuilders and the Homes and Communities Agency (HCA).
The essential principle of shared equity schemes is that the buyer has 100% ownership of the property he or she is buying - it is NOT a shared ownership proposition. The buyer funds a percentage of the property price (typically 70% to 90%) with a deposit and mortgage as usual. The balance of the asking price is made up by an equity loan as a second charge on the property for the percentage of that balance.
The amount that must eventually be repaid by the buyer is determined by the proportion of the market value of the property at the time of repayment rather than the specific amount. In other words, if the buyer borrows 30% of the value at the time of purchase, he or she pays back 30% of the new value of the home at repayment time, regardless of whether that new value is higher or lower than the original price paid.
The loan is usually interest-free for a specified period and must be paid back after a certain time (usually five to ten years) or when the property is sold. The interest-free period should allow the buyer to save up enough funds to be able to pay the loan back within the specified period.
In the case of HomeBuy Direct and FirstBuy, this equity loan is co-funded by the housebuilder and the HCA (in England) and is interest-free for five years. In year six, there is a charge of 1.75% per annum, which is index-linked annually thereafter, though this particular condition does not necessarily apply on the proprietary schemes offered by individual housebuilders.
The qualifying criteria are sometimes different, for example the scheme may be open to first time buyers only or may have a maximum property value limit (£280,000 - or in exceptional cases £300,000 - in the case of FirstBuy). Some proprietary schemes grant a longer interest-free period or specify a maximum loan period. Some allow repayment in instalments at any time over the loan period - it's imperative that you understand the precise terms of the scheme you're considering before signing up to it.
Among the individual housebuilders offering a shared equity option on selected properties at present are: