Recent mortgage Q&A
What are shared equity mortgages?
Shared equity mortgages are designed for people who have a household income of less than £60,000 per year and who are also unable to buy a home outright. The scheme is based on you taking out a loan that provides part of the deposit. This is particularly helpful to anyone who is unable to raise a large enough deposit to qualify for a mortgage and so can make it either possible, or easier, to take out a mortgage to get onto the housing ladder.
Although you have both a loan and a mortgage on the property, you do actually legally own all of the property. It is an attractive option as it means that you are potentially able to get onto the housing ladder without having to have a large deposit available. In the long term it could work out as being a more expensive option because of the repayment terms of the equity loan. During the first five years of the loan there is no interest charged, but in the sixth year a fee of 1.75% is charged, and this then rises each year by the retail price index, plus an additional 1%. Therefore you will have paid a substantial amount of interest should you keep the equity loan for the full 25 years.
Paying off the equity loan
There are a number of ways of reducing the cost of the using an equity loan. Firstly, the schemes allow you to pay off up to 10% of the loan each year after the first year. This not only means that you reduce the overall debt on your home, it also means that you are paying less in interest. This is known as staircasing.
In order to avoid paying the higher interest rates as time goes on it possible to use your increased financial stability and proof of timely repayments to increase your mortgage and pay off the equity loan, leaving you with a standard mortgage at standard rates. You will need to have the household income required by the banks in order to carry this out, so it is worth considering what your income is likely to be over the next five to ten years before you take on an equity loan.
In order to sell a shared equity property you will need approval for the sale, which is essentially just a formality but ensures that properties are not sold on without the knowledge of the shared equity agent.
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