Are you concerned with the current real estate market in Saskatoon? Have you been saving for a down payment but haven’t been able to qualify for a mortgage? Are you watching home prices rise and feeling like you may never get to a point where you can afford to buy a property?
No matter how disappointing it can feel, you are certainly not alone! Many first-time homebuyers often find themselves also unable to reach that initial mortgage qualification status. But did you know that there is alternative financing that may just be what you need? Let me introduce you to the shared equity mortgage.
What is Equity?
Okay, starting from the basics—in order to understand what a shared equity mortgage is, you’ll first need to understand the principle of equity. The elusive term you’ve undoubtedly heard mentioned every time you’ve had the discussion of homeownership, equity is your home’s current market value, minus any liens (or mortgages) left owing. As you make more payments on your mortgage, your equity share increases as you slowly lower what you owe.
By nature, equity is always fluctuating depending on how much is paid off and also by current real estate market trends influencing home values. For example, here in Saskatoon, home prices are still on the rise after an incredibly busy 2021 season, but there have been several peaks and valleys over the last 10 years. And when it comes time to sell your home, the equity will be whatever “profit” you make (again, whatever is left after the mortgage is paid off).
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What is a Shared Equity Mortgage?
So, what exactly is a shared equity mortgage? Well, rather than the entire mortgage value falling entirely on your shoulders, a shared equity mortgage allows you to enter into a joint agreement with a lender in which you get a smaller mortgage. And in exchange, the lender gets to own some of the equity in your home. Essentially, you and your mortgage lender become co-owners of your new property so you can buy a home for a fraction of the cost! The property will have to be your primary residence, of course.
While the benefit is immediately apparent—pay less and get the home you’ve been dreaming of—the true impact of a shared equity mortgage appears when it comes time to sell the house. Depending on the agreed-upon equity share, any profits or losses from the sale will be split with your co-owner, the mortgage lender. That means if the property value increases, you will both see a profit from your equity share. And if it depreciates instead, you will both see a loss.
The Benefits of a Shared Equity Mortgage
Ultimately, the biggest benefit of a shared equity mortgage is an increase in affordability. Not only will your monthly mortgage payments be smaller and easier to maintain, but it also increases how much mortgage you can afford. You also will not need to save as large of a down payment, and you can actually earn more equity by paying the mortgage down faster. Lenders also see the benefits of profit, should your home’s value increase!
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The Disadvantages of a Shared Equity Mortgage
Though it may make it easier to afford a home quicker, a shared equity mortgage isn’t the perfect solution for all. When you sell your home, it must be repaid or “bought back,” and if there is a depreciation in value, you risk taking a loss. Any profits you may have seen from the sale of your home will always be split with your lender, and if the home sees a dramatic increase in value, you may end up paying your lender more than you would with a standard mortgage. And while being able to afford more sounds appealing, you may find yourself biting off a bit more than you can chew—buying a much more expensive home than you can actually afford.
If you find yourself struggling to enter the real estate market as a first-time buyer, a shared equity mortgage may just be the solution. Start by talking to your mortgage lender, or reach out to me for some preferred partners in the city of Saskatoon, to see if this may be an option for you. Then, with your mortgage pre-approval in hand, your home search can finally begin!
FAQs
How does a shared equity mortgage work in Saskatoon?
A shared equity mortgage lets you buy a primary residence with a smaller mortgage because the lender contributes to the purchase in exchange for a share of the home's equity. You and the lender become co-owners, and the agreed share of any profit or loss is settled when the property is sold.
Who can benefit from a shared equity mortgage?
It may help first-time homebuyers who have been saving for a down payment but cannot qualify for a traditional mortgage. The arrangement can reduce the mortgage amount, lower monthly payments, and make it possible to buy sooner, although the property must be your primary residence.
How is equity calculated in a shared equity mortgage?
Equity is the home's current market value minus any mortgage or other liens still owing. Your equity can increase as you pay down the mortgage, but it can also change when Saskatoon real estate values rise or fall.
What happens to the lender's share when I sell my home?
When you sell, the mortgage is paid off and the remaining equity is divided according to the agreement with the lender. If the property has increased in value, the lender shares in the profit, and if it has depreciated, the lender also shares in the loss.
Is a shared equity mortgage cheaper than a traditional mortgage?
It can make homeownership more affordable because you may need a smaller mortgage, a smaller down payment, and lower monthly payments. However, the lender receives part of the home's future equity, so you need to compare the immediate affordability benefit with the share of future gains or losses you will give up.
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