A home equity investment or shared equity mortgage is a loan that can finance a specific acquisition over a fixed period. A home equity loan is a loan taken against the equity of an owner-occupied primary residence. This article will talk about the types of home equity investment, how it works, qualifications for shared equity mortgage, the benefits, and some things to look out for.
Types of Home Equity Investment
There are two types of home equity investment: a loan used to purchase property or shares in property (such as a house) you can live in or rent out, and a loan used to buy business investments (such as purchasing equipment or property). With both loans, you can use them on new ventures or existing assets. The first type requires you to take on more risk than the second option because it uses your own money versus investors' money.
This type of shared equity allows you to invest in an existing property. For example, if you get a shared equity mortgage on a 2-unit apartment building and the co-owner needs extra cash to buy an investment property, they can ask for a loan from your shared equity investor. In many cases, there is no repayment required until ownership of the property changes in some way (such as in foreclosure or when one owner sells their interest).
This type of home equity investment is used to purchase something new, like equipment or supplies for your business. If it's your business, you may need investors to help you cover start-up costs than loans offered by banks do not cover.
How shared equity mortgage Works
A shared equity mortgage works because the lending institution uses your home as collateral to back up this type of loan. This means that if you default on payments, they can take away both your house and your investments.
If you're using a shared equity mortgage to purchase an existing property, the repayment is made when the property's deed changes hands in some way. If you're investing in a new property with a loan from a shared-equity investor, then payments are typically due monthly.
Qualifications for Shared Equity Mortgage
Although the qualifications vary by the lender (banks and credit unions), they usually require A reasonable down payment, income that covers living expenses, and the total monthly payments on any current debts; and can meet current financial obligations. Also, some lenders may require you to own a home for at least one year and be present on your mortgage (although this is more common for existing property loans).
Benefits of Shared Equity Mortgage
Lower Interest Rates
Because shared equity mortgages are considered riskier than regular loans and cannot always be sold on the secondary market (after they are issued), interest rates may be lower than for other types of loans. That means you will pay less.
Typically, monthly repayment dates are flexible, which allows you to invest money into your new business or existing property as soon as possible.
There is no need to provide tax returns for shared equity mortgages because lenders have all the necessary information on hand for financial review.
If you have a good credit history and keep up with current payments, this can help improve your credit score, leading to reduced interest rates on future loans/mortgages.
This type of mortgage requires less paperwork and is sometimes easier to obtain than a traditional bank loan.
How much can you borrow?
The amount of money these home equity investors are willing to lend will depend on the type of investment, your ability to repay them monthly, how long they will have security over that property or business equipment until it is returned in full plus interest, and what other similar products are available for that investor (competition). One benefit of a shared equity mortgage is that you can use the money to invest in property anywhere around the world.
What other options do I have?
If you're considering investing in real estate, you might want to consider using someone like an experienced realtor or become educated about buying and selling properties in your area. Take some time to visit open houses and speak with people who work in real estate to get tips on evaluating foreclosures, short sales, etc., before deciding if this is the right investment option for you.
Drawbacks of Shared Equity Mortgage
- If you want to buy a house or property, it's better if you save more money for a down payment rather than borrowing the total price from your shared equity investor (who may not approve you for such a high loan) unless it's an existing property they already own. In that case, you might be able to cover some of your down payment by adding in some money yourself (but don't go overboard and risk getting too far over your head with debt).
- Higher interest rates because there is added risk – this is why it's essential to pay attention to market conditions and make good decisions on when to buy, when to sell and when you can make profitable returns.
- Shared equity mortgages are not available in all areas of the world or for every type of investment opportunity. Make sure you understand your options before committing to something more expensive than traditional forms of lending money.
- Unpaid/defaulted shared equity loans may affect your credit history negatively, which could limit future opportunities or being able to borrow money for other things in the future (like buying another house).
- This is still a form of borrowing money, so it is essential to have still a plan for how you will repay this loan plus interest according to the terms set out by your shared equity investors. If you can't afford your payments, contact your investors as soon as possible to discuss different repayment options.
Tips for getting the best-shared equity mortgage deal
- Before signing any contracts or beginning negotiations with shared equity investors, read all of the fine print and ask questions about anything unclear. Make sure it matches what you expect, so there are no surprises later on.
- Investigate what is included in interest rates they charge (some lenders charge fees for specific services like paperwork processing or arranging shared equity investments).
- Make sure you don't invest too high a percentage of your total income into this investment – check out other types of investments instead if it looks like you're putting too much into your shared equity deal.
- Be aware of tax implications (if you make a gain on your investment, this is considered income, so you will have to pay income taxes).
- All investors are different, so find out what their expectations are before committing yourself. Are they expecting regular financial reports? Do they want updates about which properties are doing well before the others? Will they want repayments of principal after a certain number of years or just interest payments?
- Don't be afraid to ask for help if something goes wrong with the property or if there is an emergency where you can't pay back your shared equity loan because human beings aren't perfect, and nobody will judge you for that – be open and honest.
Tips for investors looking at shared equity investments
- Be sure to find out the specific rules about how payments are made if there is more than one owner involved or what will happen if there's a disagreement between owners, so everyone knows what they're getting into from the start.
- Make sure you understand precisely how much money you're investing in this property (interest, total loan amount, etc.)
- Do your homework on each deal to make sure it's worth considering before committing any funds to it – don't take someone else's word that it's a significant investment without getting all of the facts yourself.
- Each loan is different, so don't assume that you will have the same rights and responsibilities as other investors in the property just because it's a shared equity investment – make sure you know exactly what your deal entails before making any decisions to invest in it.
- Don't forget to consider the tax implications of your shared equity investments (if you make a gain on your investment, this is considered income, so you will have to pay income taxes on it).
- Make sure all parties involved are committed to repaying the money they borrow from investors – if not, take extra security precautions like putting up collateral or requiring higher interest payments until things improve financially for that person.
Things to Look Out For
- Shared Equity Mortgage Land Lord Problem: Remember that your shared equity mortgage can be used as collateral which means the lender could take away your home if you default on payments. That's why it's essential to know how much you'll be allowed to borrow and what kind of agreement you will have with the owner (which often varies).
- Shared Equity Mortgage Payment Flexibility: shared-equity mortgages allow for flexible repayment. If things change financially and you cannot make the full payment next month, there can be late fees and other penalties like interest rate hikes. However, that's why it is a good idea to have a written contract that spells out each party's responsibilities and rights, so there are no disagreements later on.
- Shared Equity Mortgage Tax Treatment: Any gain from your shared equity investment can be considered income which means you will be taxed for it (which is essentially like buying an annuity with borrowed funds). But this also implies debt repayment is not tax-deductible.
- Shared Equity Loan Asset Protection: A shared-equity loan is usually used as collateral for another loan, but there must always be some flexibility in the arrangement because it would be terrible if you were forced to repossess someone else's home (and the lender could lose money).