Shared Equity Mortgage

Sally just found the house of her dreams, but unfortunately, it’s a little out of her price range. Luckily, her grandpa has a pretty sweet offer for her: he’ll help her buy the house if he can retain some of the property’s equity in return. In other words, he’s offering her a shared equity mortgage option.

A “shared equity mortgage” is a mortgage secured by two people: the owner-investor (Grandpa) and the owner-occupant (Sally). The owner-investor essentially loans the owner-occupant they need to buy the house, and then they own that percent of equity in the property. Sometimes the owner-investor is an entity like a bank, but sometimes, like in our example, it’s an individual private investor.

Let’s say Sally’s dream house costs $500,000. She can only get approved for a $375,000 loan, so Grandpa is loaning her the additional $125,000. Since that’s 25% of the overall purchase price, Grandpa now owns 25% of the house’s equity. Know what else is in it for Grandpa? Many states require the owner-occupant to pay the owner-investor rent equal to his portion of the equity, which means he should be getting a nice little check from Sally every month. Also, he can claim a few tax benefits for his part in all of this, like mortgage interest deductions and property depreciation. And when Sally sells the house, he gets 25% of the profits…or has to shoulder 25% of the losses, depending on how the market is. Either way, Sally gets the house she wants, Grandpa gets to partake in a nice little investment opportunity, and the two of them get to bond over the joys of joint homeownership.