What is a Shared Equity Mortgage
What You Should Know
- A shared equity mortgage lets you make a larger down payment in exchange for giving up some of the upside in your home’s equity.
- It allows you to have a lower monthly mortgage payment and save on mortgage interest and CMHC insurance costs.
- Examples include the government’s First-Time Home Buyer Incentive, municipal and builder programs, and private companies such as Lotly and Ourboro.
- You’ll still need to make a minimum down payment of at least 5%.
A shared equity mortgage is a type of mortgage where you and another party share the costs, risks, and rewards of homeownership. This is done by splitting the cost, usually with the other party paying for a portion of the down payment, in exchange for them getting an ownership stake in the property. The other party may be a government program, a non-profit, or a for-profit shared equity investment provider. This arrangement allows buyers to purchase a home with less money upfront and to have lower monthly mortgage payments.
In a shared equity mortgage, the homebuyer agrees to pay back the amount the other party contributed when selling the home. There isn’t any interest owed on this contribution amount. Instead, the other party will receive back their contribution towards the home's down payment and a share of the proceeds. This is their stake in the home’s shared equity appreciation or depreciation. In the case of depreciation, which is when the value of the home decreases, the other party might get back less than they originally put in.
This arrangement can benefit buyers who don’t have enough funds to purchase a home on their own or those who want to reduce the size of their monthly mortgage payments. For the party that provides equity, they can gain an ownership stake in a property with leverage on their investment.
Do I Still Need to Make a Down Payment? 💡
Even though the government or shared equity mortgage provider is contributing a lump-sum amount towards your down payment, you’ll still need to contribute some of your own money towards your home’s down payment as well. This minimum is usually 5% of the home’s purchase price, even if the government or shared equity mortgage provider already contributes 5% or more.
There are different providers of shared equity mortgages in Canada, but let’s take a look at the most popular one: the Government of Canada's First-Time Home Buyer Incentive. With this program, the government's share of your home equity is the same as the government's contribution to your home purchase.
Suppose you’re looking to purchase a new construction home for $500,000, and you’re looking for the government to contribute 10% of the purchase price so that you can make a larger down payment. You’ll also contribute 5% of your own money as down payment as well. This means that the government will put $50,000 towards your down payment, and you’ll put in $25,000. This reduces your mortgage amount to $425,000.
Assuming a mortgage amortization period of 25 years and a mortgage rate of 5%, let’s see how your monthly mortgage payments would be with and without the shared equity mortgage.
| With Shared Equity | Without Shared Equity | |
|---|---|---|
| Total Down Payment | $75,000 | $25,000 |
| Mortgage Amount | $425,000 | $475,000 |
| CHMC Insurance Premium | $11,900 | $19,000 |
| Monthly Mortgage Payment | $2,541/month | $2,873/month |
| Total Interest | $325,410 | $367,939 |
By obtaining a higher down payment than you otherwise would be able to afford on your own, you’ll be able to reduce your monthly mortgage payment by $332 to $2,541 per month. The total interest savings if you paid off the mortgage over 25 years would be $42,529! Plus, you’ll save $7,100 through a lower CMHC insurance premium, as your down payment was higher (but still below 20%).
This example only considers your monthly savings and doesn’t factor in what the shared equity stake will mean for your home’s appreciation.
CMHC Mortgage Insurance 💡
Since shared equity mortgages still result in a total down payment of less than 20%, you’ll be required to pay for mortgage default insurance, such as CMHC insurance, Canada Guaranty, or Sagen.
The mortgage default insurance premium is on the amount of your mortgage after taking out the contribution the shared equity mortgage has made towards your down payment. In other words, you won’t have to pay for CMHC mortgage insurance on your shared equity mortgage, but you will need to pay for it on your primary mortgage.
When you sell the home, or after a certain number of years, you’ll need to pay back the shared equity mortgage. For example, with the government’s First-Time Home Buyer Incentive, you’ll need to repay the incentive, plus a share of your home’s appreciation, after 25 years or when you sell the home.
Using the same example as above, how much of your home’s appreciation would you be missing out on?
You purchased a $500,000 home, and the government contributed 10%. This means that you’ll need to pay back the government 10% of your home’s market value when you sell the home, plus appreciation. The appreciation that applies is limited to a cap of 8% per year, but should your home’s value have gone down, the depreciation is also limited to 8% per year. You’ll need to cover, in the case of depreciation, or you’ll get back, in the case of appreciation, any amount over 8% on the government’s 10% stake.
Let’s say that your home’s value grew at a rate of 3% every year for 25 years. This means that after 25 years, your home’s market value would be just over $1 million. Since it has been 25 years, you’ll be forced to pay back the shared equity mortgage. The government would get 10% of the home’s market value, which is 10% of $1 million, or $100,000. Your stake in the home, 90%, would give you $900,000.
| With Shared Equity | Without Shared Equity | |
|---|---|---|
| Shared Equity Mortgage | $50,000 | $0 |
| Payout Amount | $100,000 | $0 |
With the shared equity mortgage, you’ll need to pay back the government $100,000. That’s $50,000 more than they contributed towards the down payment. In other words, if you didn’t get a shared equity mortgage, you’ll need to make an extra $50,000 down payment to keep the same mortgage payment as a shared equity mortgage. Still, you’ll pocket an additional $50,000 in home value appreciation.
It’s possible for home values to decrease, such as in 2022 when Canadian home prices dropped significantly. The First-Time Home Buyer Incentive has a cap on depreciation of the government’s stake. For example, let’s say that after one year, your home’s value has dropped 20% from $500,000 to $400,000. Since the cap is 8% per year, this would reduce you and the government’s equity to the following:
| You | The Government | |
|---|---|---|
| Contribution | $450,000 (90%) | $50,000 (10%) |
| Depreciation | $96,000 | $4,000 |
While the government’s share of the home’s depreciation would have been $10,000, the cap limits the annual depreciation to $4,000. The leftover $6,000 is taken out of your share of the home’s equity.
Paying Back a Shared Equity Mortgage Early 💡
You can usually pay back a shared equity mortgage early without selling your home. As contributions and appreciation can be significant, it does require you to have a possibly large amount of money available to pay off the shared equity mortgage provider without needing to sell your home.
The First-Time Home Buyer Incentive
Amount: 5-10% of the home's purchase price
Repayment: 5-10% of the home’s market value
Equity Split: 1:1 based on contribution vs. purchase price
The federal government’s First-Time Home Buyer Incentive (FTHBI) is a shared equity mortgage meant for first-time home buyers. It has certain rules, such as your income can't be over $120,000, and you can't borrow more than four times your income. This means that the maximum mortgage amount is $480,000.
There are higher limits for those in Toronto, Vancouver, or Victoria. If you're buying a home in one of these areas, your income must be below $150,000, and you can't borrow more than 4.5 times your income, for up to a $675,000 mortgage amount.
With the First-Time Home Buyer Incentive, you can get 5% or 10% towards the purchase of a new construction home, or 5% towards the purchase of an existing home or mobile/manufactured home.
The share of equity is equal to the percentage of the home’s purchase price that the First-Time Home Buyer Incentive contributes as a down payment. This will be paid back once you sell the home or after 25 years, with appreciation and depreciation capped at 8% per year. There is no interest on the FTHBI amount, and no regular payments are required. You can also choose to pay it off as early as you want.
Municipalities may offer their own shared equity mortgage programs as well.
Who’s Responsible For Home Maintenance? 💡
You’re still fully responsible for home maintenance and repairs, along with other costs of owning a home, such as property tax, utility bills, and home insurance. The shared equity mortgage provider won’t be living in your home or place tenants in your home.
Lotly
Amount: 5-15% of the home's purchase price
Repayment: Original contribution + 16% to 49% of upside/downside
Equity Split: 3.25x contribution vs. purchase price
Lotly is a private company that pools investor funds to provide down payment assistance to home buyers. Just like the government’s program, you’ll still need to make a minimum down payment of 5%. The difference is that instead of having a stake in the future market value of the home, Lotly will take a percentage of the upside/downside in addition to their original contribution.
For example, if Lotly contributes 5% of the home’s purchase price, their share of the home’s appreciation would be x3.25, or 16.25% of the home’s appreciation.
Since Lotly can contribute up to 15% of the home’s purchase price, you can avoid having to pay for CMHC insurance, as your mortgage will be for less than 80% of the home’s purchase price.
Lotly also isn’t limited to just first-time home buyers. However, it is limited to homes located in the Greater Toronto Area, Kitchener, and Waterloo.
Ourboro
Amount: 5-15% of the home's purchase price
Repayment: A percentage of appreciation based on down payment contribution
Equity Split: 1:1 based on down payment contribution
Ourboro is a similar down payment assistance program that investors fund. The main difference is the way Ourboro calculates its equity split. Instead of a 3.25x leverage that Lotly uses, Ourboro’s split is based on their contribution of the total down payment. For example, if you contribute 10% and Ourboro contributes 10%, then Ourboro would get 50% of the home’s appreciation. The maximum that Ourboro can contribute is $250,000.
You must pay back Ourboro after 30 years or when you sell the home. That’s slightly longer than the government’s program, which has a maximum length of 25 years. The repayment amount is also based on the down payment contribution split, which would be a percentage of the home’s appreciation. The repayment isn’t the original contribution in addition to the appreciation.
Ourboro is only available for homes located in certain areas of Ontario, such as Toronto, Guelph, London, and Hamilton.