If you’re in your 20s or 30s, buying a home in the GTA can feel like a faraway dream. But seeing others in your circle manage to secure a mortgage can feel confusing — how can they afford a Toronto down payment? 

Well, it turns out that 40% of young Ontario homeowners (age 18-38) received familial help for their down payment, an average of $70,000. Now it makes sense.

A $70,000 push could be shared equity, if the parent supplying it has a stake in the property. But most of the time, it’s gifted cash. 

Shared equity is when someone invests in a property with the mortgage holder (i.e. homeowner). As is implied in the name, they are sharing in the equity, risk, and rewards. It’s a great way to make homeownership more accessible. In fact, experts see shared equity as a solution to a growing housing crisis. 

But shared equity has pros and cons, so let’s explore its ins and outs, how it works, and how to leverage shared equity as a Lotly investor or homebuyer. 

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What is shared equity?

Shared equity is when an investor, sometimes a friend, company, or lender, invests in a property with the mortgage holder. 

The two parties share equity in the home, typically proportionate to each person’s investment. If the home decreases in value, both parties will feel the hit. Similarly, if the home appreciates, both parties will experience a gain. 

Shared equity is a fantastic way to acquire a property if you‘re struggling to come up with a down payment on your own. 

At Lotly, we connect two main ingredients for a GTA property purchase: 

• Budding homeowners who are eligible for a mortgage but haven’t saved a full down payment.
• Investors who want to invest (a lot or a bit of) money in single-family homes directly.

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Who participates in shared equity lending?

Ontario homebuyers have a few shared equity providers to choose from including:

Non-profit organizations

Non-profits generally have stringent requirements for shared equity arrangements. Sometimes, they require homeowners to sell back the house to them or volunteer their time throughout their contract. 

Habitat for Humanity is a popular player, offering eligible homebuyers shared equity. To be eligible, you must demonstrate a need to improve your current housing (overcrowding in Ontario government housing, or disability needs, for example) and commit to volunteering 500 hours in partnership with Habitat for Humanity. 

Private, for-profit companies (like Lotly)

Private companies are lenders or other private organizations connecting homebuyers to investors. These providers often take a portion of the home’s appreciation, so you’ll pay a little bit more for the equity access. 

However, eligibility requirements aren’t as stringent as a non-profit’s — if you’re pre-approved and can cover your mortgage payments, you’re generally good to go. 

Individuals

Perhaps you know a family member or friend equally interested in investing in a property. If you combine forces, they could be a shared equity provider. This could be a clear cut arrangement that saves you the fees of a private company. Plus, you won’t need to worry about eligibility requirements. 

However, proceed with caution when investing with friends and family. It’s always best practice to get a lawyer to lay everything out for you in writing.

Government bodies

The federal, provincial, and municipal governments offer various shared equity programs for struggling homebuyers. Eligibility, however, is stringent and based on income, and other factors. Here are some popular shared equity programs from the public sector: 

• Ontario First-Time Homebuyer Incentive
• Ontario Priority Housing Initiative
• Other government down payment assistance programs

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Benefits of being a shared equity investor

If you’re an investor, shared equity is a fantastic passive investment. 

Benefits of a shared equity mortgage for investors

• Less stress: Mortgages are a pain — you might avoid the whole ordeal by quietly investing in a down payment and reaping the appreciation 5-10 years later. Lotly homebuyers must sell or refinance their homes within that window to pay back investors, with appreciation. See our equity payout split calculator for more clarity!

• Access where you might not otherwise get it: You might not have the best credit score, or your income is volatile. Whatever the reason, banks won’t lend you a mortgage. Shared equity is a great way for you to access real estate without having to worry about mortgage rejections. 

• Retail real estate investing: A retail investor is someone who invests small amounts of capital into various investments. That doesn’t exist with real estate given the large capital demand — or does it? REITs are one example of low-key real estate investing… but where are the returns? You don’t experience or relish the same growth as you would with a property (or two). Shared equity with Lotly helps you invest small portions of money into multiple properties. This luxury was once only afforded to the most affluent of the city — now, the average data analyst or small business owner could do it. 

• Less risk and more flexibility: Shared equity agreements lessen the blow of a failing market or personal event urging you to sell at a lower price. If you share the risk with another investor, you can handle financially tough events more easily. Plus, you won’t have to pay any mortgage, utilities, property tax, or any other common home expenses. 
• Avoid the headache of being a landlord: Rental income is an attractive motivator to invest in property. But dealing with maintenance requests, cockroaches, water leaks, and tenant conflicts might not be your cup of tea. Plus, you might not have envisioned the responsibility you have over non-paying tenants or the subsequent waiting game with the Landlord & Tenant Board for resolutions. Investing in shared equity offers you a window into real estate without tenant drama. 

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Benefits of a shared equity mortgage for homebuyers

If you’re a homebuyer, shared equity helps you break into an inflated housing market.

Avoid mortgage insurance: If you can’t secure a 20% down payment, banks might still lend to you with a 5% or 10% down payment. However, you’ll have to pay mortgage insurance  — a comforting cushion for lenders, yet a hundreds-of-dollars-per-month burden for homeowners. Shared equity helps you reach a 20% down payment to avoid mortgage insurance. 

Lower monthly payments: More down payment equals less in monthly payments. Step 1? Securing a 20% down payment. Anything more is gravy and highly beneficial if you have the capital. 

More property options: A budget is limiting, but if you add a few percentage points to your down payment, you might be able to purchase the home of your dreams instead of settling. 

Risk management: We know the property market is hot in the GTA, but housing markets cool every so often, resulting in lower demand and property prices. If your home value goes down over 10 years (very unlikely, but possible), you’ll share the brunt of it with your shared equity investor. 

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Disadvantages of a shared equity mortgage

Penalties: Life happens, and your situation ten years from now might not be what you originally predicted. Say you were convinced that you’d hold tight onto your property and continue collecting rent payments until you retired. But an unexpected illness, or lay-off sparked a desperate need for capital, fast. Some people sell their homes when in a pinch. But changing your course while in a shared equity arrangement will cost you fees and penalties. Additionally, if you share equity with a family member or friend, consider that situations like these could also happen to them. To avoid penalties and fees, you might consider buying them out — but that’s a big commitment on your end. 

Less control: Of course, shared equity comes at a price. You don’t have free reign to sell, refinance, or even renovate the home unless both parties agree. 

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Can you exit a shared equity agreement?

Yes, but each arrangement has unique terms. Here are some general scenarios where a shared equity arrangement ends.

• Sale: The two parties agree to sell the home. 

• Expiry: The shared equity contract expires. For example, Lotly shared equity arrangements have a 10-year lifetime, after which, the homeowner must refinance or sell the home to pay out investors. 

• Buy out: One party, either the mortgage holder or the shared equity investor, might buy the other out of the property. Of course, terms around this action would be discussed and agreed upon in the initial contract. Generally, if you’re in a position where you feel you have no choice, a buy-out might make you vulnerable to the other party’s discretion. 

No matter how the equity arrangement ends, the investor gets their piece. And if your exit contradicts your contract terms, you might face fees and penalties. 

Curious about what a Lotly investor payout would look like? Check out our shared equity split calculator!

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Leverage shared equity with Lotly

Investors and homebuyers, to the front! Lotly offers you a secure, seamless way to enter the GTA housing market with ease. Shared equity improves accessibility for both parties, making your real estate dreams more feasible. 

Ready to get started? 

• Become a Lotly investor
• Become a Lotly homebuyer