All Topics / General Property / Shared Equity Scheme

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  • Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi All

    Many of you may have seen this evenings Today Tonight program on the exciting new Shared Equity Mortagge.

    Clients of mine and fellow Property Investing .com members have been the first people anywhere in Australia to have had their loan approved today under this scheme.

    Hopefully TT will do a follow up story later in the week about the couple and our Company.

    Congratulations to Steve & Sarah and good luck in your new home.

    Cheers

    Richard Taylor
    Residential & Commercial Finance Broker.
    Licensed Financial Planner. Ph: 07 3720 1888
    [email protected]
    New Shared Equity scheme has arrived – Email us for details.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of AmandaBSAmandaBS
    Participant
    @amandabs
    Join Date: 2005
    Post Count: 549

    Great stuff Richard and hopefully it will allow lots of people realise their dream of a home. Not too many though all we’ll have no tenants!!

    To read further about the new “Shared Equity” loan:

    http://www.propertydivas.com.au/EArticles/PDF_Article_Taylored%20Financial%20Solutions%20Pty%20Ltd_3b9d5965-4e9a-4d69-9254-a9dde01786e54639c8f1-56ec-42f6-9d93-8c7604af6d1e.pdf

    AmandaBS
    http://www.propertydivas.com.au
    FREE online Property Resources

    “It is better to be inconspicuously wealthy, than to be ostentatiously poor…”

    Profile photo of foundationfoundation
    Member
    @foundation
    Join Date: 2005
    Post Count: 1,153

    Is this really a good idea?

    If their house appreciates at 10% in the first year, the ‘equity partner’ will be entitled to 4/10ths of that, leaving them with just 6% in equity gain*. During that year they will have paid somewhere around 6.5% of the house value in interest payments (20% lower than regular mortgage rates due to ‘equity partner’)*. Thanks to compound interest, if the house continues to appreciate in this fashion, the net loss to the owners will reduce over time and turn into a net gain in a few years*.

    The first problem is, 10%+ growth is not a realistic or sustainable proposition. The second problem is that even at 7% appreciation (also unrealistic and unsustainable over the long-term), the net gain (60% of capital gain – interest costs) will be negative for a dozen years or so*! As a vehicle for building equity, in the 7% example, over the first 10 years it would cost an average of $1.72 in interest paid for every $1.00 of equity gained*! Regular saving into a 6% cash account on the other hand would yield $1.00 in equity for every $0.71 deposited over ten years (even after 30% tax)*.

    Of course there is the additional utility benefit of housing, but with rents at ½ the cost of buying and the other half yielding little to no net gains for many years to decades*, I can’t see how this makes buying much more attractive at all.

    F. [cowboy2]

    * Disclaimer – the above examples contain numerous assumptions and may not reflect real-world outcomes.

    Profile photo of AmandaBSAmandaBS
    Participant
    @amandabs
    Join Date: 2005
    Post Count: 549

    Hi Richard,

    Just wondering if you could explain if there is any problem should you choose to later use the home as a rental? Peoples circumstances do change and perhaps someone could be posted interstate and need to rent the property.

    AmandaBS
    http://www.propertydivas.com.au
    FREE online Property Resources

    “It is better to be inconspicuously wealthy, than to be ostentatiously poor…”

    Profile photo of SackoSacko
    Member
    @sacko
    Join Date: 2003
    Post Count: 1

    Does any body know whether it’s possible to use this product for an IP, as if so it should help make more IPs CF+

    SACKO!

    Profile photo of Mortgage HunterMortgage Hunter
    Participant
    @mortgage-hunter
    Join Date: 2003
    Post Count: 3,781
    Originally posted by Sacko:

    Does any body know whether it’s possible to use this product for an IP, as if so it should help make more IPs CF+

    SACKO!

    I am no expert on this product.

    But thinking aloud …

    If cashflow was your goal and you planned to buy and hold forever then who cares if the lender owns 40% of your equity – esp if they don’t get it until you die?

    Might be a fast way to build up the cashflow that so many members here are after?

    Richard?

    Simon Macks
    Residential and Commercial Finance Broker
    [email protected]
    0425 228 985

    Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Guys

    No unfortunately not at this moment can the product be used for investment but i expect that to be with us within 6 months.

    However in saying that you can refinance you existing PPOR loan and free up serviceability to enable you to buy more tax deductible IP’s.

    Calls to date seem to think this and the fact you can now afford an area where originally you didnt think you afford are the way to go.

    Cheers

    Richard Taylor
    Residential & Commercial Finance Broker.
    Licensed Financial Planner. Ph: 07 3720 1888
    [email protected]
    New Shared Equity scheme has arrived – Email us for details.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of grossrealisationgrossrealisation
    Member
    @grossrealisation
    Join Date: 2005
    Post Count: 1,031

    hi foundation
    you are not alone with this loan
    I to believe that not only will you be worse off
    but in the figure that say you make money take away the sellers margin or the banks refinance fee and stampduty on the sale or refinance and your 7% goes to about 1.5%.
    for those that are recommending this product and a couple of posts on here and in the other tread are have a really good look at this product.
    tell me a person that this loan will bennefit.
    amandbs
    dreams are just that
    dreams
    the trouble is that dreams sometimes become nightmares
    and rushing into a loan for me is not the way to go
    you do need to check the detail of the loan and what you can and can’t do within it.
    and this product for me has alot of questions that need to be answered and the website does not answer half of them.anyone interested in this type of loan, caveat emptor is my advice and get it checked by some one, then another, then another and if then you want to proceed fine you understand what this loan is and what the restriction are within it.
    my advice is tread very slow and read every line.
    my .002

    here to help
    contact me [email protected]

    Profile photo of L.A AussieL.A Aussie
    Member
    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488

    I have a concern;

    The product mentioned is another creative way to enable those who wouldn’t normally be able to afford to buy a home to suddenly be able to do so.

    For the struggling renters this is good.
    For the existing home buyers looking to upgrade this is good.

    Overall the demand on housing will continue and keep forcing house prices up, as the market will enjoy a whole new wave of previously unqualified buyers to buy, which is also good for investors currently in the market. We get more cap growth.

    My concern is that the demand on housing will continue to escalate and so too probably the rents, albeit at a slower rate, while wages will steadily lag further behind causing more problems with affordability; worse than the current situation, down the track.

    Where and how will it end? There are only so many ways that the loan structures and figures can be ‘tweaked’ to let in more otherwise renters to become buyers, and when the supply of them runs out, what next?

    Prices will have to come down again, and in this day and age of 90 and 95% LVR’s, and 100+% loans, it seems to me that the market will become so highly geared that there will be a flood of forfeitures and bankruptcies from people with neg equity and loan repayments far above their capacity to repay should there be the inevitable correction.

    I dare to say that the people most likely to use this product will be those struggling the most financially in both knowledge and position (if they were financially educated they wouldn’t need it).

    Thus, when (and if ) the big correction comes these people will be hurt the most as they will have the most exposure, lured into taking on yet another exotic loan product at bigger and bigger risk margins, which the finance and Banking industry seem not to mind too much as they power along to even bigger shareholder’s profits.

    The financially educated and those already rich will be o.k, while the uneducated will lose.

    Cheers,
    Marc.
    [email protected]

    “we get sent lemons; it’s up to us to make lemonade”

    Profile photo of foundationfoundation
    Member
    @foundation
    Join Date: 2005
    Post Count: 1,153

    Marc said “in this day and age of 90 and 95% LVR’s, and 100+% loans, it seems to me that the market will become so highly geared that there will be a flood of forfeitures and bankruptcies from people with neg equity and loan repayments far above their capacity to repay should there be the inevitable correction.”

    Agreed, but neg equity and high LVR is all that’s required. Even if people can afford to pay, if they’ve no skin in the game and their only asset is in the red, they’re far more likely to just walk away. This is happening in parts of the US as we speak.

    Anyway, I’ve changed my tune. This is a great product!

    Qualification – under one scenario and one scenario only – Zero percent growth in house prices. In this situation, the buyer saves 20% of interest costs, and loses nothing.

    If prices fall, the buyer loses big time. They’re faced with either holding on to the house for 25 years if they want the ‘equity partner’ to share in the loss, or selling sooner and copping the whole loss. But if prices rise, the buyer also loses. How so?

    For ease of example, let’s assume 100% financing. Say the buyers get a $200k house with $40k from the ‘equity partner’. Prices increase – say they double over fifteen years, during which time the owner has repaid the original loan. The owner gets their $160k back plus 60% of the $200k gain for a total of $280k.

    Now what? If they want to move to an equivalent house, it too will be worth $400,000. They are $120k short, whereas if they had used a traditional mortgage they would be able to buy it with cash.

    Same scenario, but they don’t repay the original loan. Now they get their $120k gain, but the equivalent house is $280k more. If they’d used a traditional mortgage they would have only been $200k short and could have transferred the original loan.

    Oh sure, they could use this scheme to buy a bigger/better house than they could otherwise afford then refinance out of the ‘equity partnership’ a few years later. Let’s see how that works.

    5 years later, the $200k house is worth $250k. Hooray! Big gains, let’s refinance out of the deal! All they need to do is pay out the $40k equity loan, and hand the ‘equity partner’ another $20k. If the bank wouldn’t lend them more than $160k a few years back, is it now going to lend them $220k to refinance? Have their wages increased 38% or are they stickety-stuck?

    Seriously, if you’re even moderately bullish on the long-term prospects for real estate, don’t buy houses, buy ‘partnership equity’ (assuming such product becomes available retail). This would be such a money-spinner. Houses up 10%? You’ve scored 20%ROI. Up 4% and you’ve scored 8%. Why buy for a 4% yield when this product gives similar gains from just 2% house price appreciation? That’s less than inflation!

    The only danger is that the borrowers might default while house prices have simultaneously fallen. The sub-prime mortgage fiasco in the US makes a good analogy…

    F. [cowboy2]

    Profile photo of danielleedaniellee
    Member
    @daniellee
    Join Date: 2006
    Post Count: 197

    Hi

    I was thinking of introducing this topic on the forum when I saw the EFM on TT. Looks like Richard T beat me to it…

    Was telling my partner that this loans only work on the demand side and would drive prices higher. Now, home buyers have an extra ‘20%’ loan from their ‘equity partner’. Will not be surprised if housing prices start going up.

    My rationale on prices going up is in this rough example.

    House price: $100k
    Home buyer deposit: $10k (Has planned to service loan of $90k)
    Equity partner: $20k (20% of house price)

    Since home buyer was originally able to service a loan of $90k, with help of the ‘equity partner’, they can look at a house that cost around $110-5k instead, or bid more in an auction.

    In the end, it does not target one of the main root causes of ski-high housing prices; the supply and building of housing needs to increase and governments need to have better planning of future population growth.

    Definitely agree with Foundation, Marc and Grossrealisation that this product has to be used very very carefully.

    Regards
    Daniel Lee [specs]

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Wow – I was going to post exactly what Danniellees said – I concur….and agree with Foundation/LA/Gross, that it will have to be used and chosen very carefully, if at all. I think the majority of people will completely misuse it, and there will probably be plenty of brokers that miss-sell / promote it. (just like has happened with reverse mortgages – although totally different product of course!) It appears to be really meant for someone who is looking for a long term PPOR, to avoid LMI, and keep their repayments down in essense. In other words, with no other way to practically get into their own home. And if so, well and good. Not ‘now I can by a bigger more expensive house. I had a client walk into my office the day after the TV report, and ask if ‘you are going to do them’ because they now could get ‘a bigger house for the same money’. again, hardly the point of this loan, and also as mentioned already will affect pricing (and thus affordability) as others have alluded too – higher. Many people would be surprised at their ‘servicability’, and be in most cases, much better off with a 100% LVR loan, and trying to save up for costs.
    IMHO of course….[strum]

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    I think many of you have misunderstood the market place this product is aimed at.

    Take for example one application i have on my desk at the moment from clients both of whom are professional qualified (One is a surgeon) and they have a fair deposit.

    Running the serviceability calculator of all lenders they can borrow upto $1.8M however in Noosa Waters that gets you a nice block of land. Using EFM they can borrow around $2.3 and for that they can get into a property upon the water.

    For them the additional $500K of borrowing means that the growth they will get on a more expensive property is worth sacrificing 40% of any capital gain rather than wait a few years until their salaries go up again or they have more equity.

    Nodoc / lodoc loans have been around in the UK since the early 80’s and in Oz for the last 10 years or so. The EFM is a full doc application and only if you can show serviceability will you qualify.

    The sub prime market cannot be compared as their are many other reasons why the like of New Capital are on the verge of bankrupcy.

    How many first time buyers cannot get on the bandwagon to find their own home. EFM is a consideration.

    I have had so many enquiries from clients who want to refinance to EFM and then use the extra monthly income to invest in IP’s.

    Certainly not a product for everyone but definately serves a very useful purpose in the market place.

    Cheers

    Richard Taylor
    Residential & Commercial Finance Broker.
    Licensed Financial Planner. Ph: 07 3720 1888
    [email protected]
    New Shared Equity scheme has arrived – Email us for details.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of foundationfoundation
    Member
    @foundation
    Join Date: 2005
    Post Count: 1,153

    “Running the serviceability calculator of all lenders they can borrow upto $1.8M however in Noosa Waters that gets you a nice block of land. Using EFM they can borrow around $2.3 and for that they can get into a property upon the water.

    For them the additional $500K of borrowing means that the growth they will get on a more expensive property is worth sacrificing 40% of any capital gain rather than wait a few years until their salaries go up again or they have more equity.”

    Really? Let’s see:
    http://img59.imageshack.us/img59/9914/crazy2nm6.jpg

    I must have stuffed up my calculations somewhere. It must be so obvious that I just cannot see it. Anybody spot where I’ve gone so wrong? No matter what % annual appreciation I put in, the more expensive house gives a lower net return! If this was true, then no way could “the growth they will get on a more expensive property [be] worth sacrificing 40% of any capital gain”.

    Cheers, F. [cowboy2]

    Profile photo of YossarianYossarian
    Member
    @yossarian
    Join Date: 2006
    Post Count: 136

    It’s been interesting watching the discussion around the concept evolve, but I think the broader point is being missed (not altogether suprising given this is an investment forum[biggrin]).

    This sort of product (currently being funded by Govts in SA, WA, the UK and,the NZ govt has now come out encouraing lenders to get something similar up and running) is not designed for people who see their PPOR as an investment.

    Is is clearly designed for -and will no doubt be used- by:

    *first homebuyers who simply can’t afford the price of entry level housing without someone else stumping up some cash
    *first homebuyers who can afford their first home but only by placing themselves under big pressure AND being prepared to start out in life with a debt equal or greater to the purchase price of their home (personally, I couldn’t face that now never mind when I was starting out)
    *first homebuyers who are prepared to give up potential cap gain in order to buy their second house first!
    *upgraders who happy to give a % of a potential future gain for an actual extra bedroom[happy3]
    *savvy investors who figure equities are a better play than property and figure they can free up some income from the non tax-deductible debt to leverage into,say, a margin loan.
    *recent cash-poor divorcees who want to stay in a similar house in a similar place and need a partner to put in what the lawyers took out.
    *couples looking have kids and thereby lose an income, need to reduce payments temporarily and figure the RE market is stagnant so why not take a punt.

    It clearly aint for everyone but for some is the best thing since a baker took a knife to a loaf.

    And lets remember, all the enthusiatic talk about rising property prices (infering anyone who takes on of these things is missing out on a huge gain) misses the regrettable reality of Australian property pricing. Yes, on average, the market moves up in high single digits. Pockets move up and down in big chunks, so potential future gains are just that.

    In most loans, if you do your dough the Bank hs still made theirs. At least here, the extent of their income is predicated on the extent of your gain.

    FWIW

    Profile photo of flashflash
    Member
    @flash
    Join Date: 2003
    Post Count: 140

    Hi Yossarian,

    Yes we will use this product while we have kids and then in say 3 to 4 years refinance to 95% paying out EFM etc.

    My wfe is the one with the largish income and while my income is not to bad figure we will be comfortable and have a good lifestyle with this loan

    I think if you can use this to your advantage then why not give it a go.
    Personally it doesent fit our plan to have long term as the figures speak for themselves.Obviously not a product for everyone.

    Yes we have other properties but didn’t want to start pulling equity out thereby increasing repayments on a loan.

    Works out for us in our situation.
    Cheers

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    The more I read and hear the worst it sounds. I guess life is a bit of a punt anyway at the best of times. For an interesting excercise, if it is aimed at someone to get the ‘we will live here forever’ type home, why not for an interesting excercise work out how much someone will have to pay back at the end of 25 years if they simply just pay off their loan at the required payments only – which is a likely scenario based on why the loan may have been chosen in the first place. Let’s say home bought for $400k. In 25 years, the 80% of the financed part of loan is all paid off. Now, have a guess at the hyperthetical value of the property. $700k? $800? Or 1.2 million as many tell us houses double every 10 years (!) Whatever, now, they have to pay out the 20% equity, and 40% of the capital gain of the current market value! Probably around the time they are wanting to retire! Terrifying [cigar] Ross Greenwood had some interesting views on these loans too, not dissimilar to what several have mentioned as ‘traps’. Time will tell I am sure. [strum]

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