Issue 45 -Shared Equity – what is it? - Oct 2008
We are probably all aware that buying a home – especially a first home – has been a very difficult, if not impossible, task for some time. Although the recent decreases in the price of existing houses is likely to continue for some time, (despite recent reductions in mortgage interest rates), first home buyers will probably still find it a struggle.
To help alleviate the problem, Housing New Zealand is offering a limited number of interest-free, top-up loans to first home buyers. Shared equity loans, as their name suggests, give the provider of the shared equity loan, a share in the value of the property.
There are, however, a few points that need to be made.
- There is a limit to the number of shared equity loans being issued.
- Shared-equity loans will be limited to five qualifying regions, of which the Auckland area is one. (The others are Wellington, Christchurch, Nelson and Queenstown)
- Where applications for loans exceed the number of loans available, there will be a monthly ballot for pre-approval certificates in each area. If the applicants are unsuccessful in the first ballot, Housing New Zealand will contact them and automatically enter them in the next two ballots. If they are still unsuccessful, applicants will need to start the process again, by re-applying.
- Where a shared-equity loan is granted, the principle loan has to be with Kiwibank. No additions or improvements can be made to the property without approval from Housing New Zealand. Similarly, there are restrictions on increasing your Kiwibank loan, if you also have a Housing New Zealand shared-equity loan.
- Security of the shared-equity loan is by way of a second mortgage held by the Housing Corporation.
- Loans are interest free and free of regular repayments.
- Loans are re-payable on the sale of the house.
- Loans are to be viewed as ‘top-up’ loans and are limited to a maximum of up to 30% of the value of the property.
- Upon sale of the property, any gains made in value, will be shared with Housing New Zealand, who will be entitled to the same percentage of the gain as they had to the share of the property. Similarly, if there is a loss, Housing New Zealand will share in that loss. In the event that the price of the property (before deducting sale costs) is less than that required to repay the shared-equity loan, any balance remaining will be written off by Housing New Zealand.
The above is a brief outline of the scheme. While it sounds good, there are some limitations. I see the principal of these as being:
- Inability to borrow new funds from the bank. In a situation where the owners decided that they wanted to, say, start a business and they wanted to borrow more funds, they would be unable to do so while they still had the shared-equity loan. Thus, in the event that they lacked sufficient funds themselves, the only way would be to repay the shared-equity loan first or sell their home (and pay the associated costs), so as to wipe out the New Zealand Housing loan. They could not, then, avail themselves of that type of loan again and after paying costs of sale may well not have sufficient funds to start their business.
- The requirement that the principal loan be from Kiwibank. Over the term of the loan (up to 30 years) other banks may well be able to offer better terms than Kiwibank. I therefore tend to the view that this requirement is anti-competitive and designed to assist Kiwibank gain a market advantage over other lenders.
- As there is no requirement to repay all the shared-equity loan in cases where there are insufficient funds realised from a sale of the property, my belief is that there will be no incentive in those cases for home-owners to care for the property to the extent that they may have had, had that liability remained. In other words, there is a disincentive to maintain the property’s value.
All in all, probably a well meaning but not necessarily well thought out idea that has yet to prove itself.
