Shared Equity Scheme is here

[BV]

Hi Richard
A few years ago I had a client who had 2 properties on the sunny coast which were in his super fund. The super fund was managed by AXA or something like that.
He entered into a contract of sale to sell the 2 units but because the super fund had a greater valuation on the property than the sale price they wouldnt agree to the sale and it took 6 months for them to get another valuer to sort it out
Can this have an impact in this situation and if so does the super fund offer to buy out its partners?

I guess there is always the possibility of arguments when you have a 3rd party involved, but the important thing about this scheme is the lower loan amount required to secure the property.
If this scheme was available in the old days when I was buying my 1st PPOR
I would have been able to buy in an area where I liked to live not where I could afford to live.
With 80% ownership in area A, long term returns would have been similar
to 100% ownership in area B but my livestyle would have been different.
Now this is something to think about......
Cheers

 

[simonjulie]

Let me know the post code you are looking at and I can tell you.

Qlds007

What's the limit for 2087 and 2088?

Cheers
Julie

 

[Qlds007]

Julie

2087 = $1,123,339
2088 = $3,149,584

BV thate ecactly right. If the Bank on paper told you could only afford a loan of $500K but you wanted to live in an area where the prices were $700K now you could afford to upgrade there.

 

[myla]

hello,

what is the interest rate?

what is the exit fee and is there a time frame for this condition?

what about refinancing or closing of mortgage, is that considered a sale and therefore payment to 2nd Mortgage holder?

thankyou
myla

 

[Spectre]

BV

Thats fair enough, but to add a comment, if you bought more than a few years ago with your first property, say pre-boom, and 40% of the profits you basically 'lost' due to the 2nd mortgagee taking their kick, would you be in the same spot you are now or worse off?

While I can see the market for it, it also does add another dimension to the addage of biting off more than you can chew and then chew hard, its more chewing 'harder'.
But on the flip side, it does give you the availability if you could afford to do it on the total amount to borrow less and then use the additional cash for further investments etc

also possible ?s, say you go to borrow for an IP in years to come, how does the bank assess the 20% loan. Whos to say? As the majority of brokers (myself included) often are pro non-xcollateralistation...

suppose time will tell.

Interesting....

 

[BV]

BV

Thats fair enough, but to add a comment, if you bought more than a few years ago with your first property, say pre-boom, and 40% of the profits you basically 'lost' due to the 2nd mortgagee taking their kick, would you be in the same spot you are now or worse off?
....

What 40% of the profits? it's 80+20% ownership,
We shouldn't see the 20% of the total CG as a loss as it isn't
Remember, we only borrowed 80% so we will get capital gain for that amount
Let's say we borrowed $800k to buy a house worth $1mil
the super fund comes up with the $200K.
6 years later we sell the house, and the capital gain is 50%
so we get our initial amount $800K + the 80% of the capital gain=total of $1.2Mil. The super fund gets $200K + 20% of the capital gains $100K = total of $300K
If with my initial $800K I had bought a house on my own elsewhere, the capital gain would have been similar.
cheers

 

[Mr. Fabulous]

In the event of the sale the 2nd mortgagee takes 40% of the gain made in the property and you retain 60% of the gain.

Hi BV,

I think you might be misunderstanding the product. Read the quote above - they take 40% of the gain. That to me means 40% of the total gain, not a share of the 20%. So let's say you make a gain of 100K on a property, the super fund will take 40K. At least that's the way I understand it.

In numbers it looks like this:

- buy house 500K
- sell house 600K
= capital gain of 100K

- super fund takes 40K
- you get 60K

I can't see how it would be worth it for the super funds to do this if they took a share of the gain based on your calcs. Also, let's not forget that you also need to pay associated selling costs and CGT - which will be on the whole amount, if I'm not mistaken (happy to be corrected).

Like most products it has it's advantages and disadvantages. It's be pretty sweet, for example, if you never sold the property, I imagine.

Mark

 

[Qlds007]

Myla

Interest rate on the first Bank loan 7.89% variable with fixed rates available within 3months.

No exist fees although Rismark insist on a valuation when you list the property for sale to ensure that you are not selling it to your brother.

 

[BV]

Hi BV,

I think you might be misunderstanding the product. Read the quote above - they take 40% of the gain. That to me means 40% of the total gain, not a share of the 20%.

Mark

Mark,
Thank you for the correction
Cheers

 

[AdamN]

http://blogs.theage.com.au/lifestyle/renovationnation/archives/2007/02/fancy_an_intere.html

"The day is nearing for the Australian launch of shared-equity mortgages -- a new financing arrangement allowing people to borrow 20% of the value of a house, interest-free.

So what's the catch?

You have to pay 40% of the capital gain on the house back to the lender when you eventually sell the property"

Question: What if you never want to sell? I haven't read through all the doco but are their limitations to the loan period?

 

[Mr. Fabulous]

Hi Adam,

I spoke to Richard about that over email and he stated that the loan must be repaid after 25 years - including (to my understanding) the 40% of the gain. I could be wrong though - and happy to be corrected.

I had another question for Richard, which I'll post here as I'm sure other people would like to know the answer to it:

- What if you pay down the 80% portion (the bit you pay interest on) really quickly, then save up and pay off the 20% portion. Are you required to pay 40% of the gain up to the point where you pay back the 20%? -

Mark

 

[simonjulie]

I reckon that would be a yes Mark.
Time in the market would have to be worth something to the second mortgage lender.
Simon

 

[grossreal]

hi richard
I don't wish to change this post as I think that alot of questions need to be asked with regard to this equity loan
but you do not need to qualify for the whole loan under vendor finance back
its as simple as this.
500k property.
vendor finance back of 20% ( same as shared equity)the borrower goes and get a low doc loan at 80% ( and got a few of those) he then pays the 80% to the vendor and the vendor gives him the 20% at terms to them both
usually very low.
lets look at the numbers on a 500k property with a 10% increase in 5 years thats a 50% gain
so you have 250k gain and at 40% of that's 100k
so the vendor would need to be charging 20% vendor finance back to be the same
( most investor turn over there properties in 5 years )(I don't but that's the rule of thumb)
if you had vendor finance back of 5% (the norm) you would pay back in big numbers 25k my current vendor finance back is 2%.
and for those that are thinking that its great to hold for ever,
thats right if you can access the equity build up( and I don't think you will be allowed to have a second tier behind the first as you will find the fund will be the second so you wont have leins etc),
if you can't not sure if its such a great deal,
you can vendor finance back to what ever you like and you can negotiate any type of deal.
I have looked at the low 4.45% deals for 5 years and they move up to 8.7% and I am yet to find something that is better then the norm in the market.
its horses for coarses, it sounds great that you are getting 20% for nothing but not sure if thats the case
if the property you are buying into is in a high or potential high growth area you may well find that the return for the 40% is very costly.
one other question that I think need to be answered and I think thats why this product is not aimed at investors
is that if you have made 250k the fund gets 100k
you pay all the cost out of your 150k but who pays any capital gains tax on the increase ( I don't think it will be the fund) and if 5 years the gain is say 25% taxed that's around 62k so you have 87k
less then the fund
there is alot more question to ask with regards to this type of product or for that matter any new product.
my .002

 

[AdamN]

Hi Adam,

I spoke to Richard about that over email and he stated that the loan must be repaid after 25 years - including (to my understanding) the 40% of the gain. I could be wrong though - and happy to be corrected.

Thanks Mark.

I'll throw another one at you:
What happens in the unlikely but possible event that you decide at any point within the 25 loan period to sell and your selling price is less than your initial purchase price? i.e you have made a capital loss instead of a capital gain.
If the agreement is that they will lend you the 20% of the property value with the expectation and understanding that they receive 40% of the CGT upon sale, then what is the implication for the borrower if there is no capital gain?

 

[Qlds007]

Hi Adam

Happy to answer as many questions as you want to throw in.

The answer to your question is where the property is sold at a loss (and a valuation conducted by Rismark supports this figure ) then the will share in the loss to an extent of whatever their initial contribution was - usually 20%.

Also imagine you refinanced in 2 years and the valuation was the same as it is now you have an interest free loan for 2 years not bad.

Mark - No repayments or interest are charged on the 2nd mortgage so if you have repaid your 1st mortgage then you would merely need to refinance the 2nd mortgage portion. The property would be valued and the loan amount would be increased by 40% of the profit.

There are only 2 main reasons why you would take out this type of loan:

1) You wanted to reduce your loan repayments to allow for circumstances such as children on the way, wife giving up work, divorce, allow you to invest in IP purchasing.
2) You wanted to keep you repayments the same but wanted to upgrade to what you felt you could afford.
You can service for a loan of $500K but can now borrow $666K

 

[BV]

Richard,
Is equity sharing viewed by the state governments as a partnership?
if it is, people who borrow for their first home under this scheme won't be eligible for the FHOG.
If this is the case is the lender planning to talk
to the state governments and secure an exemption?
Cheers,

 

[Qlds007]

BV It is Debt not Equity so not considered a partnership at all.

 

[BV]

BV It is Debt not Equity so not considered a partnership at all.

Richard, so are first home owners eligible for the FHOG?
Also, do you know why they don't offer it in all postcodes?
Cheers

 

[grossreal]

hi all
can you please answer the following questions.
1. is this equity loan supplied by a bank
2. is it supplied by a fund or private institution
3. was the purchaser of the loan given a disclosure as the funds profit out of the deal in year by year increments
4. was the commission for the deal supplied and what is that
5. was trailers told to the loanee and what are the trailers
6. if this is private funding or super funding what was told to the loanee with regard to what happens if the super or private liquidate and there position
7.was it disclosed to the loanee that the min renovation was 20k and what recoarse is in place if ? the loanee disagrees with the lenders view
8.is this loan covered by the consumer credit code
9.what is the major lenders view if the 20% defaults and a liquidator asks for there percentage of the property and what safe gaurds have been put in place by both lender to safe guard the borrower.

these are but a few of my questions on the product and I would very interested in the reply

 

[Mr. Fabulous]

Happy to answer as many questions as you want to throw in.

Hi Richard,

If you're 'happy to answer as many questions as we wish to throw at you', why are you not answering questions that are being asked in the other thread?

Or is it that you are happy to only give answers that have a positive slant?

Mark