Sharing equity with your lender


I have not read the "sharing equity with your lender " proposal by the federal government, only some newspaper articles about it. At a glance, it should make buying a home more affordable and should help maintaining the demand on the market. What do other people think?

Say cheese :p

I think it will just make house prices increase again.

If a purchaser is only putting in 50% (for arguments sake) into a property, their affordability has just doubled.

This means that instead of buying a $500k home, one would now be able to afford to buy a $1m home, and service it comfortably.

Obviously, there will need to be some sort of means testing or the like to limit abuse of a system such as this.
Howdy there,

I think the articles re: financial institutions purchasing a home with the purchaser was quite limited in content...

There is no mention on what the financial institutions would like in return for their 50% equtiy stake? ie. would they charge the home owner 50% of the market value rent? OR would they charge the home owner interest on the full amount? it is all unclear... but either way, the financial institutions would expect something back in return in order for them to outlay 50% of the purchase price (assuming & the settlement fees), therefore I can't personally see this driving prices up, if anything it may cause higher vacancy rates &/or would create greater competition to the fellow investors focussing on wraps (as more & more ppl would abe able to afford home loans, which would be in direct competition with wraps)...

Just my 2cents worth (but once again I have only seen one article on this matter & it was very breif)...


Simple explanation of the proposal

Just had a quick read through the proposal. That's what they suggest:
1. Property purchase through Partnership Agreement between the buyer (Managing Partner) and a financier (Limited Partner). Suggested minimum share of the Managing Partner of 25%.
2. Limited Partner is entitled to their share of sale price.
3. Managing Partner has full control of the property.
4. When selling, if the Limited Partner receives an offer that he wants to accept, he instructs his agent to submit the offer to the Limited Partner, who can either agree, or buy the Managing Partner's share for a higher price.
5. Limited Partnership rights would be traded on a secondary market. They expect that there will be specialist companies holding portfolios of Limited Partnership rights and issuing shares over these portfolios.
6 The document also discusses some socio-economic issues, such as aging population, housing affordability, household asset allocation, etc

I can highly recommend the paper as an interesting and stimulating reading.

Say cheese :p

Re: Simple explanation of the proposal

I don't understand where the YIELD is for the Investor, I see the potential for Capital Gain, but unlike Shares or Traditional Property there's no Rent or Dividends..

The proposal only deals with owner-occupied properties. There does not seem to be any reference to rental properties. My understanding is that the Managing Partner can't sell their share at all, only the whole property. Contrary to this, the Limited Partner can sell their share on the secondary market. However this is not the final report (the final report is due in October) and they would most likely add rental properties to the range of issues discussed.

Say cheese :p ,

I understand it only refers to Owner Occupied properties.. but I;m still wondering why one would become the silent partner given that there's no income to help hold the asset until such time as the homeowner chooses to sell or the interest is sold on the new 'exchange' that will be established..

Very good point Duncan. I don't see the banks (or very many others) going for this kind of structure.

Banks expect a return on their investment. They invest money borrowed from the Reserve Bank and onsell the loan - basically a wrap deal. If they become equity partners with owner-occupiers, they get no rental return, thus they get no return until the property is sold - this is negative gearing at its best (or worst depending on your point of view).

Investors will lend money without expecting a return until the property is sold, but they have high interest rates and like to see a short term exit strategy of around 1-2 years.

The only way I see any lender being interested in this is by charging a huge interest rate.

It's an interesting concept, but I don't think they've fully thought out who's going to finance it. If the government wants to get people into their own homes, why not just drop stamp duties?

Just a thought to keep in mind, it is my understanding that you can't claim the interest on borrowings unless it is for an income producing asset or has the promise of producing an income in the near future. The holding costs would not be to attractive.
I find it interesting that this proposal is being developed to help cash poor people own their own homes without having to put a large percentage of their income into it and encourage them to invest elsewhere so as not to be reliant on the pension. This proposal has one major flaw that I can see - if Joe Bloggs can suddnly buy a house for half the amount that he couldn't buy before, does anyone really think he will invest the remainder of his income? Yeah right - new car, new furniture, new boat - more money to spend on crap so when he gets to 60 he only owns half a house and lots of crap rather than a whole house and not as much crap. Correct me if I'm wrong but I can't see this or any other proposal changing basic human nature - instant gratification
Also, the people this proposal is targeting will not be to receptive of knowing that the big bad bank will always own a portion of their house even after paying it off.

banks in joint ownership

HI Lotana,
I do not agree with Noel Whittakers "anti property" stance in most cases - Sunday he had an interesting response in the Brisbane mail to the Coalitions proposal to make home ownership more affordable - intersting read, another perspective again.
Is this not a policy for first home buyers? - I may be wrong here.
A house worth $250,000. - rent $250.00 a week - Tenant gets to occupy for a yearly cost of $13,000.. In contrast a mortgage at 7 % will cost at least $17,500. a year - Add more for rates, maintanence, at least $2,000 and he states the tenant is better off than the owner. People who rent and cannot save could end up with serious financial problems if they get into a house with minimal deposit. He suggests the reason banks have long demanded that home buyers have a substantial deposit is to enable borroweres to prove they have the capacity to save.Banks know from experience borrowers who put nothing into a deal will be the first to walk away when the going gets tough. Who will be responsible for maintanence and improvements? perhaps Smiths are the owners from hell and live in such a mess that the property now sells at a loss - who will be liable to meet the shortfall? The Jones family may be U-bute D.I.Y.'s if the bank is co-owner, do the Jones's need approval from the bank for their developing house and gardens? What value if any, will be placed on the hours and months spent by the family increasing substantially the value when the property sells at a large profit? He states the catch 22 in all this is that artificial incentives to make home ownership more affordable will drive prices up even further. Interesting read and wondered what other scenarios would put question marks over how the banks would approach profit/loss situations - will the banks always be the winners?
Denise ::confused: