Who gains with equity sharing

[Aceyducey]

I was just reviewing an article from last Friday where Wizard announced they would be releasing an equity sharing product (where the home-owner buys X amount of a property & lender owns rest)......

According to the article (at http://www.propertyinsider.com.au/#),
the home owner would own 70% (subject to paying back the loan for this amount) and the lender 30%...however if the property were sold, the lender would take 60% of the capital gain.

So if you bought a property valued at $300K, on purchase the lender would own $90K, you would own $210K (subject to paying it off).

If you resold the property three years later for $400K (CG=$100K), the lender would pocket $150K, the owner $250K

Lender $150K =
Share of original property value: $90
60% of capital gains: $60

Owner $250K =
Equity he held in the $210K
plus 40% of CG: $40K

The balance of ownership has shifted from 70:30 to 62.5:37.5 (owner:lender)

It gets even worse after more time....for example, once the property has doubled in value, the lender now effectively owns 45% and the ratio is 55:45 (owner:lender)


Once the property has increased in value by 2x (to $900K) the ratio becomes 50:50

Leaving the owner with much reduced capital growth.

This doesn't sound fair to me, I think you'd have to be fairly desperate to buy outside your means to go for this kind of deal.

Or maybe the disadvantageous split would be hidden in the fine print...

Comments anyone?

Paragraph was:
"Home buyers would need to pay around 70% of the deposit and loan repayment, with Turnbull & Partners making up the difference. If and when the property is sold, 60% of the capital gain (ie: the amount the property is sold for less outstanding loans and costs) will be returned to Turnbull & Partners."

Cheers,

Aceyducey

 

[beech]

Ah the cost of home ownership for some.

Like you say the banks would really clean up over time.

I would assume it would help in pushing the prices of homes up also with more prospective buyers out and about.

 

[Peter_Tersteeg]

We've already seen what lowering the cost money has done for the price of property. If this becomes common place, those who already have property will have a lot to gain (as well as the lenders).

This only makes housing more affordable to more people. The result may well be that the market corrects itself and prices will rise beyond the reach of the people this scheme is trying to help.

Ultimatly, this scheme may fail. If there's a serious drop in the property market (to which this may contribute), will the banks take 60% of the loss? Somehow I doubt it. They'll cover themselves and leave the low income earner out in the cold, with a large debt and no asset. It'll look great on ACA or TT.

Another question which is raised is what is the banks exit strategy for this scheme? If the home owner never sells, will they ever get their money? Can their children inherit a share of the property?

Long term, I don't see this working out well. It may work in the short or medium term, but if it becomes common practice, it'll come back to bite the very people it's supposed to help.

 

[Aceyducey]

Originally posted by PT_Bear
Another question which is raised is what is the banks exit strategy for this scheme? If the home owner never sells, will they ever get their money? Can their children inherit a share of the property?

PT Bear,

I think the bank has several fairly lucrative exit schemes.

Firstly the bank can put provision in the contract to onsell their % of the property to anyone they like....lets them take the cash out & transfer the risk.

Secondly they can sell to the home owner at slightly lower lending rates or below the market value of the share - after all the lender is still making substantial money off the capital gain alone (on the basis that many of these homes will be in metro areas as in regional areas the cost of entering the housing market is lower anyway & prestige/buying beyond means is less relevant in these markets).

Lenders may even force the homeowner to keep topping up their ownership to keep it at 70%, necessitating an ongoing loan with the lender & locking the owner into an endless cycle of repayments.

Finally there may be provisions whereby the lender can force a sale of the property...the owner either has to fork out the money to buy the lender's share or else lose the property altogether.

In any case, it will be messy in the long-term.

Of course the children will inherit a share of the property - the share owned by the home owner....which they may or may not be able to onsell.


One advantage of the introduction of a partial ownership strategy would be the possibility of having transferable mortgages/easily transferrable shares of property, after all, the banks will want the ability to be able to easily liquidate their holdings.

This would allow a more US-like assumption of mortgages & offer some great new opportunities for investors.

Cheers,

Aceyducey

 

[Damien]

Hi,

I was just reading the following article today:

http://www.ihatebanks.com.au/equity_finance.htm

These loans do look like a raw deal as far as your capital gain is concerned, but the article seems to indicate that they might be a good thing for those investing for cashflow (at end of article).

Anybody else's thoughts on this?

Damien

 

[Damien]

Whoops...

Just noticed Michael G's already posted two articles on this topic lower down - one of which kind've refers briefly to using these loans for positive cashflow investing

I'll look before I post next time...

Damien