Zero rate home loan has a capital catch

[geoffw]

From The Australian:

Zero rate home loan has a capital catch

THE cost of owning a home could be cut by 20 per cent under the terms of a radical "shared equity loan" to be launched through major lenders from July.

The catch is that the borrower - a first-home buyer, upgrading home owner or cash-strapped retiree - has to surrender up to 40 per cent of any future capital gain on the sale of their home and make good 20 per cent of any fall in value of the property.
A partnership deal announced yesterday between major mortgage insurer PMI and proposed mortgage funder Rismark International (50 per cent owned by Macquarie Bank) has set the stage for the launch of the "zero interest equity finance mortgage" loans - to be distributed initially through ING Bank, Adelaide Bank and one other unnamed lender. The deal holds out the hope of making home ownership more affordable to more people, as well as giving superannuation funds and other investors a way to tap into the biggest but least accessible property market in Australia - home ownership...

 

[Bill.L]

Hi all,

Geoff, that sounds a bit too good to be true. however the article does not mention what part of the initial equity will be funded, (and they probably will exclude investors anyway).

Just imagine, I get 100% finance (interest only) at 0%. They can lend me 100% because I will always be able to service the loan .

My only risk is if property values fall, I have to come up with 20% of the loss.

I buy 100 homes that have good rental of say $350 pw, and a net of say $250 pw after all possible costs. That gives me a nice little earner of $25,000 pw with virtually no downside and very little risk. Of course I never sell, and the financial institution gets to keep 40% of the gain with my estate keeping the other 60% less any CGT after my death.

Somehow I just don't think it will be that easy.

But we can always hope

bye

 

[geoffw]

Geoff, that sounds a bit too good to be true. however the article does not mention what part of the initial equity will be funded, (and they probably will exclude investors anyway).

I've only quoted some of the article (I don't like to lift complete articles unless they are quite short).

Further down in the original article:

Home loan borrowers would get an interest-free loan of up to 20 per cent of the value of their property. In return, the borrower agrees to surrender up to 40 per cent of future capital gains made over a 25-year loan term, and to be liable for up to 20 per cent of any depreciation on the value of the home.

 

[handyandy]

Just imagine, I get 100% finance (interest only) at 0%. They can lend me 100% because I will always be able to service the loan .

Home loan borrowers would get an interest-free loan of up to 20 per cent of the value of their property. In return, the borrower agrees to surrender up to 40 per cent of future capital gains made over a 25-year loan term, and to be liable for up to 20 per cent of any depreciation on the value of the home. This equity finance mortgage becomes a second mortgage, sitting on top of a standard first mortgage that would fund any further borrowings needed.

The loan is only for 'up to 20%' of the value of the property. For this you will give away 40% of the future capital gain. This may sound OK today but when in 10 years you go to sell it will really hurt.

Say property worth $200k pay interest on 160k at 7% $11200pa plus all the other expenses such as maintenance, improvements etc. 10 year total $112,000. Plus the home owner has spent $50,000 over the time on improvements.

Sale price at year 10 $400k of which the homeowner gets $120k and the lender gets $80k

Lenders return on 40k investment is 8k per annum, an interest rate of 20%.

So much for helping the first homeowner out.

Cheers

 

[MichaelW]

Something else to consider...

If home ownership affordability improves for the owner occupiers, who represent the bulk of the real estate market in Australia, then there is the potential for prices to skyrocket even further.

There is a current demand/supply equilibrium in place whereby OOs are willing to give up a certain percentage of their take home pay in order to buy their house. If that percentage was to drop significantly, all that would happen is that the demand/supply curves would re-calibrate so that the same percent of take home pay was required to buy the home. If interest rates are much lower due to an equity scheme with the lenders, then that just means the actual prices on the properties would have to jump significantly.

Could mean the potential for some serious house price upside for us investors with a stake in the market.

Cheers,
Michael.

 

[Bill.L]

Hi all,

There always has to be a catch

Actually the last couple of paragraphs did not load when I went to the article before.

Now the deal sounds very unattractive (as I would expect).

So who would fall for such a one sided deal??

My guess is people who want to spend it now, and have not been able to save for a home deposit. The types of property they are likely to purchase are those of the typical first home buyers.

The overall effect on the property market could be similar to a new larger first home owners grant.

bye

 

[Mr. Fabulous]

Here's a slightly different view.

What do you all think about it if the buyer never sold?

And to those who like to throw in a million what if's 'never sold' means 'never ever until the human race dies out or the sun engulfs the earth, whichever comes first'.

Mark

 

[handyandy]

Here's a slightly different view.

What do you all think about it if the buyer never sold?

Mark

If you project the abritary figures then the longer you don't sell the large the interest % they get in the end.

20 years property worth $800k cap gain $600k their cut $240k effective interest $12pa 30% pa interest.

30 years $1.6 mil cap gain $1.4 their cut $560k effecive interest $18.6k 46%pa.

So when you die they collect.

Being MCB they will no doubt sell some nifty fund product that covers this offering so in the end they just collect immediately.

Cheers

 

[Mr. Fabulous]

Handyandy,

It says in the article 'when you sell'. Now, unless the human race is extinct in my lifetime (which is highly likely) or the sun engulfs the earth in that time (highly unlikely) and by then it wouldn't matter anyway, wouldn't you be able to hand the asset on to children/beneficiaries who then take on the loan and continue to pay it?

I'm most likely missing something here, just can't see what it is (yet).

Mark

 

[emu]

wouldn't you be able to hand the asset on to children/beneficiaries who then take on the loan and continue to pay it?

I'm most likely missing something here, just can't see what it is (yet).

Mark

Handing the asset over on death triggers CGT, and i don't think the banks will let you involve trusts.
As the price of property increases the banks will find ways to encourage home buyers into the market, hopefully competition with reduce the % of CG they take, or increase the interest free %.
More buyers = more demand for homes

Potentially this could be a way of buying that future retirerment home on the beachfront by increasing the yeild just enough to hold as a IP until retirement, as long as the property is not sold until the beneficiaries recieve it ( or i am hiding my own easter eggs).
Not a very good loan for investors but it has potential.

 

[handyandy]

I am sure that they wouldn't let you purchase in any structure except your own name.

You've been on this forum to long and have forgoten how the majority of people buy property.

Buy in their own name and aim to pay of the property before they retire, the old 'own my own house'

Cheers

 

[Aceyducey]

Sure the bank does well, that's their goal.

But, are YOU still ahead with these loans?

And can you borrow significantly more than you otherwise could?

Better 60% of a 200 house portfolio than 100% of a 50 house portfolio.

Cheers,

Aceyducey

 

[Merovingian]

These loans sound utterly disgusting!

I don't see myself ever applying for one...

 

[coffee]

Would this mean, we have less rental investors in the market compared with PPOR buyers. Could the decrease of of rental properties being sold, as pass rental properties are snapped up by new PPOR people ?

Increase in rents ?

Geoff

 

[Mr. Fabulous]

Handing the asset over on death triggers CGT.

What about if it's your PPOR? Since when does death automatically trigger a CGT event? Wouldn't/couldn't the liability be transferred to beneficiary/ies? It did state that only when the asset is sold will you be hit with a 40% CG thingy. What if it's never sold?

I wonder what happens if you front up and say 'I want to settle the debt'? Forgive me, I didn't read the whole article, just thinking out loud.

Mark

 

[grossreal]

hi all
what if.
property say is 300k
you did a no doc loan to 80% and then got this as a 20%( like mezz finance) and invest that way 100% lend on no money down then kept property for 21 years
property doubles every 7 property now is 900k re lend on the 80% portion keeping (20%)the mezz in place 0% as you haven't sold.
gives you 426 cash to play with.
and yes never sell just keep taking the equity out to the value of the rental.

but like bill says haven't seen the fine print and won't be for investors me thinks.

 

[Les]

G'day GR,

The idea is great - but you'd better shoot your mathematician !!

property say is 300k
you did a no doc loan to 80% and then got this as a 20%( like mezz finance) and invest that way 100% lend on no money down then kept property for 21 years - property doubles every 7 property now is 900k

According to me, even if it only doubled every TEN years, the property is now worth $1.2m !!!! If it doubled every 7 years, you're talking $2.4m

I hope you don't think I'm being being pedantic, but, to me, your idea shows the strength of property investment (and of Einstein's "eighth wonder of the world" - the wonder of compound interest). And your final figure of 426 .... (thanks to your thought below)

re lend on the 80% portion keeping (20%)the mezz in place 0% as you haven't sold. gives you 426 cash to play with

... is actually well over $1m (I make it ~$1.6m) - but, of course, you'd need to consider the rental side too (as you stated).

So, despite the maths, THANK YOU for the thought - it got these old wheels turning. Hope it does the same for others too. Kudos to you for the idea GR,

Regards,

 

[RichardC]

An earlier zero rate loan which had a lot of coverage here, Derivex, is dead now, even if it may have been conceptually possible. The "carry trade" which allowed commercial banks to borrow in one low rate juristiction and lend in another hight rate one is winding down. Even Japan is talking about raising rates, after all these years.

I didn't bring this up to open old wounds but to give a heads up to the fact that rising US and Japan interest rates will affect the availibility of funds here even if it doesn't affect the price. And it was the volume of money, not the rates which fuelled the RE boom.

 

[simonjulie]

I have only now just read this article.
I got so excited that I posted it without researching whether it was already there(Sorry geoffw )
This new product, I believe, could have a lasting effect on the property market.
If the banks allow offset accounts against both mortgages. The product will become more attractive to the borrower as they will be able to still pay out both debts over the life of the loan, thus reclaiming full equity.
The new product could hold the potential to raise the affordability level and then house prices to a new level in the same way the first home owners grant did.
There may be a lesser demand for certain types of rental properties as a result.
Interesting times ahead.
Simon

 

[Stewie]

If the banks allow offset accounts against both mortgages. The product will become more attractive to the borrower as they will be able to still pay out both debts over the life of the loan, thus reclaiming full equity.

Simon, that's not how I understand it. I don't think the borrower will be able to escape the 40% capital gain payment to the bank once the house is sold, even if the 20% zero interest loan has been paid off.

Or maybe I mis-understood your point