Here's What I Think
What Do You Think?

Shared Equity

I was pleased to see the Government annouce a Shared Equity policy to assist first home buyers.

As someone who has written software to manage mortgages - and in particular those at risk from marginal Servicability Ratio - I have strong views on this topic. [SR: Ratio of amount to pay on the mortgage to amount of income (after tax)]

I belong to a generation where by capitalising Child Benefit I was able to pay the deposit on a house the day after I signed up on my first job at University. And the interest was 3%!

Then I helped my daughter by contributing equity to her first house which she duly paid back.

I think the critical component is to get the Loan to Value ratio down to 70% or less so that banks charge the lowest interest rate. This means that there has to be some constraints - say first home only, and house valuation at no more than two-thirds of NZ mean house valuation - and then the shared equity should be no more than 30% of the valuation. That can be quite a lot of money!

If it is Shared Equity then the issue is how the capital is handled on subsequent sale of the property. Any change of ownership should be treated as a sale and the Government should be able to extract its capital in proportion to its original investment..

The Government can waive any interest on its investment but should capture its share of any capital growth.

Should the Government waive any interest?

If interest was not waived (but not required to be paid) then it would accumulate quite strongly and make it difficult for the owner to extract themselves and go on to buy a new house. [Remember 17% of people change residences each year.]

If a house was bought for $300,000 and the owner contributed $5000 (minimum) deposit (or will it be 5%?) and the Government contributed 25% ($75,000) and then made payments equal only to interest how would a sale be resolved?

Say the house is sold 2 years later for $320,000 (after sales costs) then the government recovers its $75,000 and owners would be left with $25,000 - which they would probably re-invest in a new home.

However if the Government was to take its share of increase in capital value the results would be Government gets back $80,000 and the owners $20,000.

Yes, there needs to be some constraints:

  • First house only [Needs better definition!] and which will be the residence of the owners 
  • Capital value below 50% of average house in district [Government defines districts?]
  • Owners contribute 5% deposit [Is this the only way to validate that they can manage payments? I think a smaller figure like $5,000 is enough.]
  • Make payments of Principal and Interest which would clear the mortgage in, say, 25 years
  • Government contribution would be no more than 30% of the balance outstanding
  • Government contribution can be converted to second mortgage at same interest rate and paid off over the remaining period of the first mortgage - this is the exit pattern for those who want to stay in the same house.
  • Only married couples with children?
  • Any limits on the total household income? - at time of take-up? - or later?

I think it is a good policy to help young families settle into a stable life style with sensible levels of financial commitment.

What do you think?


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  © 2008 - Ian Mitchell
22A Goldie Street St Heliers, Auckland, Ph: 09 5851580
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