Shared equity loans - sharing the home ownership dream
Monday, 3 August 2015
The government have been looking into Australia’s housing affordability issues and recently released a report, made-up of 40 recommendations, to help curb the growing crisis.
Among them was the recommendation that the Government investigate ways to expand shared equity home loan programs.
How do they work?
Shared equity home loans work by allowing homebuyers to borrow a greater amount of money in return for sharing part of the capital growth (the increase in value over time) in the property. This essentially means they can borrow more money without a corresponding increase in loan repayments.
While most would feel that sharing a portion of the capital gain is less than ideal, the main benefit of a shared equity loan is it enables homebuyers to get into the property they want sooner and begin realising all the social and financial benefits that go along with home ownership.
What are the benefits?
Shared equity loans can offer a better long-term solution for homebuyers as it means they don’t have to compromise as heavily on the home or features they want, making it less likely they’ll have to upgrade to a different property within a few years and spend thousands more in taxes and fees or renovate the property to suit their needs.
Some homebuyers use the product to lower the level of home loan repayments. Typically, no interest or loan repayments are required on the shared equity portion until your home is sold, although in some cases a facility fee maybe required to cover administration costs. This, can make the task of meeting home loan repayments more manageable for many households and may be particularly useful in offering families the flexibility to plan for lifestyle changes such as a reduced income while working part time to raise children.
The product also offers a way for single parents to refinance and remain in the family home after separation or divorce, providing greater stability for the children who can then remain in familiar surroundings.
As a homebuyer’s financial position improves with time, they have the option to ‘buy back’ some or the entire shared appreciation loan at any stage, allowing them to keep more of the appreciation gains when the property is eventually sold.
So, what's the catch?
There has been a level of uncertainty from borrowers about shared appreciation loans since they were introduced, largely based on a misunderstanding of how the product works and what happens if there are sharp rises or falls in the property’s value. In terms of sharing the property’s appreciation in value, this is usually based on the ratio between the shared appreciation loan and the purchase price, so that there is a very clear understanding between the borrower and the lender from the outset.
As one of the few providers of shared equity home loans in Australia, HomeStart Finance had the opportunity to present to the Senate committee about the product, as well as a range of other homebuyer topics.
For HomeStart, shared equity loans have been successful in unlocking the door to home ownership for thousands of homebuyers, and expanding the reach of this type of product can only be a good thing for the millions of Australians who one day dream of owning their own home.