Shared equity

Shared equity

http://www.hnzc.co.nz/hnzc/web/rent-buy-or-own/home-loans/shared-equity.htm

How does Shared Equity work?

Shared Equity is a form of home ownership assistance used in the United Kingdom and Australia.

It is designed to assist households who cannot buy a home in the area where they live and work because house prices have moved too far ahead of the maximum mortgage they can afford.

To overcome this hurdle, the government’s new Shared Equity pilot scheme will see Housing New Zealand provide an interest free loan on a home an eligible household wants to buy. This means the mortgage the household has to raise and make repayments on is reduced.

The government’s loan will exist as a second mortgage over the property. It has no interest costs, and requires no repayments until either the house is sold, or the loan term ends. At sale or at conclusion of the loan term, the household must repay the loan to Housing New Zealand. If the value of the property reduces or increases, so does the equity share, and the amount that must be repaid.

The homeowner pays all costs of ownership, such as rates and maintenance. An example:

Borrow Repay

You buy a property worth $240,000 made up of:

Your 5% deposit of $12,000

Normal home loan of $180,000

A Shared Equity loan of $48,000 (20% of the property value)

 You sell the property for $300,000. You repay:

Normal home loan of $180,000 minus any principal repayments

Shared Equity loan of $60,000 (20% of the property value at sale)

The remaining $60,000 (plus any principal repayment on your normal home loan) is your equity.

 Who is eligible for a Shared Equity loan?

To be eligible for the pilot scheme applicants must:

hold New Zealand citizenship or permanent residency, be normally resident in New Zealand, and have resided continuously in New Zealand for at least two years at any one time since becoming a citizen or permanent resident;

intend to live in the home they purchase;

be first home owners or ‘second chancers’ (households who have owned a house previously but are in a similar position in terms of assets and incomes as first home buyers);

not be able to afford a 100 percent mortgage for a starter house (defined as a home in the lower quartile of the market) and require assistance through shared equity to become a home owner;

not qualify for the government’s Welcome Home Loan;

meet normal commercial lending criteria for the non-equity share mortgage (such as a good credit history, acceptable levels of consumer debt and the income needed to service the mortgage);

be buying a dwelling at 90 percent or less of the lower quartile price of houses sold over the most recent quarter in each of the five applicable regions (see house price caps);

have a household income less that $85,000 (gross);

have no realisable or discretionary assets that could reasonably be expected to contribute to the purchase of the property, other than a deposit;

have five percent of the value of the property being purchased as a deposit.

When and how can I apply?

The pilot scheme will officially launch on 1 July 2008. Anyone interested in participating can contact Housing New Zealand at 0800 804 692 to register for an information pack.

Households are advised to contact Housing New Zealand before looking for a house they hope to buy through the scheme.

Why must I have a 5% deposit to access the scheme?

Your ability to save for a 5% deposit will signal to the Crown that you are serious about home ownership, and are prepared to make an investment of your own in the home.

Why is there a cap on the income my household can earn to be eligible the scheme?

The pilot scheme is tightly targeted at those households who can afford to make repayments on a mortgage but are unable to afford 100 per cent mortgages or other government initiatives such as the Welcome Home Loan.

Why are there caps on the price of houses that can be purchased under the scheme?

The cap on household income in the scheme means there is a maximum amount people can afford to borrow up to, even with a Shared Equity loan. The price caps reflect that maximum, and ensure that the pilot scheme is used to help households buy starter homes only.

The caps are calculated quarterly based on house sales in each applicable region. The house prices eligible for the Shared Equity Pilot Scheme for the first quarter are detailed below.

Region  House price cap

Auckland $305,000

Wellington $260,000

Nelson $240,000

Christchurch $255,000

Queenstown $385,000

Why is the scheme confined to just five regions?

The scheme has been specifically designed for regions where those on modest incomes are unable to purchase starter homes because prices are too high, and where existing products to improve access to homeownership have only limited impact. The regions chosen for the pilot all have lower quartile house prices above the New Zealand average house price of $255,000, as at December 2007.

What range of Shared Equity Loans are available?

The government’s equity share in a home will vary according to the region where the home is being purchased. The maximum stake Housing New Zealand will take is 30%, and the minimum stake is 5 %. Shared Equity loan limits for each region are below.

Region Minimum Share (of a property)  Maximum Share (of a property) 

Auckland 10% 30%

Wellington 10% 20%

Nelson 5% 10%

Christchurch 10% 20%

Queenstown 10% 30% 

The size of the equity shares reflects the relative expense of each region.

How many loans will be allocated per region?

Allocations will be made quarterly and be based on the indicative populations in the regions targeted. These will be reviewed quarterly to see if adjustments are required. Seasonal variations are likely.

Will the scheme apply to houses in the Hobsonville Development?

No, the first set of the houses in Hobsonville are not expected to be on the market until late next year. The government is considering other mechanisms to ensure a portion of those houses are affordable.

Who is responsible for maintaining the home?

The homeowner in receipt of the Shared Equity loan will be responsible for the normal ownership costs of the home, such as rates and utilities, and will also be responsible for maintenance on the home.

What if I improve my home?

The government does not wish to discourage improvements by homeowners, and so the increase in value attributed to any approved improvements to a home in the Shared Equity pilot scheme will be given to the household. Households will be required to obtain approval from Housing New Zealand in advance of the improvements they wish to make to their home to ensure there is no later disagreement over the definition of an “improvement”.

What happens if more eligible people apply for the pilot scheme than there are available loans?

Housing New Zealand will operate a ballot system if the demand exceeds available loans. However new builds will be prioritised and will bypass the ballot system, to try to help grow the supply of starter homes being built. Full details will be available when the scheme launches on 1 July 2008.

Can I repay the government’s shared equity loan?

Yes, households can reduce their Shared Equity loan by buying out a proportion of the loan based on the market value of the home at the time. The minimum amount that can be bought out at any one time is 5 percent of the market value.

There are also “staircasing” incentives built into the scheme for the homeowner to buy out Housing New Zealand’s share early. For each 5 percent repaid the homeowner will receive an additional 1 percent as an incentive. This incentive will only be available to households for the first 10 years of the Shared Equity loan.

Who carries the risk in a falling market?

Any increase or decrease in value is to be shared between the homeowner, and Housing New Zealand. If a home drops in value, the value of Housing New Zealand’s loan, and the amount the homeowner must repay, also drops.

How much money is involved and how many loans will there be?

The government has allocated $35 million over two years to the pilot. It is estimated about $9.4 million will be repaid between 2010 and 2012. The projected return is based on a range of factors including the staircasing incentives (referred to above) and standard real estate turn-over figures for first-home buyers.The exact number of loans which will be made will depend on the size of each loan approved. It is anticipated between 500 and 700 loans will be made.

What happens after two years?

That depends on what the monitoring and evaluation of the pilot scheme shows. Shared Equity is a largely new model of homeownership and it is unclear how much demand there is for it. Those who have received a Shared Equity loan during the pilot will not be affected by the conclusion of the pilot.

Related Pages:

Radio New Zealand news shared equity conference

HomeNorth Shared Equity Loan - Australian example

www.keystart.com - Australian example

The New Zealand Herald - Govt seeks partners for housing plan

Related Downloads:

"Shared Equity Fact sheet" (PDF Document, 378kb)