Increasing Affordability Problems - a Role for Shared Equity Products? Experience in Australia and the Uk - an Update

Author:Whitehead, Christine
SUMMARY

Since writing the paper that appeared in the HR September 2007 issue there have been some activities particularly with respect to the three Australian products. The Greenway Equity Mortgage, an interest-free loan for up to half of the value of the property, has been marketed most aggressively at asset-rich retired people, intending retirees, to those wishing to upgrade to a bigger home and to... (see full summary)

 
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Since writing the paper that appeared in the HFI September 2007 issue (with the same title) there have been some activities particularly with respect to the three Australian products.

The Greenway Equity Mortgage (GEM), an interest-free loan for up to half of the value of the property, has been marketed most aggressively at asset-rich retired people (as an alternative to a reverse mortgage), intending retirees (who could use their housing equity to boost their superannuation contributions), to those wishing to upgrade to a bigger home and to those wanting to extract equity for other purposes, including providing support for family. Borrowers must agree to repay the original amount of the loan and a set percentage of any increase in the value of the property. On the upside, examples provided in a media report indicated the share of capital gain increases as the size of the Initial loan increases. The examples given in one media report were a 20 per cent loan would be available for a Greenway share of capital gain of 30 per cent. For a 50 per cent loan, Greenway's share would be as much as 75 or 80 per cent. The treatment of downside house price risk is not clear although loan principal is to be repaid. Media reports suggest there is a no negative equity guarantee built into the mortgage so that the most that can be owed is the full market value of the home. Greenway aims to raise $1 billion to begin funding equity mortgages. In the first instance, this will be collected in an "originating trust". When sufficient equity mortgages are written, the plan is to securitise the mortgages and on-sell to a "term trust" (at which point the original investors will earn a return on their investment). Greenway describe their product as providing "synthetic equity" in residential property for institutional investors.

Rismark have been equally pro-active in developing a shared equity product. They announced their intention in late 2005 and, after tentative partnerships with a number of different financial institutions, finally launched their 'equity finance mortgage' (EFM) in 2007 through the Adelaide Bank. The product, developed by the key contributors to the Prime Minister's Taskforce is true to the principles articulated in that report. It is based on a zero interest equity share loan of up to 20% of the property value in return for up to 40% of any capital gain, repayable within 25 years. In the case of negative capital gains when the property is sold, the EFM lender...

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