Shared equity mortgages, as a solution to Australia’s housing affordability problem, have been talked about for years, but apart from a few failed commercial attempts it has been left to governments to develop initiatives in this area.
But this year things changed, with several financial institutions partnering with investment managers and fintechs to launch shared equity products. Product rollout is still in the early stages, so we are yet to see whether it will work this time.
Groups launching or planning to launch shared equity products include: AMP Bank working with investment company Bricklet; Home Owners’ Partnering Equity (HOPE) working with Police Bank and possibly other lenders; mortgage insurer Genworth and shared equity deposit bond developer OSQO; FrontYa; and OwnHome.
AMP’s shared equity partner Bricklet was founded three years ago and has been working with property developers Mirvac and Stockland to develop a shared equity service for property investors. Its partnership with AMP is its first move into the owner occupier market.
It has funding from two private funds owned by high net worth investors. Under the arrangement with AMP, the funds will acquire between 20 and 30 per cent of the equity in the property, allowing the bank to lend at a loan-to-valuation ratio of 80 per cent or less and not charge lenders mortgage insurance.
Bricklet chief executive Darren Younger said the investors would expect to hold their equity for five to 10 years, at which time the borrower would be expected to refinance and pay them out (the home owner can buy out the equity investor at any time).
Investors will receive an annual fee of 6 per cent of the value of their investment in the property and any capital gain on sale of their equity.
Younger said Bricklet would pre-approve home buyers with as little as A$20,000 of savings.
AMP Bank group executive Sean O’Malley said the bank was targeting borrowers with appropriate income to service the loan but who don’t have a deposit. The product is not designed for social housing purposes.
HOPE launched a shared equity scheme this year, announcing that it had raised A$30 million of investor funds. The HOPE scheme will co-invest up to 50 per cent of a mortgage and is designed for essential workers such as teachers, police and nurses.
In November, its initial partner Police Bank settled its first loans under the scheme.
Mortgage insurer Genworth has invested in OSQO, a start-up that hopes to fill home buyers’ deposit gaps. OSQO is developing a platform that raises funds from a range of sources, including private investors, to provide home buyers with a “shared equity deposit bond” to fund a deposit.
OSQO will pay investors quarterly interest at prevailing mortgage rates, which is passed through from the home buyers, and advise home buyers on the best time to refinance and pay out their OSQO finance.
It claims its fees will be cheaper than the cost of lenders mortgage insurance would be if the borrowers took out a loan with a loan-to-valuation ratio over 80 per cent.
Genworth chief executive Pauline Blight-Johnson said she hopes to have an OSQO product in the market next year.
FrontYa, which was launched last year, offers to double a home buyer’s deposit with a contribution of up to $250,000 for approved properties. The funding is for six years and FrontYa will take 25 per cent of the property’s capital appreciation over that time.
If there is no increase in value, the property owner is only required to repay the deposit funding. The company is yet to provide any details of partnerships with enders of its business activity.
OwnHome, which was launched last year, offers a variation on the shared equity theme. It will buy the property for customers, who enter a lease agreement and an option agreement.
The option to buy the property from OwnHome can be exercised any time from year three to year seven. The price will be the OwnHome purchase cost plus an increase of 3.8 per cent a year. Each year, 2.5 per cent of the monthly lease payments go to “purchase credits”.
OwnHome does a serviceability assessment of the customer to determine what the price of the property will be and then allows the customer to choose a property in that price range. OwnHome will be the title holder until the option is exercised.
And in another variation, BankFirst has a Shared Equity Agreement that supports parents or other family members who contribute money towards a deposit. The formal agreement protects the contributor’s interest if circumstances change and they need the money back.