40-year home loans being offered.
With housing affordability officially at record lows, financial engineering is reaching out to close the gap for first-time home buyers eager to get a start.
Yesterday Savings & Loan Credit Union started to offer 40 year home loans to customers, taking us one step closer to Japan's multi-generation property loans.
And the appearance of shared equity loans such as that offered by Adelaide Bank/Rismark is another attempt to bridge the affordability gap for potential home buyers at a time when rents are also soaring.
Sceptics claim that the housing market will quickly absorb any affordability short cuts, much as the first home owners grant quickly resulted in prices inflating by a similar amount.
The first independent analysis of shared equity loans disagrees with this idea.
Financial researcher Cannex found that shared equity products are unlikely to have any effect on property prices unless they become very widespread.
Even then, the effects are likely to be modest "because by using this form of loan a borrower with affordability issues has quite different needs from a property upgrader who can suddenly afford one more bedroom.''
The shared equity loan lowers the bar for home ownership by funding 20 per cent of the house with an interest free equity finance mortgage (EFM).
A conventional home loan and deposit covers the remaining 80 per cent of the house value.
The catch is that the issuer of the EFM gets to keep up to 40 per cent of the capital growth on the house.
Surprisingly, Cannex found this sort of a deal can work in the home owner's favour, particularly in times of low to moderate house price growth.
The first saving is in mortgage insurance, which might otherwise have been required if a very large proportion of the property price was being borrowed.
Using historic prices, Cannex found that buyers who used a shared equity loan would have been ahead in the muddling main markets of Sydney, Melbourne and Brisbane but way behind in the faster growing markets like Perth and Darwin.
So the trick is to only used shared equity in markets which are unlikely to experience sharp price growth.
Savings & Loans chief Greg Connor said the new 40-year loans came after requests from members who could not break into the property market.
He said they would reduce the minimum payment on a $250,000 loan by as much as $95.21 a month.
"We see extended terms as a stepping stone for most borrowers who can move to a standard length mortgage after becoming established,'' said Mr Connor.
Of course the price of a 40-year loan term is that it takes a lot longer to start making a dent in the loan principal and you pay interest for a lot longer.
Source: The Herald Sun
