Shared Equity - Going Halves
In the lead-up to the 2022 Federal Election, both major parties unveiled their respective housing policies aimed at facilitating the entry of first-home buyers into the property market. The Liberal Party proposed enabling people to access their superannuation to raise a deposit, while the Labor Party promoted their proposed ‘’Help to Buy’’ scheme based on co-equity principles. Following their victory in May 2022, the Labour Party has been implementing this flagship housing policy, with the scheme set to commence in 2024.
The ‘’Help to Buy’’ scheme will be limited to 10,000 applicants annually over a span of 4 years. This initiative offers eligible participants an equity contribution of up to 40% for new homes and 30% for existing properties. As an example of how this would work if an eligible buyer was looking to purchase a home, the contributions could be as follows:
|Property Price||Maximum 40% for New Home||Maximum 30% for Existing Home|
This scheme would allow eligible buyers to receive $300,000 from the government as an equity contribution for a new home, or up to $225,000 for an existing home toward the purchase of a property worth $750,000. This offers a substantial financial boost to those seeking to enter the property market while reducing the amount required for a mortgage. As an example, the potential savings are as follows, based on a $750,000 new home purchase:
Mortgage Cost (with 40% shared equity)
|Purchase Price||Govt Shared Equity||Mortgage Amount||Loan 30 yrs @ 6%|
Mortgage Cost (10% deposit only)
|Purchase Price||10% Deposit||Mortgage Amount||Loan 30 yrs @ 6%|
Clearly, there are big savings to be made if a first-home buyer is eligible to participate in the shared equity scheme. To qualify for this initiative, participants must meet certain criteria, which include:
· Maximum gross annual income of $90,000 for individuals or $120,000 for couples
· Minimum age of 18 years old and Australian citizenship
· Must not own a property under the participants name, in Australia or overseas
· Property purchased must be occupied as the primary place of residence
· Applicants must have a minimum 2% deposit and pay all legal and conveyancing costs
· Must pass the serviceability criteria of the lender to qualify for a home loan.
Participants are not required to pay rent on the equity stake contributed by the Government and may also choose to gradually buy back the Government’s equity up to 5% at a time.
The scheme is not without its risks, as the initial equity stake provided by the Government must be repaid, even if the value of the property decreases. For example, if the market falls and the buyer of the home above for $750,000 sells in a declining market for $650,000, then the Government's equity stake of $300,000 still has to be repaid (which now represents circa 46%).
However, it is anticipated that, over time, the value of scheme participant's homes will rise, especially if they retain them over the medium to long term. On this basis, when the time comes to sell, if the Government’s equity stake remains unpaid, the scheme will recoup its original equity, plus its share of the capital gain. Therefore, with the example above if the home purchased for $750,000 is eventually sold for say $1,000,000, then the Government will get $400,000 based on the original 40% stake and 40% of the capital gain, assuming none of the original equity has been repaid.
It remains to be seen what happens in a scenario in which the maximum allowable 5% increments are fully repaid over time, resulting in the complete repayment of the equity stake by the time the property is sold. If no adjustments are made, it would pay to chip away at the equity stake until it is repaid, which effectively becomes an interest-free loan, instead of sharing any capital gain with the Government upon the property’s sale.