With the increasing unaffordability of housing in our main centres, many local authorities, Housing Trusts, and even public companies like Fletchers are looking at shared equity schemes as a way of bridging the gap between the market value (say $600,000) and what first time buyers can afford to pay for that same property (say only $400,00
The NZ Housing Foundation in Auckland and the Queenstown Lakes Community Housing Trust have been the pioneers of such schemes in New Zealand. The schemes are worth considering when you have land but could afford to wait to receive the land price in the future, including a share in the capital growth!
In this article we look at some of the key features of shared equity schemes.
In any scheme there is an element of split ownership. This means that the home owner and scheme provider each own a specified percentage share of the property from the date of purchase. For example, the home owner owns a 60% share of the property while the scheme provider owns a 40% share of the property based on each parties' contribution to the purchase price. The home owner and their family then have the right to occupy the property subject to the terms of the Property Sharing Agreement.
In order to maintain the value of the property the Property Sharing Agreement will specify who is responsible for maintaining the property, usually split between general maintenance and improvements.
- General Maintenance
The obligation to maintain the property to a good standard usually falls on the home owner. Included in the general maintenance obligation can be a requirement to adhere to fencing and landscaping rules, such as not making any alterations to the fences or additions/practical changes to the landscaping, without the scheme providers consent. The home owner is also required to keep the garden tidy, regularly prune trees, hedges and shrubs often to specified maximum heights and maintain an irrigation system.
The home owner is also obliged to insure the property, pay the premiums and ensure that they do not do anything to negate the insurance. The scheme provider's interest in the property will be noted on the insurance policy so that they will be informed by the insurance company if the home owner does not pay the insurance premium.
The home owner is required to obtain the prior written consent of the scheme provider in respect of any general improvements they wish to make to the property at their own cost. The scheme provider can withhold its consent at its discretion. If the home owner does proceed with improvements, with the scheme owners consent, then the works must be completed in a reasonable time, to a professional and tradesman-like standard compiling with all regulations including obtaining a Code Compliance Certificate, if required.
The scheme provider must be provided with all relevant documentation and the home owner also indemnifies the scheme provider if carrying out the improvements causes any losses.
Role of the homeowners bank
The home owner will usually be borrowing part of their purchase funds from a Bank so it is important that the structure of the scheme protects the Bank's interest so that they will be willing to lend money to participants in the scheme. The Bank will have a mortgage registered against the entire property to secure the home owners borrowing. The scheme rules will provide that the home owner must pay all amounts owing to the Bank on a principal and interest basis and also ensure that the Bank has no recourse to the scheme provider personally for the home owner's borrowing.
The home owner will disclose its maximum bank loan amount in the scheme documentation and will not be permitted to go above that amount without the scheme providers consent, including redrawing. The Bank will also be permitted to disclose information relating to the home owners borrowing to the scheme provider.
Home owner selling
The structure of the shared equity scheme also needs to provide for the situation where the home owner either wants to sell and move on or is forced to do so (for example the end of a relationship).
The scheme will provide that there is a period in which the home owner cannot offer their share of the property for sale e.g. two years. This is often referred to as a standstill period.
If the home owner wishes to exit the property after the standstill period then the Property Sharing Agreement would normally provide for:
- Scheme Provider has first option to buy
The home owner must first offer their share to the scheme provider and the appointment of a valuer is agreed to ascertain a current market value. The home owner can decide if they wish to sell their share at the current market value and the scheme provider can also decide if they wish to acquire the share at that value. The home owner will be required to pay a processing fee to cover the scheme provider's costs in going through this process as well as some form of transfer fee.
- Sale on the open market
If the scheme provider does not elect to purchase the home owners share at the valuation then the property can be sold on the open market to an independent third party. However, the scheme provider must approve the terms of the sale and has another opportunity to purchase the property based on the offer from the third party. The net sale price (being the sale price less agent's commission and reasonable conveyancing costs) is used to first repay the Bank, then pay the scheme provider for their share and any amounts owed by the home owner to the scheme provider under the Property Sharing Agreement, with the balance then paid to the home owner.
Home owners buying scheme providers share
The home owner will also have the option to buy the scheme providers share (or part) in the property. The scheme will usually provide for this to occur at any time after the standstill period in multiples of 5%, except that once the 85% threshold is reached the offer must be for all of the scheme providers share. A similar process to the sale to the scheme provider will be followed with the value determined by an independent valuer.
It is important to realise that on any sale of the property or scheme providers share then the scheme provider will receive market value for their share based on valuation at the time rather than based on initial contributions.
The scheme rules will also provide that the scheme provider may request a statement of income, assets and liability in order to review the home owner's financial position. If following the review, the scheme provider determines that the home owner is financially stable, with their Banks support, the scheme provider can require the home owner to buy out the scheme providers share. This will free up scheme providers funds to assist other potential home owners in need.
It will also be a feature of the shared equity scheme that on the expiry of a certain period, for example ten years, the home owner will be required to buy out the scheme providers share. This is to ensure that the assistance offered by the scheme is for a finite period and gain by the equity will continue to be rolled over to assist new prospective home owners.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.