A Shadow Deal: How to Buy a Home You Can’t Afford

Can’t afford the new home you want?

Struggling to save for a down payment?

Don’t worry! In just a few short months, New Zealand will usher in a brand-new scheme called ‘Shared Ownership’…and you’ll get that house you always wanted!

Up until now, banks have been bound by silly ‘regulations’ to encourage ‘responsible’ lending.

But now, with the latest-and-greatest innovation in New Zealand’s housing-bubble-pumping history, banks can simply step around those barriers!

Here’s how it works now…

The Reserve Bank of New Zealand has placed a restriction on mortgage lending called a loan-to-value ratio (LVR). That ratio measures the bank’s loan compared to the value of the home.

For example…

If you wanted a house valued at $500,000, you could walk in with the $100,000 cash you’ve saved up and get the bank to lend you the rest. The LVR would be 80% (or you could call it a 20% deposit).

Now, that’s the threshold for ‘low deposit lending’ and anything less is somewhat risky for banks to take on…

So the RBNZ has placed certain regulations on how many low-deposit loans the bank can offer.

For loans to occupiers, it can only represent 15% of the bank’s portfolio.

And for loans to those planning to let, it can only represent 5% — and that’s with a 35% minimum deposit as the benchmark.

In other words, it’s not impossible for banks to offer risky loans, but they’re limited on how many they can offer.

As the RBNZ proudly states, ‘Prudent lending standards are important for the long-term health of the banking system and the economy.

Well, the joke’s on them!

With the new ‘shared ownership’ plan, folks can come in with whatever deposit they have…and can get basically whatever house they want…

Let’s say you still want that $500,000 house…but you only have $50,000 to your name.

Under the old regime, you’d likely be kicked out of the bank and told to keep renting for another decade or so…

But now, thanks to the financial gymnastics of ‘shared ownership’, you can walk out a happy owner of a half-million-dollar home.[openx slug=inpost]

Here’s how it works:

You walk into your neighbourhood bank saying that you want to buy a $500,000 home.

You only have $50,000 for a deposit.

Per the RBNZ’s regulations, the bank can only offer you a loan up to $200,000.

But…

The mortgage officer gives you a sly smile and presses a secret button under his desk. Suddenly you’re whisked through a back hall to the office of a ‘third party’.

In the dark shadows of the financial world, away from the prying eyes of the RBNZ, this third party offers to buy the remaining $250,000 of the house for you…and in return, you’ll be their tenant.

That’s right. You’ll pay rent. You’ll still be under all the tenancy rules. But at least you’ll ‘own’ the home…sorta.

You’ll own half of it. And you’ll be paying rent on the other half.

And don’t forget the mortgage payments to the bank.

Best-case scenario: you manage to afford the mortgage payments AND afford rent AND somehow save up enough to buy out the third party’s ownership.

To be fair, this could happen…theoretically.

Some folks might have the income to manage it, but simply don’t have any cash saved up.

A hybrid own/rent deal like this could be a handy stepping stone towards owning the house outright.

But, realistically, this sort of deal is only useful for folks who can’t afford the house they want.

They don’t have the income. They don’t have the savings. They’re simply in no position to be purchasing something so expensive.

Where I’m from, we call these people ‘renters’.

And this sort of unusual lending practice ‘predatory lending’.

But apparently, in New Zealand, there ain’t no mountain high enough or valley low enough to keep a Kiwi from achieving the Kiwi dream.

So screw prudent lending practices!

At least, that’s what BNZ has done by announcing this new shared ownership programme, set to launch next year. According to BNZ chief customer officer Paul Carter this programme was designed to fill a hole in the market:

Some New Zealanders are lucky enough to have mums and dads topping up their savings, so they can get the deposit to buy a house. Not everyone has family to call on in this way and that’s where shared ownership could help.’

If you can’t afford the house — and your mum and dad can’t help out either — why not turn to the caring arms of the mafia an unnamed third party for your financial needs?

Housing Minister Phil Twyford has no qualms about it. He said, ‘We are looking at a similar scheme for low-income earners so it’s great to see BNZ looking at a progressive home ownership model like this.

To hear the Housing Minister call this sort of scheme ‘progressive’ makes my stomach churn…

The only thing it’s going to progress is the timeline until this crazy bubble detonates.

Give out more loans to folks who can’t afford it. Ramp up housing prices even more. In fact, double the unaffordability of NZ homes by combining mortgages and rent.

Sounds like a splendid idea…

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: If you’re looking for a new home, let me know…I’m considering offering a hybrid ownership/rental scheme for the cardboard boxes out by my recycling. Great views. Low down payment. Cheap rent. The Kiwi dream!


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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