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23 May 2018

Government Looks at Interest Free Mortgages

In an effort to tackle the housing affordability crisis, the New Zealand Government is considering an interest free loan scheme for first-home buyers. The shared equity scheme could save first-home buyers up to $100 a week compared to a commercial mortgage, with officials working on the scheme alongside its Kiwibuild programme, which is planning to build 10,000 houses a year at up to $650,000 each. With New Zealand's housing shortage continuing to worsen by the month, this could be a great way to boost home ownership rates in certain demographics. 

The shared equity scheme could see first-home buyers co-owning property together with a bank, government agency, or other third party. Not only would this reduce the initial deposit amount, it would also reduce weekly mortgage repayments. Once they're in a good position, the owner could buy the remaining share of the property off the third party and own the property outright. While the Government is still unsure exactly who will finance the scheme, they are in talks with numerous banks to see whether enough capital can be raised.

According to the latest Reserve Bank figures, the amount of money borrowed by first-home buyers continues to rise. First-home buyers borrowed $911 million in March, which beat the previous high of $897 million in November 2016. In recent times, the share of the new mortgage market for first-home buyers has risen from under 10 percent during 2015 to a consistent 15.5 percent today. However, despite the existence of loan to value (LVR) restrictions, first-home buyers are being hit with unsustainable levels of debt, especially when the size of loans is compared to income levels.

Despite an increase in the amount borrowed by first-home buyers, housing affordability remains a key concern. According to Housing Minister Phil Twyford, the average price of property remains out of reach for a large portion of the population: "I've got officials working on shared equity because we know that even the Kiwibuild price brackets are not affordable for lots of people... There's no way they could take on a $600,000 mortgage – a $400,000 mortgage, maybe, then you'd get a much bigger group of people."

The future of this scheme will depend greatly on Labour's confidence and supply agreement with the Green Party, which includes an ongoing commitment to investigate progressive home ownership models. The Greens have already tabled a version of the scheme which it called rent-to-own, which would require participants to make weekly payments of up to 30 percent of their income to the Crown. This version of the scheme would not involve banks or private lenders, and would sit alongside the HomeStart grants introduced by the National Government.

Shared equity schemes have already proven successful in the community housing sector. The NZ Housing Foundation is one of the biggest providers, with its co-ownership scheme holding on to 30 percent of each home and available to households earning between $65,000 and $95,000 a year. Along with the possible introduction of a shared equity scheme, the Government is  also attempting to increase housing supply through the Kiwibuild project. This plan has hit a recent hurdle, however, with the promise of houses available between $500,000 and $600,000 now reaching up to $650,000 based on the number of bedrooms.

Image Source:  NizamD/Shutterstock