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REVIEW OF HOMENORTH PRODUCTS

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REVIEW OF HOMENORTH PRODUCTS Powered By Docstoc
					        Review of

    HomeNorth
            Products




Discussion Paper




        1
INTRODUCTION
Through Territory Housing, the Northern Territory Government has offered home
ownership assistance schemes for over twenty years. For at least the last ten years,
the aim of the schemes has been to assist low to middle income earners obtain the old
and continuing Australian dream, to own their own home.

In September 2002, the Housing Minister, Mr John Ah Kit announced Home Territory:
Secure Affordable Housing to 2010. Part of Home Territory, is considering ways in
which Home Ownership can be increased in the Territory.

To ensure that the HomeNorth schemes are adequate and in line with industry
requirements they are reviewed every three years. A comprehensive review of the
schemes has been completed by Stamfords Advisors and Consultants, the review
included an extensive list of recommendations.

These recommendations included the cessation of the existing HomeNorth Products
and replacement with three new products, these being a Standard Variable Loan;
Shared Equity Loan and Fee Assistance Loan.

The purpose of this discussion paper is to receive community and industry feedback to
ensure that any new products that are introduced take into account community and
industry’s point of view. Details in this paper are for consultation purposes prior to any
decisions being made by government.




                                             2
TARGET GROUP
As mentioned previously, HomeNorth schemes are aimed at the low to middle income
earners. In particular, those who are between the eligibility level of Public Housing
rental assistance and those who are eligible for home loans through Private Financial
Lenders. Territory Housing is not here to compete with Private Financial Lenders.

The gap which is not covered by Public Housing rental assistance and the Private
Financiers is shown as the shaded area in the graph below.

              $1,600

              $1,500                                   Private Home Loan Eligibility is
                                                       above this line
              $1,400

              $1,300

              $1,200

              $1,100

              $1,000
 Income $pw




               $900

               $800

               $700

               $600
                                                     Public Rental Housing Eligibility ($759) is
               $500                                  below this line
               $400

               $300

               $200

               $100

                 $0
                 $100,000   $120,000   $140,000   $160,000   $180,000   $200,000   $220,000   $240,000   $260,000   $280,000   $300,000

                                                                 Purchase Price



The graph is based on a couple with one child with the following assumptions:
• A couple with one child and a gross income of $759 per week or less is eligible for
   public rental housing assistance.
• Private Home Loan Eligibility calculated on the industry standards as follows:
   • Interest rate of 2% above the market rate (8.57%);
   • Living Expenses of $375pw;
   • Net Disposable Income Ratio of 1.25:1;
   • 5% deposit and all fees paid by client, (including mortgage insurance).

These Private Home Lending industry standards have been based on GE Mortgage
Insurance Services (GEMIS) calculator as at October 2002.




                                                                                                   3
Net Disposable Income

Net Disposable Income is defined as the net income remaining after living expenses,
compared to loan repayments.

An example is as follows:
            Purchase Price                                                                                 $180,000
            Loan                                                                                           $171,000
            Repayments                                                                                       $306pw
            Gross Income                                                                                   $1,006pw

                                   Net Income                                                                 $758pw
                                   Less Living Expenses                                                       $375pw
                                   Net Disposable Income                                                      $383pw

                                   Net Disposable Income Ratio                                                      1.25:1
                                   (being 383/306)


PROPOSED HOMENORTH MARKET

The proposed HomeNorth products will cover the area shaded brown in the following
graph, being the area between the HomeNorth Loan Eligibility line to the proposed
maximum gross income ceiling of $1,250pw.
              $1,600

              $1,500        HomeNorth                               Private Home Loan
              $1,400        Market                                  Eligibility
              $1,300

              $1,200

              $1,100

              $1,000
 Income $pw




               $900

               $800

               $700

               $600
                                                                                        Public Rental Housing
               $500                                                                     Eligibility ($759)
               $400

               $300
                            HomeNorth Loan
               $200         Eligiblity
               $100

                 $0
                 $100,000   $120,000   $140,000   $160,000   $180,000   $200,000   $220,000   $240,000   $260,000   $280,000   $300,000

                                                                 Purchase Price

The graph is based on the same assumptions as previously mentioned for the Public
Rental Housing Eligiblity and the Private Home Loan Eligibility.




                                                                                                  4
The HomeNorth Loan Eligibility assumptions are as follows:
     • Interest rate of 1% above the Reserve Bank Home Loan Rate (7.49%);
     • Living Expenses of $340pw;
     • Debt Servicing Ratio of 0.30:1 (30%);
     • Shared equity of 30% (maximum $45,000) and 20% Interest Only component
        of the loan;
     • 2% deposit paid by client.

The review recommended that the HomeNorth loan interest rate be based on Reserve
Bank Home Loan Interest Rate instead of the Commonwealth Bank Variable Home
Loan Rate, which is how the current HomeNorth schemes are based. Eligibility
calculations have been based on 1% above the Reserve Bank Home Loan Rate to
allow for fluctuations in the market. However, Private Home Lending industry standards
assess at 2% above the market. The reasons for this difference stance, is that interest
rates under the proposed schemes will not automatically move with the market, rather,
Territory Housing will have the discretion to determine if and when an interest rate
increase will be passed onto the borrower. Therefore, the Department feels that a 1%
buffer would be sufficient.

Living expenses have been calculated utilising pre-October 2002 GEMIS rates, due to
the target clients being on lower incomes, thereby, reducing their living expenses
accordingly.

Over the last few years, the finance industry has changed the way it has calculated
affordability by now utilising Net Disposable Income ratio (as explained earlier) rather
than Debt Servicing Ratio. However, in the review process, Stamfords obtained
Actuarial advice which stated that a Debt Service Ratio (DSR) of 27% to 29% is
acceptable. It was further an opinion of the review, that the current HomeNorth DSR of
30% is acceptable for the home loan repayments, with the DSR not exceeding 40% for
total finance committments, including credit card commitments.

Debt Servicing Ratio

Debt Servicing Ratio is defined as a percentage of the loan repayment to the Gross
Income.

An example is as follows:
            Purchase Price                      $180,000
            Principal & Interest Loan            $95,400
            Interest Only Loan (20%)             $36,000
            Territory Housing share              $45,000 (maximum amount)
            Repayments                              $200pw
            Gross Income                            $666pw

             Debt Servicing Ratio               30% or 0.30:1
             (being 200:666)




                                            5
PROPOSED OVERLAP OF MARKETS

There will be a slight overlap of the HomeNorth market with Private Financial Lenders
market and the Public Housing rental market. The Public Housing rental market overlap
will be beneficial to the Territory, by assisting Public Housing tenants enter Home
Ownership to provide a more stable population.

The overlap of HomeNorth products with the Private Financial Lenders market is
displayed in orange below. As the proposed schemes will be focused on a low deposit
requirement, rather than an interest rate subsidy, and will increase the applicants’
borrowing power utilising the shared equity scheme, potential conflict will be limited.

The current level of property prices in the Northern Territory, will effectively reduce this
conflict further. For example, a household with gross weekly income of $755pw can
afford to purchase a property with private finance to a value of $100,000. Whereas,
HomeNorth facilitates the purchase of a property of around $200,000, being just above
the average price of a single detached dwelling in the Palmerston area.

              $1,600

              $1,500                                                Private Home Loan
                            HomeNorth Market
                                                                    Eligibility
              $1,400

              $1,300

              $1,200

              $1,100

              $1,000
 Income $pw




               $900

               $800

               $700

               $600
                                                                             Public Rental Housing
               $500                                                          Eligibility ($759)
               $400

               $300

               $200
                                                    Palmerston Average      Alice Springs Average     Northern Suburbs
               $100                                 Sales $196,400          Sales $219,200            Average Sales $242,300

                 $0
                 $100,000   $120,000   $140,000   $160,000   $180,000    $200,000   $220,000   $240,000   $260,000   $280,000   $300,000

                                                                 Purchase Price



The yellow area in the above chart demonstrates where HomeNorth applicants are
restricted to a maximum purchase price depending on their income level. However, the
applicant’s choice of purchase price is far above that which a Private Finance Lender is
able to offer.

The graph also indicates the differing levels of affordability between regions. For
example, to purchase an average property in Alice Springs through HomeNorth, a
household would require a gross weekly income of $865. On the other hand, to
purchase a single detached dwelling in Darwin Northern Suburbs, a household would
require a gross weekly income of about $970.




                                                                                                    6
CURRENT PRODUCTS
There are four current HomeNorth products:

•   HomeShare loans available to public housing tenants wishing to purchase a
    Territory Housing property. These loans are available to tenants with a maximum
    gross household income of $1,100pw who do not currently own any other dwelling in
    the Northern Territory. If the tenant’s gross household income is less than
    $1,000pw, they may be able to purchase a share in the property with Territory
    Housing.

•   HomeStart loans available to first homebuyers wishing to purchase a dwelling from
    the private market or construct a dwelling. These loans are available to applicants
    with a maximum gross household income of $800pw, and allow purchase of a
    property up to a maximum market value of $180,000. Applicants may purchase
    100% or a share in the dwelling with Territory Housing.

•   Deposit Assistance Grants assist first homebuyers with a deposit for their
    purchase or construction. To qualify for this grant, the applicants must obtain
    finance and can not exceed gross household income of $1,100pw. The
    purchase/construction price cannot exceed $180,000 and the grant is paid at time of
    settlement or with the first progress payment for construction loans.

•   Assist Interest Subsidy is available to first homebuyers obtaining private finance to
    assist with their monthly mortgage repayments. To be eligible for this subsidy, the
    applicants maximum gross household income cannot exceed $1,000pw and the
    purchase price cannot exceed $180,000.

These products are now outdated and the review recommended that they be no longer
offered. The three major features, which have influenced the products’ effectiveness in
the market place, are:
    • Maximum limits on income levels;
    • Maximum limits on market values; and
    • Limited to first homebuyers.

Incomes have increased in the Territory since the existing product parameters were set
in September 2000. Therefore, the current maximum income levels are not capturing
the full target group. Australian average weekly earnings have increase by
approximately 6.3% over twelve months to $922.70 as of May 2003.




                                            7
Market Values are determined by property sale prices. Property sales have increased
dramatically since the existing products were introduced. A comparison of average sale
prices for single detached dwellings, as provided by the Australian Valuation Office, for
the financial year to 30 September 2000 & 2003, are as follows:

Area                 F/Y to 30/9/00   F/Y to 30/9/03    Percentage
                                                        change
Northern Suburbs     $196,900         $242,300          Increase by
                                                        23%
Palmerston           $173,500         $196,400          Increase by
                                                        13%
Alice Springs        $166,300         $219,200          Increase by
                                                        32%

Alice Springs has experienced a dramatic increase in property prices. If this increase
continues at the above rate, the average sale price in three years time will be around
$289,000. The Northern Suburbs, which includes sales for Marrara, Nightcliff and
Sanderson areas, have also experienced dramatic increases. If this trend continues,
the average sale price in these areas is likely to be around $298,000.

As the current products are only available to first home buyers, they exclude access
by those people who wish to start again in home ownership, after perhaps going
through a divorce, or even moving from interstate. These people may be on limited
incomes with limited capacity to raise a deposit.




                                            8
PROPOSED NEW PRODUCTS
Territory Housing are proposing three new products to supersede the existing products.
These are a Standard Variable Loan; Shared Equity Loan and Fee Assistance
Loan.

The proposed Standard Variable Loan features summarised as follows:
   • Maximum purchase price of $300,000, reviewed annually;
   • Maximum loan amount of $210,000, reviewed annually;
   • Loan can be split between principal & interest and interest only;
   • Minimum deposit 2%;
   • Maximum gross income of $1,250pw;
   • Maximum loan term of 35 years;
   • Redraw facility available;
   • Not restricted to First Home Buyers; and
   • Flexibility to vary loan arrangements in hard times.

The proposed Shared Equity Loan features summarised as follows:
   • Maximum purchase price of $300,000, reviewed annually;
   • Maximum loan amount of $200,000, reviewed annually;
   • Purchase can be split with minimum equity of 70%, and option to have 20% on
      an interest only basis;
   • Minimum deposit 2%;
   • Maximum gross income of $1,250pw;
   • Maximum loan term of 35 years;
   • Redraw facility available;
   • Not restricted to First Home Buyers; and
   • Flexibility to vary loan arrangements in hard times.

The proposed Fee Assistance Loan features summarised as follows:
   • Available to Standard Variable Rate Loan and Shared Equity Loan applicants;
   • Maximum of $2,000; and
   • Main aim is to assist those applicants who are not first home buyers.

Standard Variable Loan

The review recommended a maximum purchase price of $225,000 for both Standard
Variable Loan and Shared Equity Loan schemes. However, based on the current
escalations in the sales figures for single detached dwellings, there is a concern that
this maximum limit could become quickly outdated. To overcome this problem, and to
cater for additional potential increases in property prices over the next three years,
Housing Business Services is considering the following options:
       • Set the maximum purchase price at $300,000; or
       • Set different maximum purchase prices for each region based on average
           sale figures; and
       • Implement an annual review process.

The review recommended a maximum loan of $200,000 with provision for annual
review. However, Housing Business Services have adjusted this amount to $210,000

                                           9
for the Standard Variable loan. However, this amount may need to be further increased
to $250,000, depending on the determination of maximum purchase prices.

Another feature of the Standard Variable Loan is to split the loan into two portions for
repayment purposes. That is, a portion of the loan will repay principal and interest, with
the remaining portion only repaying the interest. This ultimately reduces the overall
repayment commitment, thereby making the loan more affordable. The interest only
portion on the loan can then be converted to principal and interest repayments once the
client’s financial position improves.

Shared Equity Loan

As mentioned earlier, the review recommended a maximum purchase price of
$225,000. However, due to dramatic increases in property prices, this amount may now
be inadequate. Housing Business Services are considering various options as detailed
in the Standard Variable Loan.

If a limit of $300,000 is adopted, an example of a Shared Equity Loan is as follows:
                Principal & Interest repayment loan    $200,000
                Interest Only loan                      $44,000
                Territory Housing Shared Equity         $50,000
                Applicant’s 2% deposit                 . $6,000
                Total Purchase Price                   $300,000

The purchase can be made up of Shared Equity owned by Territory Housing, Principal
& Interest and Interest Only repayments.

The review recommended that the Shared Equity portion be between 40% and 50% of
the purchase price, with a maximum amount of $45,000. However, as the borrowers
pays all the rates, taxes and expenses in exchange for living in the shared equity
portion rent free, it is in the borrower’s interest to own the majority share. Therefore, it
is recommended a maximum shared equity portion of 30% with a maximum value of
$50,000 adopted. Discretionary authority can then be an option by the Department to
vary these amounts in special circumstances, including when a borrower is in financial
difficulty.

Features Common to both Standard Variable and Shared Equity Loans

A minimum deposit of 2% is suggested, with no requirement for Mortgage Insurance.
However, a higher deposit may be required if maximum loan and purchase price options
are utilised.

A maximum gross income limit is suggested to limit the conflict with Private Financial
Lenders. As mentioned earlier, it is proposed that the existing HomeNorth products be
no longer offered to new applicants. These products have income limits of $1,100pw for
Public Housing Tenants via HomeShare loans, and $800pw for First Home Buyers via
HomeStart loans. The proposed new products will not distinguish between Public
Housing Tenants and First Home Buyers. Therefore, the maximum income limit will
have to include these income levels. Based on the scenario of a maximum purchase
price of $300,000, a gross household income of $1,250pw would be necessary to
purchase under the Shared Equity Loan scheme.


                                              10
A maximum loan term of 35 years was recommended by the review. Existing loan
schemes have a loan term of 30 years with a provision to increase to 45 years in the
case of financial hardship. Previous loan schemes had maximum loan terms up to 45
years. This caused the debt to reduce much too slowly and allowed no flexibility in the
case of financial hardship.

Introduction of a redraw facility will allow the clients to reuse any monies that they have
paid, over and above the minimum loan repayments. It is proposed that these redraws
will be restricted to purposes such as improvements to the property or purchasing of the
Territory Housing share. A minimum redraw limit will be considered to prevent an
increase in the cost of managing the loans, for example $10,000. The redraw facility is
not intended to be utilised for pay ongoing bills or to purchase christmas presents.

It is proposed that the new products will not be restricted to first homebuyers. However,
the schemes’ intentions are not to lend for investment purposes. Therefore, applicants
must not own another dwelling in Australia at the time of application, and they must live
in the mortgaged property.

There will be a variety of means to assist borrowers in hard times. One way is to adjust
the interest rate and/or repayments for a specified time; extend the term of the loan; or
ultimately, Territory Housing can purchase a share, or a larger share in the property,
thereby reducing the debt to the borrower. This will subsequently reduce the repayment
commitment, thereby assisting the borrower when in financial difficulty.

Fee Assistance Loan

The Fee Assistance Loan is aimed at assisting those applicants who do not have the
money to cover the fees. This would mainly cover those applicants who are not eligible
for the First Home Owners Grant of $7,000.

Full details of this loan scheme is yet to be determined.
It is proposed that the loan will accrue interest at the market rate.
Some examples of loan term versus loan repayments are as follows:
        • Loan Term of 5 years, Loan repayments will be less than $10 per week;
        • Loan Term of 10 years, Loan repayments will be $5.25 per week.




                                            11
SUMMARY
The main features of the proposed products are:
   • Aimed to assist low to middle income earners;
   • Low deposit required;
   • No longer restricted to first home buyers;
   • Loans assessed at 1% above the market to allow for interest rate fluctuations;
   • Fee assistance loan for those not eligible for the First Home Owners Grant.

The details in this discussion paper are only proposed at this stage. Further
investigations will be made once community and industry feedback is obtained.

To register your comments, please forward them by 9 January 2004 to:
       Ms Jenny Henwood
       DCDSCA
       GPO Box 4621
       Darwin NT 0801
or by email
       jenny.henwood@nt.gov.au




                                          12

				
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