With the government being reasonably obsessed with protecting lenders and the economy from less than perfect borrowers, the result is that now more than ever, those who often contribute the most to the mortgage payments (the tenants), are less likely to own a home than ever before.
Here’s an extract of some time-earned wisdom from the Geelong finance broker Andrew Monk.
As a tenant, your rent is an income stream of an investor, and in many cases your rent is covering the lion’s share of the mortgage.
However just being able to pay the rent shouldn’t immediately qualify you for a home loan. But there is a case for a much better deal for potential owner occupiers, especially while rents are so close to mortgage payments.
A lot of people benefit from the way things are. But in the whole affordability debate, we might be ignoring the fact that the current system is no help to many people who could afford mortgage payments, but can’t get a loan.
Our current lending system is part of our culture, and its not easy to question a whole culture – but here’s some questions anyway:
Why isn’t the person who is making most of the payments eventually getting to own a home?
Why is your income good enough to help someone else get a loan, but not good enough for you?
Surely these questions must be too naive and simplistic, right? Not really.
It’s true that there are good reasons you need to be such a strong borrower these days – defaulting is an expensive process for the bank and the mortgage insurer.
The performance of each loan can also affect the value of a whole bundle of mortgages, related securities, and the reputation of the bank – and default rates can have a very negative effect on the economy. So the banks and the economy need protecting from you – although many would argue that this is the other way around.
But what if regulatory authorities embraced some new thinking about some old ideas?
There are other financial systems that work differently, such as Islamic finance, although similar models aren’t limited to any specific faith or culture. In 2005 the Victorian government made changes to its stamp duty laws in response to this need – by exempting stamp duty where lending institutions acquire the property title in order to facilitate providing the finance.
This was designed to help specific lenders provide credit contracts that have a lot in common with rent to buy, or vendor terms contracts, such as those that have already existed in Australia for a 100 years or more. In these finance models, finance is provided without a traditional mortgage because the lender holds the title.
When a breach occurs on such contracts to the extent that it cannot be remedied, the ‘foreclosure’ process is much simpler. In such cases the contract can eventually be rescinded and the property made available to another purchaser, (just like an investment property might be available to another tenant). This occurs with no great harm to the lender or it’s shareholders – and no need for a mortgagee in possession sale.
What some of these alternatives have in common, is that borrowers have a greater choice to assume the risk of their own credit worthiness, and default losses can be limited to a pre-determined set of costs – with most of the buyer’s accumulated equity being protected even if the contract becomes untenable.
In other words, there are other models where credit worthiness is much less of a risk to the lender, the borrower and the economy.
In most of these alternatives the concept is simple. Ownership transitions from one party to the other over time. If the first party owes money on the property, then that gets paid down faster than the ownership transfers.
Unfortunately most of these models have become caught up in our complex finance and consumer laws, and the result is that many alternative solutions have become un-viable.
So some new thinking might include reviewing the protection measures that keep so many capable, potential home owners out of the market.
This could open the door for institutional investors, developers or housing co-operatives to find some new solutions based on some very old ideas.