Are You a Homebuyer?
As a homebuyer, the question of affordability is one of the key considerations.
Because of how the typical home is financed, affordability is synonymous with “debt serviceability”, i.e., the ability to make a monthly payment on a mortgage loan. Additionally, those who have limited funds for their own down payment must often borrow more money, which increases their monthly payment and can lead to the requirement for mortgage insurance, further increasing the monthly obligation for the homebuyer. And as we witnessed in the financial crisis of 2007 through 2010, high monthly mortgage payments still need to be paid regardless of the price movement of the home, resulting in the erosion of home equity. We have since experienced a rebound of home prices, and for those who still own their homes, they have enjoyed an increase in their household wealth. But as we know, home prices can be volatile, and the ability to monetize the equity value has been limited to options that increase the homeowner’s debt. We believe the new option of using equity financing can enable homeownership but on a more financially prudent basis.
With equity financing, homebuyers can:
- Supplement their down payment funds, thereby reducing the level of mortgage debt assumed and improving affordability through lower monthly payments
- Eliminate the need for mortgage insurance, which increases monthly payment requirements and further reduces affordability
- Add flexibility to the prices of homes being considered to purchase, in reference to price, school district, location, while maintaining the ability to renovate the home without exhausting monthly income
- Share the risk of price movement with an investor. While our investors are seeking price appreciation in underlying properties, as an equity participant, they also share the risk of downside price movements, unlike a mortgage lender
- Transition from renting to homeownership. There are many renters, particularly in the millennial generation, who aspire to homeownership, and even with good jobs and income, they are unable to qualify for mortgage loans, due to possibly having ongoing student loan payments. Using a form of non-debt funding can bring the dream of homeownership to the next generation.