Tool 2: Applying Innovation Financing Techniques

A: The Second Mortgage Approach

This tool allows you to calculate a homebuyer’s annual mortgage carrying cost, and the income they require for affordability, under the second mortgage approach. In the second mortgage approach, a non-profit organization sells a home below the full market price by pricing at the cost of construction (eliminating any profit). The homebuyer takes out a first mortgage from a financial institution for the sale price of the home (minus the down payment). In addition, the non-profit organization offers the buyer a second mortgage for the difference between the full market and sale price of the home. The homeowner is not required to pay interest on the second mortgage and repayment of the second mortgage is only required when the house is sold or inherited.

Please note that the blue cells below are calculation cells and thus, do not require entered information.

Steps:

1. In column A, enter the name of the approach (e.g., second mortgage approach)
2. In column B, enter the full market price of the home.
3. In column C, enter the sale price of a given home. (Note that sale price is reduced to an “affordable level” for the targeted homebuyer by eliminating the developer’s profit.)
4. In column D, calculate the down payment on the home by multiplying the down-payment rate by the sale price of the home (C).
5. For column E, click "calculate" to determine the amount of the first mortgage.
6. For column F, click "calculate" to determine the amount of the second mortgage.
7. In column G, calculate the annual mortgage carrying costs (including principal, interest, and taxes). This calculation will depend on several variables—namely, the mortgage interest rate, the mortgages’ amortization, and local property tax rates.
8. For column H, click the "calculate" button to determine the income the homeowner will require to achieve affordability (a shelter-to-income ratio under 30 per cent).

2B: The Shared Equity Approach

This tool allows you to calculate the income a homeowner require for affordability, under the shared equity approach. In this approach, an entity (a non-profit organization or quasi-governmental body) purchases a direct stake in the equity of a property, sparing the homebuyer a portion of the home's cost.

Upon the sale of the property, the entity gets a percentage of the sale price, corresponding to the percentage of its stake in the property. If the property has appreciated, the entity achieves a “capital gain”.

Please note that the blue cells below are calculation cells and thus, do not require entered information.

Steps:

1. In column A, enter the name of the approach (e.g., shared equity approach).
2. In column B, enter the sale price of the home.
3. In column C, calculate the entity’s equity stake by multiplying the entity’s percentage stake by the sale price of the home (B).
4. For column D, click the "calculate" button to determine the homeowner’s equity stake.
5. In column E, calculate the homeowner’s down payment on the property by multiplying the down-payment rate (e.g. 10 per cent) by the homeowner’s equity stake in the home (D).
6. For column F, click the "calculate" button to determine the amount of the first mortgage required for the home.
7. In column G, calculate the annual mortgage carrying costs (including principal, interest, and taxes). This calculation will depend on several variables, namely the mortgage interest rate, the mortgage’s amortization, and local property tax rates.
8. For column H, click the "calculate" button to determine the income the homeowner will require to achieve affordability (a shelter-to-income ratio under 30 per cent).

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