portion, of each Home Ownership Scheme mortgage. The banks argued that specification would make these mortgages more attractive to other banks and deposit-taking companies, which are not now committed to the scheme: with the yield on a Home Ownership Scheme mortgage higher than the yield on other specified liquid assets, uncommitted lenders could be persuaded to join the scheme.
The Official Attitude
22
Officials accept the reasons put forward by the four banks for the shortfall in funds committed to the Home Ownership Scheme. The present economic situation, leading to much higher interest rates, and partly causing and partly combined with a rapidly developing and expanding financial sector, could not have been foreseen at the time when the original scheme was negotiated; and it is not in the least surprising that so few banks and deposit-taking companies have proved willing to support the scheme - with the result that the scheme is being disproportionately financed by only four institutions. A way must, therefore, be found to make the terms of the scheme sufficiently attractive to bring in many more lenders.
23
At the same time, however, it is essential to ensure that the purchasers of Home Ownership Scheme flats can continue to afford any higher interest payments that may be proposed. With an interest rate of 13.95% (as calculated in paragraph 19), families with a household income of up to $5,000 (the current limit) would be able to afford over 95% of the flats in Phase IIa of the H. O.S., on the following assumptions:
(a)
the average selling price of the flats is based on
a degree of cross-subsidisation of all flats within Phase II;
(b)
the downpayment is not less than 20%;
(c)
the mortgage is repaid over a 15-year term; and
(d)
not more than 40% of household income is used to service the mortgage.
24
It is considered that the interest rate formula discussed with the four banks should provide an adequate incentive to uncommitted lenders to join the scheme, and that there is no need for any form of Government subvention, nor for any other means of raising private sector funds to be explored.
CONFIDENTIAL