In (3), we concluded that HB will have to fork out more money to own the house if it appreciates. This is a bigger burden compared to a mortgage where the HB enjoys the appreciation in full without any additional liabilities.
What if the house depreciates? What is the order of priority to suffer the loss – HB, developer and investors?
1. The developer suffers the first loss (from the 20% he did not receive when the house was sold).
2. HB is next, up to the equity he has put in (20% of the original house value).
3. Lastly is the investors.
Although the HB has to absorb all the depreciation in a mortgage, he is not under threat of compulsory loss realisation (he has to sell the house if he cannot raise the refinancing amount in Year 5) as per the FMH scheme. He can opt to just stay in the house, which is what home ownership is, in the first place.