Property: Why do banks prefer debt over equity financing?

The property market has always relied on debt financing, using property as collateral and charging interest rates throughout the payment period. But could there be another way of owning property? HiP thinks so.

Banks rely on debt as the simplest form of financing, simply because debt is more secure asset than equity. Debt normally comes with a collateral — so when you buy your house, you take on a loan — your debt — which is backed by your house. Banks like this system, not only do they get the final amount back after a period of time, but they’ll also receive monthly amount of interest on top too, allowing a steady income all the way through. Plus, they’re also well protected too. If you default on the payments, your house, as collateral, can be taken off you and used to repay the debt on your behalf.

The whole property system is built around this system, and mortgages are very profitable for banks and lenders.

And this is how the property market has always worked. You, the borrower, puts paying the mortgage as top priority. As long as the payments are met, there is a roof over your head. Stop the payments, the house is taken away and you can become homeless. But keep up the payments and after a few decades, you own the property.

So homeownership: it’s risky and it doesn’t always work out in the borrower’s favour, but is this the only system that could work when it comes to homeownership?

HiP thinks not, which is why it’s offering a revolutionary new way to buy, own and invest in property.

So how exactly could HiP change this system?

In a nutshell, when you use HiP to buy a house, HiP will only take away as much collateral as it needs to cover the mortgage. HiP doesn’t necessarily need the entire property to be collateralised against the mortgage. Often on a house, there’s equity that is building up month on month.

With HiP’s system, they are enabling disposable equity. This means equity which is not tied to the mortgage as collateral can be freely traded in the HiP exchange.

So you as a first time homebuyer, can buy a percentage of your house initially. If you own your home, you can sell a bit of equity off to free up some cash, or as an investor you can choose what percentage of a property you want to own — whether it’s 1% or 100%.

This will allow real time trading of debt and equity, and allow a multitude of options for homebuyers, property owners and investors.

Watch Mark Attwood interview HiP co-founder and financial services expert Tobias Straessle on the gamechanging system: