Equity Finance Mortgage (EFM)®

 

 

EFM Presentation


     

    What is an Equity Finance Mortgage (EFM)®?


    An EFM® is a new type of loan which can help Australians achieve their goals - whether it be purchase their first home, reduce their existing home loan repayments to free up cash-flow for other costs; or even help them purchase a more expensive property than they would otherwise be able to afford - like a family that has out-grown their current home.


    EFM is not like regular second mortgages, as it allows you to borrow up to 20% of a property's value. There is no annual percentage rate applicable to an EFM loan unless you are in default. You are not required to make any regular monthly interest repayments throughout the term of the EFM loan.Back to top

     

    How does an Equity Finance Mortgage (EFM®) work?

    Normally, a borrower will have one mortgage against their property. Sometimes, they will have more than one (ie a second mortgage), and an Equity Finance Mortgage (EFM) works a little like this. EFM® works in conjunction with a traditional home loan so that the borrower would have a loan with the Bank, and also a ‘loan' with EFM, all secured against the one property.

    However, EFM is not like regular second mortgages, as it allows you to borrow up to 20% of a property's value. There is no annual percentage rate applicable to an EFM loan unless you are in default. You are not required to make any regular monthly interest repayments throughout the term of the EFM loan. Instead, when you sell the property or repay the EFM, you repay the EFM amount you originally borrowed plus up to a 40% share of any increase in the value of the property.    Back to top

     

    EXAMPLE - Lower your monthly loan repayments with an EFM®

    John and Mary want to purchase a home for $400,000. They have a $20,000 deposit and enough additional funds to meet other costs associated with the purchase. With a traditional home loan, this is what their scenario would look like:

    Property value: $400,000
    Deposit:
    		$20,000
    Loan needed: $380,000
    Traditional Home Loan required
    (95% of property value)    :    		 $380,000
    Lenders Mortgage Insurance (LMI) premium:
    		$7,471
    Monthly loan repayments required: $2,883

    If John and Mary were to get an EFM in addition to their traditional home loan, their scenario would look like this:
    Property value: $400,000
    Deposit:
    		$20,000
    Loan needed: $380,000
    EFM Contribution (20% of property value):
    		 $80,000
    Traditional Home Loan required
    (75% of property value)    :    		 $300,000
    Lenders Mortgage Insurance (LMI) premium:
    		$4,562
    Monthly loan repayments required: $2,276
    Back to top

     

    EXAMPLE - Buy a more expensive home and keep the same monthly loan repayments with an EFM®

    Jack and Alice wish to buy a bigger house to accommodate their growing family but they can't afford any more than their current loan repayments. If they sold their unit they would have $75,000 of equity from the sale which is enough to cover the purchase costs and still have a $50,000 deposit. Using a traditional home loan they can afford to buy a property worth $425,000 and their situation looks like this:

    Property value: $425,000
    Deposit:
    		$50,000
    Loan needed: $375,000
    Traditional Home Loan required
    (88% of property value)    :    		 $375,000
    Lenders Mortgage Insurance (LMI) premium:
    		$5,172
    Monthly loan repayments required: $2,845

    If Jack and Alice were to get a 20% EFM® contribution in addition to their traditional home loan, their scenario would look like this:
    Property value:
    		 $531,000
    Deposit:
    		$50,000
    Loan needed:
    		 $481,000
    EFM (20% of property value):
    		 $106,000
    Traditional Home Loan required
    (71% of property value)    :
    		 $375,000
    Lenders Mortgage Insurance (LMI) premium:
    		$6,175
    Monthly loan repayments required:
    		 $2,845
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    What is the maximum proportion of the property value that an EFM® can cover?

    EFMs are available at the set percentages of either 10%, 15% or 20% of the property value. The original contribution percentage then determines the percentage of any increase or decrease which you share when you sell the property or repay the EFM.

    EFM as a percentage of property value The share of any increase in value that you have to pay when you sell, refinance or repay the EFM The share of any decrease in value that you may be able to share when you sell the property or repay the EFM on the loan expiry date.
    20% 40% 20%
    15%
    		 30%
    		 15%
    10%
    		 20%
    		 10%

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    Sharing in any future decreases in the value of your property

    By taking out an EFM® you are agreeing to share any future increases in the value of your property. That is, if your EFM was for 20% of the property's value, you will have to give up 40% of any increase in its value when you sell the property or repay the EFM for some other reason. Within this example it is important to remember that , unless you are in default, you will always get the major share (at least 60%) of any increase in the value of your property. Back to top

     

    EXAMPLE - Your property value has increased

    John and Mary have sold their property for $634,750. They purchased it for $400,000 six years ago using an EFM® of $80,000 (20% of the property value).

    They now have to repay $93,900 (40% of the capital gain) plus the original EFM amount. However, they get to keep 60% of the capital gain ($140,850) and they have gone from having 5% equity to having 30% equity in their home.

    In addition, they have saved $39,900 in repayments as compared to a traditional home loan over the same period. They now have $190,646 to put towards their next purchase. Their scenario is as follows:

    Property Value at Sale:
    $634,750
    Less Original Value:
    $400,000
    Capital appreciation:
    $234,750
    Original EFM amount (20%):
    $80,000
    Plus 40% share of capital appreciation:
    $93,900
    Total EFM Payout:
    $173,900
    Traditional Home Loan Repayment
    $270,204
    60% of appreciation for John & Mary
    $140,850
    John & Mary's equity after repaying the EFM and
    the traditional home loan:
    $190,646

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    EXTENDED EXAMPLE - Lower your monthly loan repayments AND then sell in 9 years when your property has increased in value

    John and Mary want to purchase a home for $400,000. They have a $20,000 deposit and enough additional funds to meet other costs associated with the purchase. With a traditional home loan, this is what their scenario would look like:

    Property value: $400,000
    Deposit:
    		$20,000
    Loan needed: $380,000
    Traditional Home Loan required
    (95% of property value)    :    		 $380,000
    Lenders Mortgage Insurance (LMI) premium:
    		$7,471
    Monthly loan repayments required: $2,883

    If John and Mary were to get an EFM® in addition to their traditional home loan, their scenario would look like this:
    Property value:
    $400,000
    Deposit:
    $20,000
    Loan needed:
    $380,000
    EFm Contribution (20% of property value):
    $80,000
    Traditional Home Loan required
    (75% of property value)    :
    $300,000
    Lenders Mortgage Insurance (LMI) premium:
    $4,562
    Monthly loan repayments required:
    $2,276

    Back to top

     

    Sharing in any future decreases in the value of your property

    If you repay the EFM® loan on the Loan Expiry Date, and the property has actually decreased in value between the time you took out the EFM loan and when you repay it, you will be required to repay the original EFM loan amount less a share of the decrease in value. That is, the amount you repay will be actually less than the original amount that was advanced to you under the EFM loan. The share of the decrease in value of the property is called the "Depreciation Allowance" and is equal to the Original EFM Percentage times the decrease in the value of the property.

    For example if your EFM loan amount was for 20% of the original value of your property then the EFM loan percentage would be 20% and the Depreciation Allowance is then 20% of the decrease in the value of the property. Other percentages are as follows:

    EFM loan as % of original
    property value    		 Depreciation Allowance as % of decrease in property value
    20% 20%
    15%
    		 15%
    10%
    		 10%

    However, if you are repaying the EFM loan other than on the Loan Expiry Date or because you are in default under the EFM loan, you will not be eligible for the Depreciation Allowance if your property value has decreased in value over the term of the EFM loan. For example, if you were to have a financial windfall or if you wanted to refinance the EFM loan to a traditional home loan, or if you are in default under the EFM loan and are required to repay the EFM loan, and the property has fallen in value, the Depreciation Allowance will not apply. You will be required to repay the original EFM loan amount (and any applicable fees or default interest) in full.    Back to top

     

    EXAMPLE - Your property value has decreased

    Gary and Gail are selling their property for $380,000. They purchased it for $400,000 using an EFM® of $80,000 (20% of the property value).

    Whilst the property will sell for less than they purchased it for, Gary and Gail are able to share the $20,000 loss that they would have had to bear alone under a traditional home loan arrangement. Because they are selling the property at a loss they will not have to repay the full EFM amount and are $4,000 better off. Their scenario is as follows:

    Original property value:
    $400,000
    Less property value at sale:
    $380,000
    Decrease in Value:
    $20,000
    Original EFM amount:
    $80,000
    Less 20% share of Decrease in Value (depreciation allowance):
    $4,000
    Total EFM Payout:
    $76,000
    Traditional Home Loan Repayment:
    $286,832
    Gary and Gail's equity after repaying the EFM and the traditional home loan
    $17,168

    Example excludes discharge administration fees, government charges and other fees and charges associated with discharging a loan and the associated mortgage.

    For the assumptions used in calculating this example please refer the EFM site assumptions & disclaimer detailed below    Back to top

     

    Who is eligible for an EFM®?

    To be eligible for an EFM® you must:

    a)
    		 be an individual or be borrowing jointly with one or more other individuals - you cannot be a company or a trust
    b)
    		 not require the support of a guarantor
    c)
    		 secure the EFM® with your owner occupied property which must be in an acceptable location and of an acceptable type
    d)
    		 have a 5% deposit to put towards any home purchase
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    What loan purposes can I use an EFM® for?

    EFM's are restricted to standard residential loan purposes such as purchase or refinance of an owner occupied property, including debt consolidation. Loans must be regulated only.

    EFM's are NOT available for the following purposes:
    a) Investment
    b) Other personal use
    c) Building loans with progress payments
    d) Loan portability
    e) Business purposes
    f) Vacant land    Back to top

     

    Are there any restrictions on property security?

    Standard residential property is acceptable. However, EFM® s are only available for restricted postcodes. This is to ensure that the spread of security properties is well diversified for risk management purposes. Most mainland capitals are well represented. Before an EFM loan can be approved, it must be post code approved as well.Back to top

     

    What loan types are available?

    EFM®'s are only available in conjunction with:
    a) Standard Variable rate Term Loan
    b) Variable rate Line of Credit
    c) 100% Offset
    d) Principal & Interest Repayments only

    EFM's are NOT available with:
    a) Interest Only repayments
    b) Introductory fixed and discounted variable rates
    c) Lo Doc Loans
    d) Go-Between (Bridging) Loans
    e) Large Loan Discounts
    f) Line of Credit with Secured Visa    Back to top

     

    What are the costs?

    You are responsible for covering the following costs:

    a)
    		 Application fee
    b)
    		 Valuation costs
    c)
    		 Legal fees and disbursements
    d)
    		 Standard fees associated with your traditional home loan
    e)
    		 Stamp duty and government fees associated with a purchase
    f)
    		 Standard discharge fees and charges associated with discharging a loan
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    How do I apply for an EFM®?

    To discuss your individual circumstances and apply for an EFM®, all you need to do is contact us and we will help you through the process.
    a) Ph: 1300 30 29 29
    b) Email: assist@mortgagebuddy.com.au
    c) Fax: (02) 4959 2611    Back to top

     

    What else do I need to know?

    All loans are subject to standard lending criteria and Lenders Mortgage Insurance approval (where applicable). You will be required to complete a loan application form and provide the necessary supporting documentation.Back to top

     

     

    EFM Explained

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    EFM site assumptions & disclaimer.

    This website contains examples and graphs that illustrate the financial impact of using EFM loans. They do not represent what will actually happen for any loan that you may take as property prices, interest rates and other circumstances will change. The examples and graphs are formulated based on a set of assumptions outlined below. These assumptions are not forecasts or predictions and may or may not reflect actual events.

    Each example assumes that the EFM is for 20% of the property's value at the outset, has a 0% interest rate and that no default interest is payable. The actual EFM may be for less than 20% of the property's value and the outcomes may vary considerably if default interest becomes payable. All examples of how any increase in the value of the property is shared assume that the value of the property has increased by an annual nominal rate of growth of 8%. This is based on estimates of historical median rates of capital growth attributable to Australian residential real estate over the period 1986 to 2005. Actual rates of growth may be greater or less than this number.

    If the example contains a traditional home loan comparison, it assumes that the traditional home loan interest rate is 7.80% p.a., the loan term is 25 years, all principal and interest payments are made on time, the only repayments made are the required repayments - that is no additional repayments or redraws are made, and no event of default has occurred and default interest is not incurred at anytime during the life of the loan.

    The actual traditional home loan term and interest rate may be greater or less than these assumptions and individual circumstances such as additional repayments may affect the outcomes considerably. The assumed interest rate of 7.80% for the traditional home loan used in the examples is based on the ‘Indicator Lending Rates – Banks’ published by the Reserve Bank of Australia for a standard variable rate housing loan as at October 2006.

    If the example contains Lenders Mortgage Insurance, the premium payable is based on rates effective for the relevant product as at the date of this booklet.

    Assumptions specific to an example are detailed in the example. Numbers may have been rounded to the nearest thousand or one percent where relevant. Fees and charges other than those mentioned in the examples such as application fees, valuation and legal fees, conveyancing fees and stamp duty on the purchase of a property are payable. These will vary depending on the individual circumstances.

    This web site does not take into account your personal objectives, financial situation or particular needs. You should obtain a copy of the "Equity Finance Mortgage Disclosure Document" and the "Equity Finance Mortgage Terms and Conditions Booklet" and consider them before making a decision about whether to acquire an Equity Finance Mortgage. A copy of the "Equity Finance Mortgage Disclosure Document" and the "Equity Finance Mortgage Terms and Conditions Booklet" can be obtained by calling your lender.

    All information is correct as at 01/02/2007 and is subject to change.

    Fees, charges, terms, conditions and lending criteria apply. Full details are available on application. EFMs are arranged by Rismark International Funds Management Limited ABN 15 114 530 139. AFS licence number (293881) (trading as Rismark International). Permanent Custodians Limited ACN 001 426 384 is the lender.
    ARES Capital Management Pty Limited's intellectual property relating to the EFM product is protected by Australian Innovation Patent No. 2005 100 871, 2005 100 869, 2005 100 868, 2005 100 867, 2005 100 865, and 2005 100 864.
    ® Equity Finance Mortgage (EFM) and EFM are registered trade marks of ARES Capital Management Pty Limited ABN 93 113 861 046.
    TM Equity Finance Mortgage is a pending trade mark of ARES Capital Management Pty Limited ABN 93 113 861 046.