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For many, buying that home, whether it’s your first home or a subsequent one, feels just out of reach. For others, managing home loan repayments can sometimes become a struggle or simply just prevent you from doing some of the things you want to do.
Now there is a new home loan available that can help you reduce your home loan repayments or even purchase a more expensive property than you may otherwise be able to afford. An Equity Finance Mortgage, (EFM) works in conjunction with a traditional home loan. Together they let you move some of the expense of a traditional home loan to later when you eventually sell your property.
An EFM allows you to borrow up to 20% of the property value and you pay no interest and make no regular payments.
TRADITIONAL HOME LOAN
Property Value = $400,000
Deposit = $20,000
Loan Needed = $380,000
Traditional Home Loan (95% of property Value) = $380,000
Lenders Mortgage Insurance Premium = $7,417
Monthly Repayments Required = $2,883
ADDING AN EFM TO MAKE PURCHASING A HOME AFFORDABLE
Property Value = $400,000
Deposit = $20,000
Loan Needed = $380,000
EFM (20% of property value) = $80,000
Traditional Home Loan (75% of property value) = $300,000
Lenders Mortgage Insurance Premium = $4,652
Monthly Repayments Required = $2,276
While an EFM shares in the capital growth of your property when you eventually sell, it also takes its share in the loss if the property has depreciated, so you don’t end up wearing the total loss.
An EFM allows people to
- Look in areas to buy where they may have originally thought out of their reach.
- Reduce their existing mortgage repayments to allow for other things, such as education, property renovation, holiday etc.
In return for the benefits available to you when you take out an EFM, because no annual percentage rate is applicable to your loan (unless you are in default) and you do not make monthly interest repayments during the term of an EFM, you must agree to share any increase in the value of your property with the lender.
AN INCREASE IN PROPERTY VALUE
From the previous example: To repay their EFM in year 6, Jack and Julie must repay $93,900 on top of the $80,000 they originally borrowed. They have made a capital gain of $104,850 and have $190,646 to contribute towards their next property purchase. They have gone from having 5% equity in their home to 30%. In addition, they have saved $43,696 in repayments as compared to a traditional home loan over the same period.
YEAR 6
Property Value at Sale = $634,750
Less Original Property Value = $400,000
Capital Appreciation = $234,750
Original EFM Amount (20%) = $80,000
Plus Appreciation Payment (40%) = $93,900
Total EFM Payment = $173,900
Traditional Home Loan Repayment = $270,204
60% of Appreciation for Jack and Julie = $140,850
Jack and Julie’s equity after repaying the EFM and traditional home loan = $190,646
Of course individual circumstance may depend on eligibility. We recommend talking to a qualified EFM consultant for full details about this product.
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