Equity Finance Mortgage (EFM)

Transcription

1 Introducing the award-winning Equity Finance Mortgage (EFM) Best New Product of the Year 2007 Best New Product of the Year 2008

2 What is an EFM? An Equity Finance Mortgage (EFM) is an award-winning home loan that can help you to: Reduce the upfront and ongoing costs of purchasing a new property; or Reduce your current monthly mortgage repayments (via a refinancing of your existing loan); or Buy a more expensive property than you may otherwise be able to afford. An EFM works in conjunction with a traditional home loan. Together, they let you defer some of the expense of a traditional home loan to later when you eventually sell your property. Here s how: An EFM 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 EFM loan, which you can hold for 25 years. Instead, when you sell the property or repay the EFM for some other reason, you repay the EFM amount you originally borrowed plus up to a 40% share of any increase in the value of the property (assuming you take out a 20% EFM). If you take out a smaller, say, 15% EFM, then the lender will only be entitled to 30% of the growth, leaving you with 70% of the upside on your home. And while nobody likes to talk about property values decreasing, if this does happen when you have an EFM and you are selling your property, you may not have to repay the full EFM loan amount - a feature unique to an EFM. Specifically, if the value of your home falls, and you realise a capital loss when you sell your property, the EFM lender will share up to 20% of the realised losses on your property (assuming you take out a 20% EFM)! The share of the losses borne by the lender will depend on how much you borrow in the first place and how much your property has decreased in value. The lender will not share in any losses if they are not fully realised by you when you repay the EFM. The original idea behind the EFM loan, which was developed based on the pioneering work of the 2003 Prime Minister Home Ownership Task Force, was to create a better alignment of interests between the borrower and lender: If you do well, and your property s value increases, the lender can do well; However, if you suffer, and you realise a loss when you sell your property, you may not be charged any regular interest whatsoever on the EFM; In fact, the EFM lender may share up to 20% of the losses, leaving you with less to repay on the EFM loan than they originally lent to you! We strongly recommend that you obtain independent legal and financial advice in relation to this EFM loan prior to entering into the EFM loan contract. Page 2 The most innovative lending product in 15 years InfoChoice, 2007

3 How can I reduce my payments? Using an EFM in conjunction with a traditional home loan, you can reduce your monthly loan repayments by up to 25% or more! The following example explains how... A current home owner, Belinda, has already purchased a home and has a traditional home loan for $360,000. She is happy with her house, but would like to be able to afford such things as a private school education for her children or an occasional holiday. By refinancing her traditional home loan and replacing it with an EFM combined with another normal home loan, Belinda can reduce her monthly repayments without extending the term of her loan and free up funds to do these things (subject to credit approval by an acceptable traditional home loan lender). Here s how: Traditional home loan only Property value: $400,000 Traditional home loan (90%): $360,000 Lenders mortgage insurance: $5,400 Monthly repayments: $2,948 Adding an EFM loan to reduce your regular repayments Property value: $400,000 EFM (20% of property value): $80,000 Traditional home loan (70%): $280,000 Lenders mortgage insurance: $3,560 Monthly repayments: $2,293 Using an EFM may reduce your monthly repayments by up to 25% or more Note: This example excludes application fees & other fees such as valuation fees, account keeping fees, transaction fees as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. For any additional assumptions used in calculating this example please refer to the Assumption section. The illustration above shows that by using an EFM, Belinda can reduce her monthly home loan repayments by $655 per month! She has also significantly reduced the lenders mortgage insurance that she would otherwise have paid on the total loan package from $5,400 to $3,560. As we explained earlier, instead of charging a regular interest rate on the EFM, the lender is entitled to share in the capital gains on your property, as determined when you choose to repay the EFM. The most innovative lending product in 15 years InfoChoice, 2007 Page 3

4 How can I get a larger home? By using an EFM in conjunction with a traditional home loan, you can afford to purchase up to a 25% more expensive property (subject to all the necessary credit approvals)! The following example explains how... An EFM could be used to enable Jenny & Matt to purchase a bigger house in a better suburb to accommodate their growing family. They know that they would have approximately $75,000 of equity from the sale of their existing apartment - enough to cover the purchase costs and still have a $55,000 deposit to put towards their purchase. Jenny and Matt can afford to borrow $370,000 using a traditional home loan making repayments of $3,030 per month. This would allow them to purchase a home for $425,000. But by adding an EFM, they can purchase a 25% more expensive home and make the same monthly loan repayments that they would have made on the smaller property. And remember, when using a 20% EFM, Jenny and Matt will keep 60% of the growth on their 25% bigger home, which is akin to 75% of t he gains on a smaller property. Here s how: Traditional home loan only Property value: $425,000 Deposit: $55,000 Traditional home loan (87%): $370,000 Lenders mortgage insurance: $4,699 Monthly repayments: $3,030 Adding an EFM for a more expensive property: Property value: $531,000 Deposit: $55,000 Need to Fund: $476,000 EFM loan percentage (20%): $106,000 Traditional home loan (70%): $370,000 Lenders mortgage insurance: $4,717 Monthly repayments: $3,030 Adding an EFM allows the purchase of a 25% more expensive home Note: This example excludes application fees and other fees such as valuation fees, account keeping fees, transaction fees as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. For any additional assumptions used in calculating this example please refer to the Assumption section. The illustration above shows that by using an EFM in conjunction with a traditional home loan, Jenny and Matt have been able to purchase a 25% more expensive home worth $531,000 with the the same monthly loan repayments that they would have been making on a $425,000 property. As we explained earlier, instead of charging a regular interest rate on the EFM, the lender is entitled to share in the capital gains on your property, as determined when you choose to repay the EFM. Page 4 The most innovative lending product in 15 years InfoChoice, 2007

5 How can I reduce my purchase cost? By using an EFM in conjunction with a traditional home loan, you can significantly reduce the upfront and ongoing costs of purchasing a new property (subject to all the necessary credit approvals etc). The example below shows how... Jack and Adrian want to purchase a home for $400,000. They have a $40,000 deposit and sufficient additional funds to meet most of the costs associated with the purchase, such as stamp duty on the transfer and conveyancing costs. They could borrow $360,000 using a traditional home loan which would require them to repay $2,948 per month in regular home loan repayments or they could take advantage of an EFM to reduce their monthly repayments. Here is how an EFM could work for them: Traditional home loan only Property value: $400,000 Deposit: $40,000 Loan Needed: $360,000 Traditional home loan (90%): $360,000 Lenders mortgage insurance: $5,400 Monthly repayments: $2,948 Adding an EFM to make purchasing a home affordable Property value: $400,000 Deposit: $40,000 Loan Needed: $360,000 EFM (20% of property value): $80,000 Traditional home loan (70%): $280,000 Lenders mortgage insurance: $3,560 Monthly repayments: $2,293 Adding an EFM reduces the repayments required on a traditional home loan by up to 20% Note: This example excludes application fees and other fees such as valuation fees, account keeping fees, transaction fees as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. For any additional assumptions used in calculating this example please refer to the Assumption section. The illustration at left shows that by using an EFM in conjunction with a traditional home loan, Jack and Adrian have made their purchase more affordable by reducing: their regular monthly home loan repayments by $655 a month; and the Lenders Mortgage Insurance premium by $2,840. As we explained earlier, instead of charging a regular interest rate on the EFM, the lender is entitled to share in the capital gains on your property, as determined when you choose to repay the EFM. The most innovative lending product in 15 years InfoChoice, 2007 Page 5

6 How an EFM works over time Since no annual percentage rate is applicable to your EFM loan (unless you are in default), and you do not make any ongoing monthly interest repayments during the term of the EFM, you must agree to share with the EFM lender a proportion of any increase in the value of your property over time. This happens when you repay your EFM. For example, 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. You will get the major share (ie, 60%) of any increase in the value of the property. percentage of any increase or decrease in the value of the property you share in the future. Remember Jack and Adrian - they took out an $80,000 EFM and a $280,000 traditional home loan to purchase a $400,000 property. The following graph shows you what they would have to repay, and how much equity they would have in their property at 3, 6 and 9 years if its value increased by 8% per annum. Of course property values may increase by more or less than 8% per annum and this will impact the outcomes. On the other hand, when it comes time to sell your property, and you realise a loss, an EFM allows you to potentially share that loss and reduce the amount you have to repay by up to 20% of the decrease in the property s value. The share of the losses borne by the lender will depend on how much you borrow in the first place and how much your property has decreased in value. The lender will not share in any losses if they are not fully realised by you when you repay the EFM (ie, via a sale of your home). If there has been no growth in the value of your home during the term that you have held the EFM, you simply repay the original principal loan sum with no interest whatsoever. This area shows the total amount owing on the EFM including the appreciation payment. This area indicates the amount of equity Jack and Adrian have in their home and will keep. This area shows the total amount owing on the traditional home loan. The table at the bottom of the page sets out the percentage of the property value that you can borrow and the corresponding The EFM has no monthly repayments required... EFM loan amount as a % of property value (LVR) The share of any increase in value you pay to the EFM lender in the future The share of any increase in value you keep on your home in the future 20% 40% (lender s share) 60% (your share) 20% 15% 30% (lender s share) 70% (your share) 15% 10% 20% (lender s share) 80% (your share) 10% The share of any decrease in your property s value the EFM lender may bear in the future* EFM COSTS IF A HOME S VALUE RISES Jack and Adrian took out an $80,000 EFM and a $280,000 traditional home loan to purchase a $400,000 property. Let s assume that in 6 year s time, Jack and Adrian s property is worth $634,750. When repaying their EFM in year 6 (while either living in their home and refinancing out of the EFM, or when selling their home), Jack and Adrian must repay the original $80,000 that they borrowed plus an appreciation payment equal to 40% of the capital growth on their home during the period that they had the EFM (since they took out a 20% EFM). The appreciation payment is a substitute for a traditional interest rate -- remember that the EFM lender charges no interest on the EFM and requires no regular interest or principal repayments on the loan during its maximum 25 year term. Page 6 The most innovative lending product in 15 years InfoChoice, 2007

7 Jack and Adrian must therefore repay $93,900 on top of the $80,000 they originally borrowed via the EFM. Jack and Adrian have made a capital gain of $140,850 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 $39,900 in repayments as compared to a traditional home loan over the same period by not having to pay any interest on the 20% EFM during the term of the loan. 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 repayment: $173,900 Traditional home loan repayment: $270,204 60% of appreciation for Jack and Adrian: $140,850 Jack and Adrian s equity after repaying the EFM and traditional home loan: $190,646 Note: This example excludes application fees and other fees such as valuation fees, account keeping fees, transaction fees and lenders mortgage insurance (if applicable) as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. For any additional assumptions used in calculating this example please refer to the Assumption section. EFM COSTS IF A HOME S VALUE FALLS If Jack and Adrian s $400,000 property has fallen in value by 5% to $380,000, on sale they may be eligible for a depreciation allowance (ie, the EFM lender may share in the realised capital losses). Note that the EFM lender will not share in any losses if they are not fully realised by you when you repay the EFM (eg, if you refinance the EFM and there is no actual sale event). The simple principle here is that the EFM lender will only bear real losses, as opposed to paper losses. While Jack and Adrian s property will sell for less than they purchased it for (ie, $380,000), they are able to share with the EFM lender the $20,000 loss that they would have had to otherwise bear by themselves under a traditional home loan arrangement. In particular, the EFM lender, having originally provided a 20% EFM, will bear $4,000 (or 20%) of their total $20,000 loss. And, importantly, Jack and Adrian will have paid no interest on the EFM for the duration of the period that they have held the loan. That s right, in this scenario not only has the EFM been interest-free, but the EFM lender has also reduced the original loan amount by the EFM lender s share of the loss. And so, Jack and Adrian are actually $4,000 better off. Note that the depreciation allowance provided by the EFM lender may not always apply. For example, the EFM lender will not bear losses if you are in default when the property is sold, or if you refinance out of the EFM and do not actually realise a real capital loss (ie, because you have not sold your property). Year 3 Original property value: $400,000 less property value at sale: $380,000 Capital depreciation: $20,000 Original EFM amount (20%): $80,000 less depreciation allowance (20%): $4,000 EFM less 20% of depreciation $76,000 Traditional home loan repayment: $286,832 Jack and Adrian s equity after repaying the EFM and traditional home loan: $17,168 Note: This example excludes application fees and other fees such as valuation fees, account keeping fees, transaction fees and lenders mortgage insurance (if applicable) as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. For any additional assumptions used in calculating this example please refer to the Assumption section. EFM COSTS IF A HOME S VALUE STAYS THE SAME Jack and Adrian purchased a $400,000 property by using an $80,000 EFM 6 years ago. They have now sold their property for $400,000. This means that there is no capital appreciation. As the EFM portion was 20% of the property value at purchase, Jack and Adrian will be required to pay the original EFM amount of $80,000 plus an additional 40% of the capital appreciation, which in this case is $0. Jack and Adrian will therefore be repaying the EFM amount originally borrowed only, effectively allowing them to have borrowed $80,000, at no cost, for 6 years. The example below demonstrates how this works: Property value at sale: $400,000 Less original property value: $400,000 Capital appreciation: $0 Original EFM amount (20%): $80,000 plus appreciation payment (40%): $0 Total EFM repayment: $80,000 Traditional home loan repayment: $270,204 Jack and Adrian s equity after repaying the EFM and traditional home loan: $49,796 Note: This example excludes application fees and other fees such as valuation fees, account keeping fees, transaction fees and lenders mortgage insurance (if applicable) as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. For any additional assumptions used in calculating this example please refer to the Assumption section. If you want to compare an EFM with a normal home loan, or work out the potential repayments that you may have to make under an EFM, please visit the website where you will find comparison and repayment calculators to facilitate this task. The most innovative lending product in 15 years InfoChoice, 2007 Page 7

8 Other EFM details WHO IS ELIGIBLE? To be eligible for an EFM, you must: be an individual or be borrowing jointly with one other individual - you cannot be a company or a trust; own a freehold property, or seek to buy a freehold property, in a metropolitan area in mainland Australia; not require the support of a guarantor; secure the EFM with your owner occupied property which must be in an acceptable location and of an acceptable type; and have a 10% deposit to put towards any home purchase. EFM approval is also subject to formal credit approval. Further details on the eligibility criteria are available from one of our accredited lenders. HOME IMPROVEMENTS WITH AN EFM. Under an EFM, you can get credits for home renovations that you undertake. In particular, you can benefit from any increase your improvements add to the value of your property by asking for that amount to be taken into consideration later when your EFM repayment amount is calculated. This happens when you sell the property or repay the EFM for some other reason, provided your improvements were approved before they commenced. Please note that the amount you spend and the value of your property must increase by at least $20,000 before approval for your improvement may be obtained. EFM approval is also subject to formal credit approval and compliance with the guidelines set out in the EFM Terms and Conditions Booklet. BORROWING IN THE FUTURE. Having an EFM won t stop you from accessing the equity that builds up in your home over time for other things like renovations, putting a deposit on an investment property, or purchasing a car. You won t be able to increase your EFM loan amount, but subject to all the necessary credit approvals and compliance with the guidelines set out in the EFM Terms and Conditions Booklet, you can increase the amount you owe on your traditional home loan or refinance it to another loan. OTHER BENEFITS OF AN EFM. With an EFM you: Have full title to the home - it remains in your name (subject to a first mortgage granted to a traditional home loan lender and a second mortgage granted to Permanent Custodians Limited, which is the EFM lender of record); Can refinance (ie, discharge) the EFM loan at any time at your discretion; Only have to repay the EFM if: you sell your property; the EFM gets to the end of its 25 year term; the property passes to your estate; your property changes hands for any other reason; or you are in default. You can refinance your EFM or repay it early--the choice is yours-- but the EFM lender will not share in any decrease in your property value at the time you repay if you do not actually realise the loss (ie, by selling your property). While the EFM lender will share in real losses, they will not share in paper losses that have not actually been realised in a proper third-party sale. In situations when you repay the EFM without selling your property, and the value of your home has declined, you would normally just repay the original dollar value of the EFM loan amount with no interest whatsoever. And don t forget, except in extreme circumstances (for example if your property is destroyed and is uninsured or if you are in default), you will always get a minimum 60% of any increase in the value of the property (assuming you take out a 20% EFM). Of course, if you only took out a 15% EFM, you would always capture 70% of the growth since in this scenario the EFM lender is only entitled to 30% of the growth. WHERE CAN I GET ONE? Applying for an EFM should be easy! If you are interested, follow these steps: 1. Schedule an appointment with one of our accredited lenders (go to to find out who these are) who will talk you through the product and application process and help you submit your application; 2. Download the EFM Disclosure Document from and obtain a copy of the EFM Terms and Conditions Booklet from one of our accredited lenders; 3. Discuss your intention to obtain an EFM with your legal representative and/or an independent financial adviser; 4. Carefully review and, once you are comfortable, sign all the required documentation and if you are approved we will provide you with the EFM. Page 8 The most innovative lending product in 15 years InfoChoice, 2007

9 ASSUMPTIONS This brochure 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 contained in this brochure is formulated on a range of assumptions. The main assumptions are outlined below. These assumptions are not forecasts or predictions and may or may not represent actual events. Each example excludes application fees and other fees associated with the loans such as valuation fees, account keeping fees, transaction fees as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. Each example assumes that the EFM loan is for 20% of the property s value at the outset and that no default interest is payable at any time over the term of the EFM loan. The actual EFM loan 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 an Appreciation Payment assume that the value of the property has increased by a nominal rate of capital growth of 8% p.a. This is based on historical median rates of capital growth in Australian capital cities attributable to Australian residential real estate over the period between the fourth quarter of 1986 to the first quarter of Actual rates of growth may be greater or less than this percentage. If the example contains a traditional home loan comparison, it assumes that the traditional home loan interest rate is 8.70% 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 any time during the term of the loan. The assumed interest rate of 8.70% 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 January The actual traditional home loan term and interest rate applicable to your particular situation may be greater or less than the interest rates used in these assumptions and individual circumstances and events such as changes in interest rates and the making of additional repayments may affect the outcomes considerably. If the example includes Lenders Mortgage Insurance, the premium payable is based on PMI Mortgage Insurance Ltd s ABN ( PMI ) premium rates effective for the relevant product as at 3 January Numbers may have been rounded to the nearest thousand, or to one percent, where relevant. Fees, charges, terms, conditions and lending criteria apply. Fees and charges such as application fees, valuation costs, legal fees, conveyancing fees and stamp duty and other government charges on the purchase of a property are not mentioned in the examples but may be payable. These fees and charges will vary, depending on the individual circumstances. This brochure does not take into account your personal objectives, financial situation, or particular needs. You should obtain a copy of the EFM Disclosure Document (available from ) and the EFM Terms and Conditions Booklet from one of our accredited lenders and consider them before making a decision about whether to enter into an EFM. The most innovative lending product in 15 years InfoChoice, 2007 Page 9

10 For more information call or visit at Best New Product of the Year 2007 Best New Product of the Year 2008 EFM loans have been developed by and will be provided by Rismark International Funds Management Ltd ABN AFS licence number (trading as Rismark International) ( Rismark, we, us or our ). EFM loans are offered in conjunction with certain traditional home loans offered by approved lenders and their originators. Rismark has appointed Adelaide Bank Ltd ABN AFS licence number ( Adelaide Bank ) as an approved lender. Adelaide Bank and its originators ( Adelaide Bank originators ) will distribute and manage EFM loans. Rismark has consented to Adelaide Bank and Adelaide Bank originators branding EFM loans as Adelaide Bank or Adelaide Bank originator-branded EFM loans. Rismark may over time also appoint other financial institutions to distribute and manage EFM loans. Rismark has appointed Permanent Custodians Limited ACN ( Permanent ) as lender of record, custodian and mortgagee for Rismark. This means Permanent will enter into the EFM loan contract and Mortgage on behalf of Rismark.(R) Equity Finance Mortgage (EFM) and EFM are registered trade marks of ARES Capital Management Pty Limited ABN TM Equity Finance Mortgage is a pending trade mark of ARES Capital Management Pty Limited ABN ARES Capital Management Pty Limited s intellectual property relating to the EFM product is protected by Australian Innovation Patent Numbers , , , , , , No , and No Version Dated 1st March The most innovative lending product in 15 years InfoChoice, 2007