Over the last few weeks I have received numourous requests from clients asking if they can refinance their standard home loan to an Equity Finance Mortgage to enable them to free up income to purchase further investment properties given the current state of the market.
It is something that has come to light over the last 6 months with an increase in interest rates and eroding of equity values.
I was interested to see how many other forumites had given this exercise some thought.
In essence an EFM or Equity Finance Mortgage is a Shared Equity Scheme with a 2 fold lender involved.
1) Adelaide Bank who will advance upto 75% of the purchase price of the property at standard variable rates.
2) Rismark Internation who will provide upto 20% of the purchase price on a Non repayment and interest free basis.Normally reduced repayments are made to the Bank who holds the first mortgage and nothing to Rismark who hold a 2nd mortgage on the property.
Once the property is sold or refinanced Rismark take their original 20% and a further 20% of the profit (less sale cost expenses). Interestingly enough they also share in 20% of any loss that occurs.
In essence in a flat market it could be seen to be an interest free loan for upto 25 years.
Clients who have taken this option try and pay off as much of the Adelaide Bank loan as possible knowing that the 2nd mortgage is interest and repayment free thus creating more equity as time goes by.
The loan can be refinanced at any time so with timing you can catch the next stage of house appreciation.
Be interested to hear the thoughts of others.
Richard Taylor | Australia's leading private lender
hi Rich,
Yes we are very happy with our EFM loan to date.
I think in the current market and years of possible flat growth will suit this type of loan.suits us in our situation with the wife off work on maternity leave and only I the bread winner.
We intend to refinance in a few years when the market turns around a bit.
No doubt you will see more and more enquiries as time marches on.
CheersHi Richard
Can you use EFM for Family trust? Just curious
As far as I know, EFM is for only PPOR???
CheersDonald
Hi Steve
I knew you would have your hand up to give the product a plug being the first person in OZ to have settled on a deal.
(By the way hope the family are all doing well).Be suprised how many purchase and refinance enquiries i have had for the product over the last few months.
Donald Yes you are correct it has to be a PPOR in your personal names.
Talking with Rismark the brakes have been put on the release of the IP product for the time being.
Richard Taylor | Australia's leading private lender
The EFM is a great product for certain situations, and has been thoroughly set up to be flexible and fair.
In the above example, Richard, if you were to take a 20% EFM then Rismark will actually be entitled to 40% of the capital growth in value, and you rightly quoted they will also reduce the original loan by as much as 20%. The operate on a 1-2-1 rule.
10% EFM – 20% share of capital growth – 10% capital reduction
15% EFM – 30% share of capital growth – 15% capital reduction
20% EFM – 40% share of capital growth – 20% capital reduction
The big drawback of the original scenario (to free up cash flow) if that the effect of this can be diminished if Owner Occupied property is currently on I/O, as the term loan that comes along with the EFM is P+I only, and currently going for around 9.54% var.Ideally, it is great for situations like above, where wife stops work to have a baby etc, of if servicability is tight and family needs to up-size house etc. Rismark are alos starting to predict an end to this product within the next 3 6 months, unless additional funding is sourced.
Overall, it is pretty good if used in the right way.
I hope that helps.
Tim
You are correct in your summary of the product and I agree that one of the downsides is the P & I component.
We have completed about 8 of these to date including the first one settled in Oz being Flash from the forum.
Whilst i agree that funding has been tight I recently attended a breakfast with Christopher Joye and he was asked about the issue of funding to which he assured the table that this was secure for the time being.
There are a few similar private schemes in operation here in Qld so i think it will make interesting competition to the main players over the next 6-12 months.
Certainly the number of enquiries has risen considerably over the last few months.
Richard Taylor | Australia's leading private lender
Mostly it is just an agreement between the listing agent and the seller on what they both think the property is worth. It is easier to value a normal suburban house in a busy neighborhood as you can go on previous sales of a similar nature. But when a property is unique or different, renovated or highly sought after then different rules may apply. An agent will be happy to come to your house and value it for free. However, (Shock! Horror!) it has been know that some agents may inflate their market valuations in order to get the business.
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christine
Mostly it is just an agreement between the listing agent and the seller on what they both think the property is worth. It is easier to value a normal suburban house in a busy neighborhood as you can go on previous sales of a similar nature. But when a property is unique or different, renovated or highly sought after then different rules may apply. An agent will be happy to come to your house and value it for free. However, (Shock! Horror!) it has been know that some agents may inflate their market valuations in order to get the business.
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christine
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