Understanding Equity Finance Mortgages by Harry Pontikis

  In an attempt to capture more of the first home owners market, Lenders have been lending up to 100% of the value of homes. In the past year, many have started lending all of the home price, as well as the taxes and fees to the value of an additional 6% above the price of the home. This makes the total borrowing 106% of the value of the property.
At a time where home affordability is a critical discussion point in Australia, there is a new solution to buying a home. It comes under many names but the principles are similar; They are called EFM's.

EFM's come into play If you want to buy a house but can't afford the repayments on the loan or you don't have enough for a deposit. Some lenders are willing to pay up to 20% of the cost without asking you to pay one cent in interest on that part of the loan - ever. Working in conjunction with a traditional home loan, an equity finance mortgage (EFM) allows you some slack on the cost of buying a home, in return for a certain amount of shared equity in the future value of the home.
An example is where you have to have saved 5% of the purchase price. The lender will contribute at 'no cost or interest' 20% of the home's value. So, you have to borrow the remaining 75% of the cost of the property.
e.g.

• House purchase price is $300k.


• Money you can contribute is 5% or $15k


• Lender will contribute 20% of the price or $60k.


• Home loan (and repayments) is 75% of the value of the property is $225k instead of:


• 95% of the value of the property or a loan of $285k.

The benefit of doing this is no interest or principle repayments for up to 25 years (or until the house is sold) on the EFM and because you have only borrowed 75%, your savings are significant each month in repayments.
The downside is your 'finance silent partner' can take up to 40% share in capital gains once your home is sold or you refinance. Should the value of your home fall, its capital loss is capped at 20%.
If you buy a house in a high capital growth area, you will be better off with a traditional mortgage but if you buy in markets where growth rates are modest or flat, an EFM is definitely a great option.
A concern is that they could drive property prices even further, making it harder for battlers to get into the market -even with such innovative products.