Equity Finance Mortgage

[grossreal]

hi alexlee
interest slant
what if you put in a 65k pool ( and that cheap)and this increases the value by say 100k and you refinace or sell.
you think you have made 100k but you get 60k so you lost 5k.
you would be better not spend anything on the house.

any increase buy your money is a loss of 40%
interesting if you want this product

 

[hobo-jo]

hi alexlee
interest slant
what if you put in a 65k pool ( and that cheap)and this increases the value by say 100k and you refinace or sell.
you think you have made 100k but you get 60k so you lost 5k.
you would be better not spend anything on the house.

any increase buy your money is a loss of 40%
interesting if you want this product

Actually with renovations over $20k, you put in the application, have the property valued before and after the work and this increase is taken into consideration when the final payout of the efm is calculated.

http://www.efm.info/qa/home-improvements.aspx

I think those that are putting the loan in the 'don't do under any circumstance' basket should have a read of the site first and get their head around the product before commenting.

 

[alexlee]

hi alexlee
interest slant
what if you put in a 65k pool ( and that cheap)and this increases the value by say 100k and you refinace or sell.
you think you have made 100k but you get 60k so you lost 5k.
you would be better not spend anything on the house.

any increase buy your money is a loss of 40%
interesting if you want this product

You're thinking like a property investor, Gross. Most people don't. They'll just be thinking 'I spent $x out of my hard earned, highly taxed dollars on this pool. Why should the lender get a portion of that even though they didn't do anything?'
Alex

 

[Mr. Fabulous]

Hi hobo-jo,

You suggested people look at their site, so that's exactly what I did. I've only read one page so far and already my reservations of the product are being strengthened. Here's the renovations section (my italics and bold):

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.

So far, so good.

This happens when you sell the property or repay the EFM for some other reason provided your improvements were approved before they commenced.

Uh oh! So now Rismark has to approve any renovations you make before you start them! So they determine whether renovations are appropriate or not. Fantastic! Where do I sign up for one of these glorious loans?

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.

Okay, so now you have to prove to them that your property is going to be worth more than 20K after you do the reno (edit: just found out you have to SPEND a minimum of 20K before they will think about approving your renovation). "Want to put in a new bathroom? What's that, you're only gonna spend 5 grand on it? Oh so sorry, we don't approve of that renovation, if you go ahead with it, it won't count towards your credits." Who knows what else they will do if you perform 'unapproved' renovations.

EFM approval is also subject to formal credit approval and compliance with the guidelines set out in the website.

So now you can't do a thing to *snicker* "your" home without getting their approval first.

hobo-jo, would you like me to look at the other pages and see what else I can find?

As grossreal already mentioned, there is nothing on the site about FHOG eligibility nor stamp duty exemptions. You'd think they would state this as a selling point to people....

Mark

Edit: Found these in the Q&A section - they're good for a laugh:

What happens if I do not get consent to my renovations?
You will not be eligible for an improvement amount if you do not obtain consent for your renovations or home improvements before you commence. This means that the amount you repay on the EFM in due course will be based on the full value of the property at the time and not the value less the improvement amount.

Why don't I obtain an improvement amount if I tell you about the renovations later?
The improvement amount is the difference between the value of the property before and after you carry out the renovations. If you do not obtain consent to the improvements before you commence we will not be able to obtain a starting valuation and therefore will not be able to measure the increase in value attributable to your renovations.

What happens if I do four separate renovations for a total value exceeding $20,000?
Each renovation or home improvement project carried out must be for $20,000 or greater and comply with all requirements to be eligible for the improvement amount. A number of smaller renovations will not collectively qualify. You would be best advised to do a series of projects as one to ensure they qualify.

*This one was my favourite. Let's say in five years you need a new bathroom. So you do your bathroom. Then a few years later you do the kitchen. Then a few bits here and a few bits there, all adding up to 23K. You know something? No eligibility for you! Come back, one year! Or when you've done 20K minimum worth of approved renovations IN ONE GO.

What do I do if renovations will take longer than 6 months?
You can request an extension of time to complete your renovations if work is delayed. Depending on the duration of the delay, you may be required to obtain a further valuation before consent will be granted this will usually only occur in extreme circumstances. You should apply for consent as close a possible to the date a builder would be available to commence work.

If you have not notified us that the renovations are complete 5 months after consent is granted, you will receive a reminder letter advising that you will need to apply for an extension if work is not completed within the next month.

 

[Mr. Fabulous]

You're thinking like a property investor, Gross. Most people don't. They'll just be thinking 'I spent $x out of my hard earned, highly taxed dollars on this pool. Why should the lender get a portion of that even though they didn't do anything?'
Alex

Hi Alex,

They'll want to be spending at least 20 grand on that pool before they put it in or they don't even stand a chance of getting credits.

Mark

 

[hobo-jo]

Uh oh! So now EFM has to approve any renovations you make before you start them! So they determine whether renovations are appropriate or not. Fantastic! Where do I sign up for one of these glorious loans?

They have an interest in your home, of course they are not going to let every tom, dick or harry that thinks he is a handyman putting on that second level. Seriously it is common sense that they would want to know what renovations are being made and that they are all council approved, etc.

Okay, so now you have to prove to them that your property is going to be worth more than 20K after you do the reno. "Want to put in a new bathroom? What's that, you're only gonna spend 5 grand on it? Oh so sorry, we don't approve of that renovation, if you go ahead with it, it won't count towards your credits." Who knows what else they will do if you perform 'unapproved' renovations.

$10,000 is probably a more reasonable mark, but they have to stop the buck somewhere. If they are paying for the valuers to come out, then they will want to make sure they don't have the owners calling them every time a little change is made.

I just find it ridiculous that people are discounting the loan without even reading up on it properly or considering that it would work quite well for some people in some situations. You could probably take any standard home loan product/contract and pick it apart the way you have this product Mark, I'm not sure what the point is that you are trying to make.

 

[alexlee]

I think it's a complex product with many conditions that an ordinary PPOR buyer (which this product is aimed at) won't understand. How many people will realise that you'll need their approval to paint, do renos, etc, especially when it's such a departure from ordinary financing? Progressive renos have always been a traditional way to add value: what will people do when the value-add of their unapproved reno is taken by the finance provider?

Will they keep receipts for work done? People would never think 'hey, maybe I need to talk to my financier about these renos I'm thinking about doing'. Most people won't read all the fine print (their fault, I know, but tell that to the Daily Telegraph).

It may be fine for people who know exactly what they're getting into and keep good records (you can say that about any loan, of course). But this product just has too many conditions and, most importantly, conditions that the majority of people would never have imagined. (Who would imagine that you can't do renos even if you owned the place?) What happens if the reno does bad? Who takes responsibility? I guarantee few borrowers would read that far into the 4-point font.
Alex

 

[i010105]

If the buyer expects property to slow in the next 5 years say, wouldn't this be a better option than borrowing the 20%?

I haven't calculated this, but if within the 5 years the increase of the property is on average 5% pa, but rates are at 8% pa, wouldn't it make more sense to pay the 40% increase in equity compared to the the high interest for the 20% initial purchase price?

And when the property is expected to increase in value rapidly in the following 5 years after the previous period (Years 6 to 10), just make sure you realise the low growth for the bank to claim its 40% on and then just before the high growth period, claim back the 20% equity.

 

[alexlee]

If the buyer expects property to slow in the next 5 years say, wouldn't this be a better option than borrowing the 20%?

I haven't calculated this, but if within the 5 years the increase of the property is on average 5% pa, but rates are at 8% pa, wouldn't it make more sense to pay the 40% increase in equity compared to the the high interest for the 20% initial purchase price?

And when the property is expected to increase in value rapidly in the following 5 years after the previous period (Years 6 to 10), just make sure you realise the low growth for the bank to claim its 40% on and then just before the high growth period, claim back the 20% equity.

Why bother buying if you expect the market to be flat? Rent at 4% of the purchase price and put the rest of the money into the sharemarket instead. Just wait 5 years and buy then.

If I could time markets that well I would be sitting on my island.
Alex

 

[i010105]

Why bother buying if you expect the market to be flat? Rent at 4% of the purchase price and put the rest of the money into the sharemarket instead. Just wait 5 years and buy then.

If I could time markets that well I would be sitting on my island.
Alex

It's all about expectations...what you think may not be what happens, but you plan like it is anyway, right?

I am thinking maybe there is a property that you see potential in, but you have to put through with a few initial years of low growth before you can realise the high returns in the long term. Does that make sense?

edit: To clarify, it might be the opportunity that you don't expect to get at the end of the low growth period.

 

[alexlee]

It's all about expectations...what you think may not be what happens, but you plan like it is anyway, right?

I am thinking maybe there is a property that you see potential in, but you have to put through with a few initial years of low growth before you can realise the high returns in the long term. Does that make sense?

Yes, but personally, I can't time the market that well. When markets move, they MOVE. This product will be aimed at ordinary 'battlers' who want a leg on the ladder. How astute do you think they will be?

One way to use the Equity Finance Mortgage is to treat it as a high interest loan, get into a property you couldn't otherwise afford (a dangerous strategy in any case) and aim to refinance out of it ASAP. I think the problems will be apparent when people use it like a normal 25 year product.
Alex

 

[Mr. Fabulous]

Hi hobo-jo,

The point of the ridiculousness of the conditions is that you must spend at least 20K before they will approve reno's and you must spend at least 20K in one go. Even then they don't guarantee 'approval' of reno's. You put in a pool for 15K - no credits. You re-do the kitchen for 7K - no credits. This is how they get you. How many people do major reno's on their properties that cost at least 20K? I think it would be fair to say that people do little things here and there (but little I mean way below the 20K mark like a new kitchen or modernising the bathroom).

Let's say you're a reno whiz and you do a kitchen reno that adds $20,000 in value to the house for $5,000. Because you didn't spend $20,000 on the reno, you get no credits and Rismark gets 40% of the gain - with the cost of the new kitchen not discounted - but from the price you purchased the property at. So you spend 5 grand and a number of hours, only to watch Rismark take $8,000 off you, thank you very much.

Like I pointed out, if you simply do a bathroom makeover - or any improvement for that matter - that they either don't approve of or doesn't cost at least 20K you don't get credits for it. It's right there in the Q&A and I even quoted it in my last post.

I did exactly what you suggested and read the site. I have a fair understanding of the product (I also emailed Richard a few times asking questions). So I do understand the product - in actual fact after reading the site, it made me dislike the product even more than I did before!

I'll tell you a little story. I used to work at Crown Casino. My brother claimed he had a mate who had a guaranteed system to win on roulette. I told him 'If your mate has a system, the casino knows about it and has worked out long ago how to beat it. They have people working full time who are there to work out systems and how to get around those systems.'

This is the same principal. Rismark has people working for them who are there specifically to catch every loophole, to design a product that will catch the large majority of people. A tiny minority might find ways to get the loan to work to their advantage in *certain* situations, but this will be rare.

Like Alexlee said, the people that will get suck... err... apply for this loan are people who want a house they can't afford. Then they'll scream bloody murder when they get come to the realisation that they have given up a huge amount of the gain when they sell and are at the very least back in the same position they were in before.

Mark

 

[Qlds007]

Gross - Might want to talk to the OSR i met with them here in Qld last week and clarified everything we needed to.

Mark - Sorry what is different with the EMF to wrapping or providing Vendor Finance terms (and i assure you i have enough of those) you actaully get title to the property under an EFM. With a wrap you cant even get a border to stay overnight without obtaining the wrappers permission.

It may not be everyone but i think many of you have missed the market it is aimed at. Thankfully the number of calls we took today after the program last night seems to indicate otherwise.

 

[Mr. Fabulous]

Hi Richard,

I'd be interested to talk to these people who get the loan when it comes time to sell/pay out the loan and see if they're still happy with it then. Which market is it aimed at exactly? Because I've looked at this every which way and it seems to me that the only party that walks away with a win is Rismark.

I've already asked for people who believe in the product to show how it provides a win/win situation and no one has answered that yet. Probably because it can't be done. I'm more than happy to be proven wrong - so please, go right ahead - do your worst!

Mark

 

[Mr. Fabulous]

You could probably take any standard home loan product/contract and pick it apart the way you have this product Mark, I'm not sure what the point is that you are trying to make.

Firstly, with standard loans the banks don't stack up everything on their side to favour themselves and they don't take a whopping great chunk of your CG and tell you what improvements you can and can't make.

Secondly, I have the right to an opinion and the right to express it. I've discussed this product and explained very clearly why I don't think it's any good and used examples. If you don't like what I have to say, you can always put me on ignore.

Mark

 

[Saint]

Looking at things from a broker view, brokers get paid for loans they write by lenders, through commissions etc

It would be 'interesting' to find out what the commission is for a 0% interest loan, i.e. if Rismark is collecting 40% of the gain then I would assume that Richard or whoever is offering this product would be collecting a percentage of the gain or something along the line.

In the interests of full disclosure, can this be clarified as brokers on the forum have previously disclosed commissions as to their lenders in previous occasions, and from the looks of things Richard is the only broker on the forum who seems to have a monopoly on the product, so far.


Cheerio
Saint.

 

[yo yo ma]

http://www.smh.com.au/news/national...gger-home-loans/2007/03/13/1173722471210.html
Here is an ad/ article in todays SMH
Steve

 

[hobo-jo]

Secondly, I have the right to an opinion and the right to express it. I've discussed this product and explained very clearly why I don't think it's any good and used examples. If you don't like what I have to say, you can always put me on ignore.

Happy to hear what you have to say, why would I put you on ignore? You certainly are entitled to your opinion as am I and I'm all for thought out discussion of this product

You are right when you state there will be a lot of unhappy people at the end of it and unhappy with the renovation rules, but I also feel that there will be a lot of satisfied borrowers as well.

This is an investor forum, we all have the mindset to make as much money from real estate as possible. Not everyone is like that, some people just want to live comfortably and want to start living that way now (Australia is very much a now society). I know families that have lived in the same house for 20-30+ years. This is who the loan will work well for. Couples perhaps with a baby on the way or just on a low income, that are just out of a particular market, can you this to boost their lending capacity. So as I pointed out earlier, rather than compromising their living styles or getting stuck in the rent trap, they can use this as a leg up.

Also as mentioned earlier, you don't have to wait the full 25 years, you can repay it earlier. So for those in a situation where they might have some extra money coming their way down the track in the form of a raise or inheritance but want to buy now and refinance it later, they have a chance to do that.

I am openly admitting that this product is DEFINITELY not for everyone, it is a niche product that shouldn't be used by anyone without examining the product in detail, but Mark if you can't see that this product could work extremely well in some situations (especially with unaffordability of housing where it's at) I think you are just not looking hard enough or playing the ignorance card.

 

[buzzlightyear]

Silly product?

http://www.theage.com.au/news/business/warning-on-silly-loans/2007/03/13/1173722467796.html

 

[alexlee]

I know families that have lived in the same house for 20-30+ years. This is who the loan will work well for. Couples perhaps with a baby on the way or just on a low income, that are just out of a particular market, can you this to boost their lending capacity.

I take a completely different view. I think people who use this product and live in the property long term without refinancing it are the people who will end up hating it the most. Can you imagine all the things that an ordinary homeowner does to improve their property over 20 years? Can you imagine what will happen in 20 years when, say, they decide to upgrade and buy another home? Just the paper trail of all the improvements would be a nightmare. Together with all the approvals that are needed to get improvement credits (which I guarantee most people will not realise they need to do), over time you're looking at massive confusion.

I definitely do not see how this product would be useful for your ordinary mum and dad PPOR buyer. If you plan to improve your property (as many people do) and you don't stick to the letter of the agreement, you're going to end up losing much of the value added to the bank.

If anything, I think this product would be most useful (in the same way as any 100% LVR product) where it is used short term. Use it to get yourself past the serviceability hurdle, treat it as a high interest 100% LVR loan, and refinance and get out of it as quickly as you can.

Bottom line, though, I still believe you buy what you can afford. If you can't afford a particular property, either save more money, or buy a cheaper place and upgrade later. The ability to buy the property you want where you want is NOT an assumed right. It must be earned.
Alex