Equity Finance Mortgage

Hi All

Many of you may have seen this evenings Today Tonight program on the exciting new Shared Equity Mortagge.

Clients of mine and fellow Somersoft members have been the first people anywhere in Australia to have had their loan approved today under this scheme.

Hopefully TT will do a follow up story later in the week about the couple and our Company.

Congratulations to Steve & Sarah and good luck in your new home.
 
Thanks Richard,
We are very pleased to have a loan under this scheme.

it gives us a bit of breathing space when kids come along not having to make any repayments on 20% part.

Also will help with future borrowing as far as servicability goes in the future.

Cheers.
 
Geoff

No no penalties for selling early.

Of course if you sold within say 3 years and the house hadnt gone up in value at all then the 20% would a totally interest free loan as 40% of nothing is nothing.
 
I've heard on the grapevine that there is another company coming out with a product like this soon - but only taking 20%.

Hi flash,

Just curious. When you say 'it gives us a bit of breathing space... not having to make any repayments on 20% part."

Did you think about the implications of having to give up 40% of the gain when you do sell or when you pay back the loan?

Mark

P.S. In my opinion, this thread is skirting dangerously close to being a thinly veiled ad for Richard and the product.
 
Hi Geoff,

Suppose your property you bought remained the same value over say 2 to 4 years and over this time you repaid 20% of your mortgage.

you could simply refinance,not paying any capital gain and save interest over this period.

Obviously the EFM have done thier home work and assume a price rise.
they are quite postcode restricted and won't lend in certain parts of the inner city.

I figure a Win,Win in our situation.
Cheers
 
Hi Geoff

As someone who is planning to buy a PPOR soon I see this loan as a win-win. I see the non-deductible 20% that you don't pay as extra cash that I could use as a deposit to fund a further IP that would be deductible.

Assuming I bought the IP in the same area and both PPOR and IP cost $100K and went up in CG to $200K each. I would have gained $140K ($100K + $100K - EFM profit $40K - initial $20K EFM deposit ). If I didn't use the EFM I would only be able to afford just the PPOR and would only get $100K gain, $40K less.

Even if the above scenario doesn't pan out the other great benefit is I can get my PPOR earlier and the cashflow that I don't use to pay the 20% part of the interest I can use to save up and refinance later to a normal loan.
 
When you sell, does the equity partner who put in 20% of the loan initially, take 40% of the total sell price? I only caught the end of this story on TV last night but would like to see all the facts about the type of loan on offer.
 
When you sell, does the equity partner who put in 20% of the loan initially, take 40% of the total sell price? I only caught the end of this story on TV last night but would like to see all the facts about the type of loan on offer.

Hi Jacque, as explained to me by Richard, the equity partner takes 40% of the gain + their initial 20% deposit.

= (sell price - initial purchase price) * 40% + 20% of initial purchase price.

Richard can correct me if I'm wrong.
 
Hi Jacque, as explained to me by Richard, the equity partner takes 40% of the gain + their initial 20% deposit.

= (sell price - initial purchase price) * 40% + 20% of initial purchase price.

Richard can correct me if I'm wrong.

Surely there'd have to be restrictions on refinancing too - you shouldn't be able to refinance to release equity when you don't have a claim to 40% of that equity.

I see it as a dangerously short-sighted loan that will leave many 'battlers' cying out loud in 10 years time.

Cheers,
 
I see it as a dangerously short-sighted loan that will leave many 'battlers' cying out loud in 10 years time.

You hit the nail right on the head there Barracuda. This is defintiely a short sighted loan which is going to hurt a lot of people when they realise just how much CG they don't have once they sell. Essentially, this is going to put people who use this loan on the back foot from day one.

For those that claim it's a win/win, can you please explain how exactly it's a win/win, cause I can't see how it possibly could be. I can only see it being a win/lose. Let's say the property doesn't go up in value from when you bought it to when you sold it - the super company loses because they made zero out of the deal... actually, come to think of it, that's a lose/lose because the vendor has made nothing also.... and still gets stuck with selling costs and buying costs of a new property.

Then you have the situation where if you did make a gain, the super company is going to take 40% of that gain, which means you the vendor either have to come up with thousands of dollars in order to buy a comparable property, because the values have gone up on everything or buy something less desirable. So that makes it a win/lose - with the super company winning and the vendor losing.

BUT if you hold and never sell, you have to pay back the loan after 25 years - including the 40% gain. So if you do that you now either have to come up with (potentially) hundreds of thousands of dollars out of nowhere or sell the property in order to pay back the loan and give the super company their money plus the 40% gain. So that's another win/lose with the vendor losing bigtime.

I fail to see how this is a win/win in any situation, happy to see some examples though.

Ruroshin and Flash - by reading between the lines in your posts, it looks to me like Richard has really pushed the idea that you come out on top if you make no gain (how you come out on top in this situation is beyond me, just the aomunt of money you've wasted on interest payments in such a situation is a killer) - do either of you really believe that you're in a win-win position if this happens and do you really believe that there is going to be no growth in SE Queensland over the next couple of years with 1,500 people a week migrating here, with demand for housing continuing to outstrip supply?

Mark
 
Surely there'd have to be restrictions on refinancing too - you shouldn't be able to refinance to release equity when you don't have a claim to 40% of that equity.

I see it as a dangerously short-sighted loan that will leave many 'battlers' cying out loud in 10 years time.

Cheers,

As far as I know there is no restriction on refinancing but I would imagine when you do, the house is revalued and the 40% comes from the gain in value.

For those that claim it's a win/win, can you please explain how exactly it's a win/win, cause I can't see how it possibly could be. I can only see it being a win/lose. Let's say the property doesn't go up in value from when you bought it to when you sold it - the super company loses because they made zero out of the deal... actually, come to think of it, that's a lose/lose because the vendor has made nothing also.... and still gets stuck with selling costs and buying costs of a new property.

You get to afford a home that you might not otherwise be able to if you didn't use the loan = win for me
The equity partner gets profit of CG = win for them.

The loan is postcode restricted and I'm sure they have done their research and only allowed postcode with strong CG history or potential.

Ruroshin and Flash - by reading between the lines in your posts, it looks to me like Richard has really pushed the idea that you come out on top if you make no gain

Actually, I was the one that ask Richard about it first.

Sure there are some risks but the worst that can happen is I lose some CG that I wouldn't been able to make anyway with out the loan in the first place. My plan is to get my home now and save to refinance within 2 or 3 years, consider the 40% gain on any CG within that time as capitalised interest on the 20% deposit.
 
Fantastic! So now you refinance and pay interest on money you don't even have!

Mark

during this time I would of saved to pay out that 20% initial deposit and yes I will be paying interest on the 40% CG but now I have an extra asset that I wouldn't of otherwise have and in the long term isn't this much better?
 
There are a few funders out there with this type of product available now. I can see how it might be interesting to a first home owner, but I think that there are better alternatives available to most people.
 
You get to afford a home that you might not otherwise be able to if you didn't use the loan

Yes, but Tony that to me just sounds like a nice way of saying that you've bought a property you normally couldn't afford. I don't understand the concept of buying something that is normally out of your reach, because it is going to come back and bite you on the bum.

Why would you not just use a standard loan that allows you to buy something within your affordability and keep 100% of the gain (taking CGT into account) whether you do or don't sell.

So essentially for the next two years (assuming you can pay the 20% + 40% gain off in two years) you're going to be saving like crazy and (from where I'm sitting) not really getting anywhere financially because you're paying off a debt which you didn't need to have in the first place.

So again I fail to see how it's a win/win.

Mark
 
Mark, I ran some numbers for what my plan would look like. Let me know if I made a mistake somewhere.

I plan to buy in Sunnybank Hills in SEQ.

* The median price there is $365,500 which is about what I would consider buying anyway.

* I will have about 5% deposit when I buy = $18,275 (+ ~5% purchasing cost but its the same for both scenario so ignore for comparison purposes)

* This suburb last year growth was 5%.
* Its long term average is 9.3%.
* According to HTW report brisbane is in its recovery phase so let say 6% growth 2007 and 8% for 2008.

* From here onwards I can save about $20,000 pa on top of loan repayment.

* Plan is to refinance in 2 years

* For simple calculation, IO loan at 7%.

Using EFM scenario:

Property Purchase: $365,500

5% my deposit: $18,275

20% EFM deposit: $73,100

Loan: $274,125

Total Interest for 2yr: $38,377.50

Property Value after 2yr: $396,494.40

CG: $30,994.40

40% of CG: $12,397.76

EFM payout: $12,397.76 + $73,100 = $85,497.76

Money saved after 2yr: $40,000

Refinance loan: $274,125 + $85,497.76 - $40,000 = $319,622.76

Equity: $76,871.64

Normal 95% Loan Scenario

Purchase Price: $365,500

5% my deposit: $18,275

2% LMI: $7,310.00

Loan: $354,535.00

Total Interest for 2yr: $49,634.90

Property Value after 2yr: $396,494.40

CG: $30,994.40

Money saved after 2yr: $40,000

Current Loan: $354,535.00 - $40,000 = $314,535.00

Equity: $81,959.40


Comparison

Equity difference between EFM and 95% loan: -$5,087.76
Interest payment different between 95% loan and EFM: $11,257.40

Gain: $6,169.64

So after 2 years and refinancing I would be ahead $6K. The $11K difference in interest payment I would save with the EFM loan I could use to further pay down the loan thus reducing interest even move over the 2 years.

I gain $6K = win for me
Equity partner gain 12K or 16.4% ROI = win for them (well 8% pa is not great so I guess not a great win but not a lost for them either)

Even if we consider that the suburb achieve its long term average of 9.3% over the next 2 years the EFM loan would still come out on top by $3K. The suburb would have to grow by 24% over the next 2 years before the 95% loan would start looking better.

This assume 2 things:
1. my estimate of growth is close to actual. I don't expect this place to explode with growth over the next 2 years. If the growth is less then I come out even better.

2. Interest rate doesn't fall dramatically over the next 2yrs i.e. drop to 3%. If it does then I would of been better off with the 95% loan, if it raises then I gain even more by using EFM.
 
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hi all
this post is very interesting for a couple of reasons we are having a debate about jaffasoft and his I am a moderator and even thou I have been asked to join out side of this forum I don't have an issue with it I do have an issue if the post is from a member that is promoting a product that they are involved in.I think that that typoe of post does need to be caveat emptor as there is some very large risk for me with this product the same risk with no doc loans.
and that is who they are aimed at.
this product I have seen by three different lenders two are in the market at the moment and another is on its way and they are aimed at set markets this one is aimed at the ppor home owner and yes it is aimed at over stretching the budjet and getting into a home that you would not nessary be able to afford as anorm this is not a bad thing but for me it is if you are then going to say if you survive and make a 100k we get 40k and you getv 30k because the rest was your cost and if you die cos you can't and never could have owned it we will take the loss out of the money from the sale of the house this to me is very dangerous.
the other is aimed at the retirees and equity lend out of your house put it into super before july1 and we take 40% of the profit when you sell the house same thing as a reverse mortage but the loan is very similar no repayments and the percentage up front the same and the other is aimed at ip and has not been announced at this stage so will keep stum about that one at this stage.
the problem for Steve & Sarah is that steve and sarah should have been property savvy and if they were they would see that by going it to this loan they are
1.locking away there equity until the refinance ( and they pay the 20% plus the 40% of the potential gain between the supers valuation and the purchse price without the costs) or sell and the supre comes before all costs.
2. from my understanding they do not qualify for the fhog or stamp duty as the equity lender is part owner in the property (they must be as they have 20% steak)( I used that word on purpose as it reminded me of something raw and bleeding and I think that when steve and sarah,find out that this was not the golden loan they wanted,thats how they will feel)
3.there are alot of other ways to borrow without throwing 50 to 60% of profit out the window in 5 years and thats the window that most people should be working on.
 
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Thanks for that grossreal, I didn't take into account if the FHOG and stamp duty exemption would not qualify. That would probably make it not worth it for my situation.
 
Hi Tony,

It's fine if you compare two properties of the same value, but in an earlier post you said this:

'You get to afford a home that you might not otherwise be able to if you didn't use the loan'

So in an example based on the above statement you would need to use an example of a property that you can afford right now and one you could buy with the loan. How many people are going to use the loan to buy a property that they could afford now - and why would you use this to buy a property you can afford with your current capacity? Put it this way - why would you sacrifice 40% of the gain when you can pay 7.5% in interest?

The only reason I'd see anyone using this is to buy something they can't afford with their current capacity. So let's do an example using the above logic.

I'm gonna use different figures to yours for ease of example, the principle remains the same regardless of numbers. Actually, I would say the figures get a lot worse the higher the loan.

Able to afford a property now at $200,000
Able to purchase with EFM loan at $250,000

Now if your capacity is $200,000 that means you're making roughly $40,000 per annum (this can be substituted for whatever your capacity is). On current tax rates, that means you're taking home about $31,540 p.a. or $2,628 a month. The calcs include Medicare of 1.5%.

So... you have a $200,000 loan, paying let's say 7.5% I/O (I know with the EFM loan it's P&I, no exceptions - yet another reason why it's crap) but let's keep things simple. So repayments on that are $15,000 a year or $1,250 a month (remember it's higher for P&I).

You say you're going to pay off the 20% + 40% CG in two years. Okay, let's look at how realistic this actually is. So after you're paying back the loan (remember that with the EFM loan it's actually higher cause you don't have the option of paying I/O) you have $1,378 per month in disposable income.

You want to pay back the 20% ($50,000 + 40% of CG) in two years. Two years of CG on a $250,000 property at 7% (the national average) = $36,225. 40% of gain = $14,490. So the total amount you need to pay back in two years = $64,490 (this is $32,245 per year - more than our example person takes home). That's $2,687 per month over 24 months you would need to save.

Keeping in mind that you have just over half that in disposable income each month - and that disposable income was calculated on an I/O loan, when in actual fact you are paying a P&I loan so it's even less - and you need to pay for food, clothing, utilities, etc etc. Where is the money coming from in that two years?

If you refinance, you do realise that you will be paying interest on money that you will never see again, and you're okay with that? This strategy also assumes you have the capacity to refinance.

I know you said you can save about $20,000 p.a. - that's about $1,666 per month after tax. Is this realistic? If so, you could EASILY afford a $365,500 loan if you can save this much AFTER making payments on your P&I loan and general living expenses. Based on that (assuming you can actually save that much) you're still not going to even have been able to pay back 2/3 of the loan on a $250,000 loan, let alone $365,500!

Mate, you really need to take a serious look at your calculations and your estimates of how much you can save, because I think your expectations are hideously unrealistic. If Richard has gotten you a loan based on what you've stated in your post, I'd be really pretty seriously concerned right about now.

Mark
 
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