Equity Finance Mortgage

Mark,
No, I would normally not recommend that product - but then again they call me conservative.

When we wanted to purchase our first home we had to save for quite a few years (but that was back in the bad old days); so maybe I just a bit old fashioned.

:):):)

Hi Rolf,

Doesn't surprise me in the slightest that that is your answer *wink*. I'm glad that we have 'conservative' brokers like you about. But maybe you and I both are a bit old fashioned my friend.

Mark
 
Oh my...

This was on the front page of their website:

The original idea behind the EFM loan 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
(my bold)

So the lender in traditional mortgages charging you interest on borrowed money isn't doing well? A lender can only do well by stealing a great, whopping chunk of your capital growth? I felt a shiver down my spine when I read that.

Mark
 
So the lender in traditional mortgages charging you interest on borrowed money isn't doing well?

Not as well as they used to. The margins they make on loans are getting tighter and tighter, international banks are offering mortgages without branch networks (lower costs), etc. I guess the banks have to do something to keep their heads above water :D
 
hi mark
lenders are not doing well
I was on the 16th floor of star casino in the benelong suite and if you look out you see
suncorp,westpac,amp,national,cba,
I had a commercial banker there from china and he was here to talk to some of the australian banks and I pointed them out one by one
its only then that you realise how they monopolyse the sydney skyline.
banks are hurting
I wish I had that hurt its from obis there trousers are so full that they are buying insurance companies (in the case of suncorp)
 
Yeah and when I pick up the Fin and read about banks making record profits year in, year out.... my heart is breaking guys.... Banks 'aren't doing well' my ar.se.

Mark
 
I havent read every post yet, but i'm sure people can see that this a very dangerous loan for the longterm PPOR owner and average investor. Anything that misaligns capital growth with median house pricing can only cause a world of hurt for the owner.

An example:

A house worth $200,000 today(lets say this is the median house price). 10 years time. Worth $400,000(new median price).

Over those 10 years. Normal loan $200,000 capital growth.
Eq Fin loan $120,000 capital growth(60%).

With an equity finance loan, you have effectively fallen behind the median by $80,000. It's only paper money until you sell, but when you do...you either have to sell and downgrade to cheaper house(the $320,000 houses are the low end houses now), or increase your loan by $80,000 to maintain the SAME standard house you have 10 years ago. How much did you save on interest payments over those 10 years?
60 per week(interest on 20% of 200,000) x 10yrs= approx $31000.But you lost 80,000 in growth

I see only three advantages to this loan.

1. Ideal for a flat market. Essentially 20% interest free loan.
2. Ideal for certain first home buyers who could not get into the market anyway, so 60% capital growth is better than 0% growth through renting.
3. Certain property investors who could not afford to invest in property without this option.

The solution is not on the demand side....
 
hi all
here is a bit of onfo just out.
the other fund for this loan is called RAPT.
You can link to the sydney morning herald.
its rismark active property trust.
this is the fund to get the money to pay the mezz
makes for very interesting reading.
after reading it not sure who would invest in it mr powel has his work cut out to get investment in when he doesn't know the form of the trust,its tax position or how they will pay for the running of the fund.
a capital raising fund without any income.
the interesting part I find in the article is that mr powel sees that liquidity is a major problem.
mr powell gives a two or three line sentance and if I read it right (first collum third paragraph up) that they could use equity in the properties.
Ie they lend against the 20% in the properties.
if this is the case adn I have not read the loan documents but if it is then.
if the fund goes west the liquidator for the fund will come looking for that equity.
have a read because thats the only way I see that they will be able to capital raise.
and that is very very dangerous and if some one has sign to allow a lender to equity lend of your property you are in trouble.
 
grossreal, can you link to the article as it was my understanding that superannuation and other long term funds were funding the efm's.
 
It would be very interesting to read what materials Rismark gives the investors of the EFM. What sort of actuarial calculations would you have to make to arrive at a return? Granted even with normal mortgaged-backed securities you have refinancing risk, but this is even less certain. You would need critical mass to even out the risks of growth, etc.

This is a little like a zero-coupon bond with an unknown face value. How the heck would you value it? You'd have to apply a lot of assumptions about number of refinancings (banks are used to that for normal mortgage backed securities) but also have to factor in property values going up (or not), and improvements.
Alex
 
hi all
thanks y man yes that is the article.
and alexlee this is the problem with the fund
in that who would invest in it.
I will cut some very interesting parts of the article to explain a few of the answers to the 10 question.
who is the managers

"We have a subsidiary called Rismark International Funds Management, which is a responsible entity, so it's a unit trust,"

standard off the shelf common private trust

"Investors will … buy units in the trust, just like buying units in an equity trust. It's no different in that respect to investing in, say, Perpetual's Industrial Share Fund"

an equity trust is a trust that you put up equity I e I need 100 mil and 5 people throw in 20mil of equity into the trust my china projects are equity trusts.
"Perpetual's Industrial Share Fund"
not the same as I see it it should be called "Perpetual's mezz funding residential Share Fund " if it was called Perpetual's Industrial Share Fund most people including me would think I was investing in industrial property or something to do with industry not residential mezz funding and at 95% lending at that.

"This likely pattern of returns means the trust will undoubtedly be best suited to investors with a long-term investment horizon - most likely superannuation funds, self-managed super funds and individuals who don't need a fast return on capital"
I think the reporter is very generous with his/her views instead of don't need a fast return on capital it should be no return until the property is sold or refinanced and no mention that if the fund goes backwards no capital either.


for those that understand ipo and listing this bit is very interesting.

Another option might be to list the trust on the Australian Stock Exchange, so units in the trust are traded between buyers and sellers in the same way that shares are traded. The income returns that flow to unit holders would still mirror the performance of the trust's underlying property portfolio

A you need to have 5mil in cash or assetts in a fund for more then 12 months and you need to show a return on investments I would love to see this pds.

where cash flow isn't so important - particularly for people in the accumulation stage - will see it's a very, very solid asset class," Powell says
to this comment if it is correct
mr powell if you think that a fund that has no income, is investing into mezz funding at 95% ( I am yet to find a mezz funder that does not charge over 22% interest per annum over 85%) is backed by a new company yet to be formed and in a structure that is yet to be worked out and do at this stage consider cash flow or liquidity to be a bit of a problem, try a big problem.
if you consider that to be a very very solid asset class
I am sorry I don't.
I would like to find out from the fund or the pds
what these will be
Investors in the trust will, however, pay fees to its manager
because the fund makes no money and an investor also pay the management cost very interesting if the upkeep is 10 mil its out of the investors money, can't be as its invested so its a bill to the investors try that one for size.

I buy a bhp share at 39 dollars and bhp bill me each year for there up keep of the mine etc
there will be more that comes out on this loan and what it is.
the above is my view and only a view
please do not jump up and get your bankbook to invest in very very ( and I will add another) very solid asset class
westpoint was also in this very solid asset class they get one very as they were not as solid as the above
 
Hiya Gross

Good source work.

The "mezzanine funding" terminology used is in my opinion not correct.

Mezz implies short term, high rtn with an investment term of months to usually several years. Combine bugger all "real" security, and no emotional or hurt money buy in from the borrower and you have a "high risk" investment.

A residentially backed mortgage even to 100 % ( I would have thought) is a different beast to a small time developer who doesnt want to risk any of his/her money in case the deal goes bad.

I think a small to medium size development has inherent risks that a resi backed mortgage will never have. The only risk that I think they share is that of market risk.

So to compare an Equity Style Mortgage ( and there will be half a dozen more providers in the next 18 mths) to Mezz finance seems to be a long way different.

Im not saying these things are good or bad, its not for me to say, borrowers and investors are "grown ups" and unless shown otherwise can make their own decisions.

BTW, Most super funds have big buy in to securitised mortgages, some of which run well past 100 %. One thing thats a bit different from the Euity based mortgage is that, almost all of these have a third party underwriting some of the potential loss, that being the mortgage insurer.

What Im finding hard to work is this counter intuitive argument that in the specific product mentioned

1. The borrower will lose out and
2. The investors will also lose .............................

How and why ?

ta
rolf
 
hi rolf
I can understand your position.
but mezz funding is classed, rightly or wrongly as high risk.
and if the mezz is in resi or development funding there is associated risk.

and the terminology is right.
mezzaqnine funding is the funding used to top up the gap in funding that a normal lender will stop at.
mezz development funding is to fill the gap that the first tier stops at in a development.

and this loan is to top up the gap between the first tier at 80% and the loan 95% and if thats not mezz funding then,
I don't understand mezz funding
you can call it a efm, reverse equity ability loan, or a blue cow at the end of the day its a mezzanine funder product.
why
because thats what it is.
risk is always assessed with any thing in a market and I would differ on the risk profile that you suggest
mezz funding into the land component of a development is not high risk as you suggest put is not as safe as putting it into a bank account
but is alot safer then say shares
as you have a tangible asset and have done a risk profile on the project
and can see if a problem is occuring
thats not the case with shares and mezz fund has a rate of return (normally, not with this mezz funding agreed)but we all have our differing views and I accept yours

this I don't understand
So to compare an Equity Style Mortgage ( and there will be half a dozen more providers in the next 18 mths) to Mezz finance seems to be a long way different
they are the same
thats like saying that a ford car is not the same as a holden car
if you look at the both and ask which is a car.
just because others are looking at doing this type of loan doesn't say that it7 will work
look at loan and the funding
and let anyone tell me that this is not mezz funding
it is

and rolf

BTW, Most super funds have big buy in to securitised mortgages, some of which run well past 100 %. One thing thats a bit different from the Euity based mortgage is that, almost all of these have a third party underwriting some of the potential loss, that being the mortgage insurer.
they do I agree but they also have an income to pay the securitised mortgage

this to me is simple

1. The borrower will lose out and
2. The investors will
also lose .............................
the borrower will have a loan
with a first tier to 80% and they have mezz to 95%
if the mezz does not get the finance to keep going
they will be asked to fund a 95% loan on a property that has been aimed at people that want to buy a house that they can't afford and will go as anyone else who has over stretched there budget.
the investors will invest in something that is as safe as houses when in reality it mezz funding.
take out efm and call in residential mezz funding and see how many super funds will be fighting for that one.

this product if you look at it for me
can't work.
it can't work for the borrower as the risk is very high that they won't be around and if they should live long enough for you to sell you get burnt for 40%
if they liquidate your asset is on the line.
for the investor the get no income they get all the risk Ie if they liquidate there money is gone.
and for that we will bill you for the time we are in operation.
there is a winner in this and thats one is very simple.
and thats the management group that manages the system
they have no risk
they have a steady income( that get no money from the borrower but do from the fund) and they will have a profit share if it make money from anyone that sells and the get the 40%
so win win yes.

see if there is any shares in the management group thats where I would have my money.

If I took on this loan I would make it part of the loan agreement that you buy into the management group so you can keep an eye on the liquidity of the fund.
and if you have people taking out 2 and 3 mil loans with this
I would be running those numbers past an accountant not your next door neighbour or your broker.
its my view of this
and I smell something very horribly wrong with this structure or form of lending from the start and that was a long time ago.
there will be groups that will refine it
but to go to a market sell a loan, underwrite it, put a manage group in place and then find the funds with no income is a big problem

mezz funding is very profitable, the margins are comming down as more people are in the market
for me this is not the way to go
and before you sell this product you do need to tell the borrower what they are getting into.

and again sorry

if you rolf said to me
I am offering you a loan at 6.99% to 80% of your 3 mil house and i am getting mezz funding from this fund
and it is in the market for the funds at the moment and is going to use your 600k equity to secure those funds
I am going to get this commission to get the loan and the management of the fund is going to charge the investor into the fund for the upkeep and costs of the fund.
but we have to have you sign up first.
and if the fund goes into liquidation the fund will come looking for the 600k out of your house and you cant refinace because we will have you on a 95% loan.
if the loan was offered in this way and people bought it they don't deserve to have a 3mil property
why
because in reality any normal thinking person would not sign up to that form of risk.
and anyone here can tell me that they have recommend this loan for what it is and they have accepted it tell me
why
tell me what you have signed up for
read the posts very carefully understand what this a fund is and the loan and you tell me why you think its a good product and was this told to you when you signed up.
I am not grand standing here.
I am simply saying if I put up on this board a grossrealisation mezz fund all of the above would have been asked just because this is a super fund it is made out that its different
its not.
you can put a superfund together for $1500 and as richard did say in the front page
you can do this
yes you can.
and if I set it up
would you put your 3 mill loan with me and I can use the 600k in your property, stand aloan no risk to me.
it can have a funny name and it can have lots of smoke mirrors you can use unit or equity trust but lets look at what this is.
and if people can't see the risks fine to them this is a very very safe class or investment at the end of the day its someone super fund on the line ( not mine) its someone house (not mine).
I am only the pigeon here.
 
It'll be interesting to read the Cannex review of it which should be release next week according to that article.
 
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Here's another one from The Australian:
http://www.theaustralian.news.com.au/story/0,20867,21433805-5001942,00.html

I found this bit of information interesting:

You must take the Adelaide Bank/Rismark loan as a package. That is, you can take up to 20 per cent of your property value through their EFM, but your standard loan balance of up to 80 per cent is taken with Adelaide Bank.

I didn't know the standard loan had to be with Adelaide Bank.


Rismark rival Greenway Capital will launch its shared equity product in the second half of the year.

This product will extend interest-free loans to home owners with 50 per cent or more equity in properties.

They can borrow up to half the value of their properties and share up to 35 per cent of capital gains with the lender.

Wow Greenway Capital with a 50% EFM? and 35% of CG? Thats much better than Rismark's product of 20% EFM and 40% of CG.
 
BR,

The lender gets 35% see:

They can borrow up to half the value of their properties and share up to 35 per cent of capital gains with the lender.

That's the key word I think - with. That is, the lender gets 35%. Personally I think this loan is worse than the first one. People with equity are just gonna go 'Yes! I can get 50% of my equity out with no interest payments required! Hello plasma t.v. and boat and travel and new car and pool and top range dvd and new computer and....'

I wonder if people are required to pay back the principal on these (like a standard loan I mean, unlike the EFM loan where no principal is paid until the house is sold)?
 
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