First of all I'd like to agree with Terry, i.e. make sure you're clear on the benefits you believe selling with instalments will bring.
With more and more people deciding to sell their properties with vendor finance (VF) Instalment Contracts or Deposit Finance, quite a few are opting for relatively short terms, e.g. 5 years, with a large 'balloon' payment at the end of the term, i.e. the buyer has to refinance and pay off what they haven't paid off during the relatively short term.
Our discussion here does not include properties being sold with a Lease/Option (Rent To Buy) or Deposit Builder, as the National Credit Code (NCC) doesn't regulate these two VF strategies. However both Instalment Contracts and Deposit Finance are credit contracts and therefore regulated by the NCC. It's these two forms of vendor finance we'll look at here in relation to 'balloon' payments.
The following example is an extract from ASIC's Regulatory Guide 209.68 and relates to a consumer's 'capacity to repay and substantial hardship'.
'Example 10: Balloon repayments
Some products involve a large 'balloon' payment at the end of the loan term. While a consumer may be able to manage the regular repayments under the loan, whether the product is suitable for them also depends on whether they will be able to make the final, much larger, payment. We would expect the credit licensee to satisfy themselves that the consumer understands, and has the capacity to cover the final repayment before offering this type of product to the consumer.'
After reading this extract I'm sure you'll agree that structuring a loan agreement (Instalment Contract or vendor financed Mortgage) to a consumer, that does not have a zero balance at the end of the term of the loan could be problematical. We don't do it because, as ASIC indicates, how can we satisfy ourselves, at the time we draw up the loan, that the consumer will have the money to pay the balloon payment when it falls due?
In my opinion the government and the courts and tribunals are always going to 'look after' the consumer, e.g. the National Consumer Credit Protection Act 2009. We simply write up on home loans (instalment contracts) for 30 years, just like all the traditional lenders. All our buyers, except one, have refinanced without compulsion between 4 and 6 years after moving in. The exception has been with us for 10 years but the cash flow is so attractive now, we happy for him to stay as long as he likes ;-)
Cheers, Paul