Mortgage Innovation In New Climate Of Rising Rates
Newcastle Herald
Thursday March 6, 2008
RISING mortgage interest rates and low housing affordability are stretching many household budgets and providing fertile ground for innovative home loans.
Adelaide Bank and Rismark International report a strong increase in inquiries for the zero interest rate Equity Finance Mortgage (EFM), despite no advertising or marketing, a limited distribution network and no commissions paid to brokers. Rismark chief executive Christopher Joye says he deliberately chose a soft launch in March last year, only offering the product through Adelaide Bank because he was worried about a tsunami of consumer interest and limited funding capability. A fixed-interest version was added in November.With an equity finance mortgage, the lender takes equity in the property and a share of any capital gains or losses when it is sold. In return, the borrower makes no repayments of interest or principal for the term of the loan, up to 25 years.InfoChoice general manager Denis Orrock says EFM loans are innovative, but it will probably take a while for people to understand them. "If you're struggling with interest payments [it] can reduce payments significantly," Mr Orrock says. The Rismark EFM loan can be taken out only on a maximum 20 per cent of the value of an owner-occupied home, so borrowers must finance the balance with a traditional home loan from Adelaide Bank. They must also have at least a 5 per cent deposit. The lender's share of future capital gains is capped at 40 per cent, leaving the borrower with a minimum 60 per cent share of the growth in value of their home. If the property does not increase in value by the time you choose to repay the loan (which can be done at any time without penalty), you simply repay the dollar value of the original loan, making it a free form of finance.If the house falls in value and you sell for a loss, the lender will wear up to 20 per cent of the loss and reduce the original loan amount accordingly. In other words, the borrower repays less than they borrowed on top of the savings made in interest and repayments.However, the lender will share losses only on an actual sale of the property, not if you refinance and there is no sale.The EFM loan offers three strategies: to reduce monthly repayments by 30 per cent or more, to buy a more expensive home than you could otherwise afford, or to release 20 per cent of home equity for investment or other purposes.Mr Orrock says it can be used as a stepping stone into the market. The borrower could sell their home a few years down the track, share the profit and have a big enough deposit to buy their next property on their own.Take the example of someone buying a house valued at $600,000 with a deposit of $120,000.They could borrow the balance of $480,000 and pay interest on that amount, or they could take out a traditional loan of $360,000 plus an interest-free equity finance mortgage of $120,000. The latter strategy produces a monthly cash flow saving of $966. If the same person sells their home five years later for $770,000, they would be more than $30,000 better off with the mortgage, even after giving up 40 per cent of the capital gain.The potential downside of the product is the amount of capital gain borrowers give up when they sell. Mr Joye says the loan is available in all 912 postcodes where mortgage insurance is available. SMH
© 2008 Newcastle Herald