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You can make renovations or improvements to your property at any time when you have an EFM, provided you comply with the conditions the EFM lender sets. These conditions are outlined in full in the EFM Terms and Conditions Booklet and are summarised below.
Do I get the benefit of the value of the renovations I have done?
You can qualify for a reduction in the cost of an EFM when you repay the loan if you obtain the EFM lender's consent to the improvements on your property before carrying out any work and you spend at least an amount the lender's prescribe (currently set at $20,000). You can find out the Prescribed Amount at any time by contacting the EFM lender.
The EFM lender obviously has to set a minimum threshold over which it will consider compensating you for any renovations--otherwise they would end up giving you credits every time you mowed your lawn!
Before carrying out improvement work you must follow the steps outlined below. - Send your completed "Consent to Renovate form" to the EFM lender. (The proposed cost of the improvements must not be less than the Prescribed Amount);
- Provide the EFM lender with all of the plans, specifications and approvals for your planned renovations and improvements; and
- Pay the EFM lender any fees for considering your request to the renovations and improvements.
What happens after I apply for Consent to Renovate? - The EFM lender will organise to have the property valued (at your expense) by a licensed independent valuer selected by the lender from a panel of approved valuers before the works commence. Based on the valuation they obtain, they will provide you with an estimate of the expected increase in the value of your property as a result of your improvements.
- You must provide the EFM lender with a copy of any builders indemnity insurance obtained in connection with the work or any other certificates and permits they require.
- Once you have their approval, you must complete the works within 6 months of commencement (unless they otherwise agree), using licensed contractors and in accordance with the plans and specifications approved by them.
When improvement works are completed
You must complete the Application for an "Improvement Amount" (this is the renovation credit that you can get) and send it to the EFM lender, with: - Evidence that the works were completed as specified in the plan provided at application, such as the certificates of satisfactory completion and compliance;
- Invoices relating to all materials purchased for the improvements and from all licensed tradespersons who have undertaken work; and
- Evidence of fire and general insurance, ie certificate of currency. The EFM lender's (ie, mortgagee's) interest in the property must be noted on the policy at all times (not for strata, except in Victoria).
The EFM lender will then arrange for a further valuation of your property to be carried out by a licensed independent valuer selected from their panel of approved valuers.
If the EFM lender is satisfied that the improvements have been completed in accordance with the plans and other relevant information you provided to them when you applied for their consent to the improvements, they will notify you of the actual increase in the value of your property as a result of your improvements.
The increase in the value of your property as a result of approved improvement works measured at the time those works are completed is called the "Improvement Amount".
The EFM lender calculates the Improvement Amount by comparing the valuations of your property prepared by a licensed independent valuer before the improvements commenced and after they were completed.
One of the great things about the renovation credit provision in the EFM product is that you get the benefit of any independently assessed increase in the value of your home attributable to the improvement (obviously subject to various terms and conditions).
How much will you reduce my repayment by?
If the Improvement Amount is greater than or equal to the Prescribed Amount, when you repay your EFM loan, the EFM lender will decrease the amount of any capital appreciation on your property by the Improvement Amount before they calculate the cost of the EFM. This means that the cost of the EFM will be reduced when you repay your EFM loan.
However, the Improvement Amount cannot reduce the value of the EFM loan at the date of repayment below the original EFM loan amount. Therefore, if the Improvement Amount exceeds the capital appreciation on your property when you repay your EFM loan, then the lender will only reduce the value of the EFM loan at the date of repayment by the amount of the capital appreciation.
If there has not been any increase in the value of your property or if the value of your property has decreased when you repay your EFM loan, they will not use the Improvement Amount to reduce the amount you have to repay them.
Can I borrow further funds under my traditional home loan for the renovation?
Yes, subject to obtaining the necessary approvals and meeting all relevant credit criteria required by your traditional home loan lender, you may be able to increase your traditional home loan amount to fund your renovations and improvements. If you wish to do this, you will need to obtain the EFM lender's consent to the loan increase and you may have to pay for a refinancing valuation before increasing your traditional loan amount.
Can I complete the improvements myself?
All improvements must be done by fully licensed contractors if you wish to claim an Improvement Amount. If you are a licensed tradesperson, you may do the work yourself, however only the cost of the goods, services and materials you purchase will contribute towards the Prescribed Amount, not the value of your own labour.
While this might seem tough, it is next to impossible for the EFM lender to accurately verify the cost of your renovations if the works are not completed by an independent party. Of course, you can still do the renovations yourself, but you will not be able to claim a credit for any work that is not independently costed (ie, in accordance with the provisions described above).
Renovating - an example of how the Improvement Amount may reduce the amount you have to repay
Jason and Sandra purchased a property for $500,000 4 years ago using a $100,000 EFM loan and a traditional home loan. They completed some approved renovations last year. The value of the property before the work commenced was $550,000 and after the work was completed was $600,000. The Improvement Amount was therefore $50,000.
Jason and Sandra are about to sell their property and repay their EFM loan. The following examples show how the Improvement Amount reduces the amount they have to repay based on two different sale prices. These illustrate how the cost of the EFM is reduced where the Improvement Amount is greater or less than the capital appreciation.
| | Sale price $650,000 | Sale price $545,000 | | Original Purchase price | $500,000 | $500,000 | | Capital appreciation | $150,000 | $45,000 | | less Improvement Amount | $50,000 | $50,000 | | Reduced capital appreciation | $100,000 | $0 | | Appreciation Payment (40%) | $40,000 | $0 | | Original EFM loan amount (20%) | $100,000 | $100,000 | | Total EFM loan repayment | $140,000 | $100,000 |
Note: This calculation excludes all fees, charges or costs associated with the improving the property or discharging the loan such as valuation fees and discharge of security fees. These fees and charges will impact the amount repayable to us. This example assumes that Jason and Sandra met all requirements for claiming a reduction of the cost of the EFM.
If Jason and Sandra sell their property for $650,000 and apply for a reduction of the "Appreciation Payment" amount (ie, the EFM lender's minority share of the capital gains on their home), the full Improvement Amount will be used to reduce the capital appreciation on the property before the Appreciation Payment is calculated.
The Appreciation Payment they have to repay on top of their original EFM loan amount is therefore reduced to $40,000 (ie, 40% of the reduced capital appreciation of $100,000). If there was no Improvement Amount, Jason and Sandra would have paid 40% of $150,000, which is $60,000.
If Jason and Sandra's property only sells for $545,000, the capital appreciation on the property will be reduced to zero by reducing the capital appreciation on the property by the Improvement Amount because the capital appreciation is less than the Improvement Amount. In this case, there is no Appreciation Payment and they only have to repay the original EFM loan amount.
In the unfortunate circumstance that the property sold for less than the purchase price, Jason and Sandra would not be able to use the Improvement Amount when repaying the EFM loan. They may, however, still be eligible for a "Depreciation Allowance" whereby the EFM lender may bear a proportion of their losses and reduce the amount owing under the EFM by that share (meaning that no only with the EFM cost them nothing, but the EFM lender may also wear a proportion of their losses with them).
Please carefully read and review the EFM Disclosure Document available on this website or through one of our accredited lenders. This website does not take into account your personal objectives, financial situation, or particular needs. You should obtain a copy of the EFM Disclosure Document (available on this website) and the EFM Terms and Conditions Booklet from one of our accredited lenders and consider them before making a decision about whether to enter into an EFM. |
Copyright 2008 Rismark International. All rights reserved. Fees, charges, terms, conditions and lending criteria apply. Full details are available on application. EFM loans have been developed by and will be provided by Rismark International Funds Management Ltd ABN 15 114 530 139 AFS licence number 293881 (trading as Rismark International) ('Rismark', 'we', 'us' or 'our'). EFM loans are offered in conjunction with certain traditional home loans offered by approved lenders and their originators. Rismark has appointed Adelaide Bank a division of Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFS licence number 237879 ('Adelaide Bank') as an approved lender Adelaide Bank and its originators ('Adelaide Bank originators') will distribute and manage EFM loans. Rismark has consented to Adelaide Bank and Adelaide Bank originators branding EFM loans as Adelaide Bank or Adelaide Bank originator-branded EFM loans. Rismark may over time also appoint other financial institutions to distribute and manage EFM loans. Rismark has appointed Permanent Custodians Limited ACN 001 426 384 ('Permanent') as lender of record, custodian and mortgagee for Rismark. This means Permanent will enter into the EFM loan contract and Mortgage on behalf of Rismark.(R) Equity Finance Mortgage (EFM) and EFM are registered trade marks of ARES Capital Management Pty Limited ABN 93 113 861 046. TM Equity Finance Mortgage is a pending trade mark of ARES Capital Management Pty Limited ABN 93 113 861 046. ARES Capital Management Pty Limited's ABN 93 113 861 046 intellectual property relating to the EFM product is protected by Australian Innovation Patent Numbers 2005100 871, 2005100 869, 2005100 868, 2005100 867, 2005100 865, 2005100 864, 2007100 445, and 2007100 448.
