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What is an EFM? |
The EFM is an award-winning home loan that allows you to borrow up to 20% of your property's value with no regular monthly interest repayments throughout the EFM loan, which you can hold for 25 years.
The EFM lender does not charge any interest on the EFM loan amount (unless you are in default). Instead, when you sell the property or repay the EFM for some other reason, you repay the EFM amount you originally borrowed plus a minority share of any increase in the value of the property.
The EFM works in conjunction with a traditional home loan. Together, they let you move some of the expense of a traditional home loan to later when you eventually sell your home. An EFM can help you to:
1) Reduce the upfront and ongoing costs of purchasing a new property; or
2) Reduce your current monthly mortgage repayments; or
3) Buy a more expensive property than you could previously afford.
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Who would use an EFM? |
The flexibility of the EFM product is such that there is an incredibly diverse range of people who have used the product. For real-life case studies of EFM borrowers, refer to the Testimonials page on this website. Examples of the common categories of people who have used EFMs in the past include:
1) Existing home owners who want to upgrade to a bigger and better home (eg, with a larger number of bedrooms and/or located in a more attractive area);
2) Existing home owners who want to substantially reduce their current mortgage repayments and boost their disposable income (eg, because they are having children, they are finding it difficult to service their existing debts, or they just want more freedom to live their lives as they choose);
3) First time buyers who can afford to purchase a new home but would like to get a 25% more expensive property than that which they can currently access using a more conventional mortgage (eg, these home owners are happy taking 60% of the capital gains on a better home located in a more attractive suburb because they think this property will grow more rapidly than the one that they could afford using a traditional mortgage);
4) Older home owners who want to refinance their current mortgage and release, say, 20% of the equity that has built up in their home for expenditure purposes (eg, buying an investment property, investing in super, investing in managed funds, or just having more disposable cash to live a better life);
5) Renters who are currently priced out of the market and would not be able to become home owners were it not for the EFM (eg, as a result of a reduction in their mortgage repayments).
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What is the cost of an EFM? |
Since no annual percentage rate is applicable to your EFM loan (unless you are in default), and you do not make any ongoing monthly interest repayments during the term of the EFM, you must agree to share with the EFM lender a minority proportion of any increase in the value of your property over time. This happens when you repay your EFM.
For example, if your EFM was for 20% of the property's value, you will have to give up 40% of any increase in its value when you sell the property or repay the EFM for some other reason. You will get the major share (ie, 60%) of any increase in the value of the property.
On the other hand, when it comes time to sell your property, and you realise a loss, an EFM allows you to potentially share that loss and reduce the amount you have to repay by up to 20% of the decrease in the property’s value.
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Are there age restrictions? |
EFMs are typically only available to individuals aged between 18 and under 65. At this stage, EFMs are not being made available on a stand-alone basis for the retiree market as an "equity-release" device (ie, similar to a reverse mortgage). However, at some point in the future retirees will be able to use an EFM just like a reverse mortgage.
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What house price index do you use? |
A house price index is a series of numbers that represent changes in the value of a particular class of properties in a given region over time based on actual market sales. For example, you can construct an index representing the value of houses on the lower north shore of Sydney, or home units in all of Melbourne.
In Australia, we are fortunate because government offices collect 100% of all home sales due to our stamp duty system. This means that the house price indices have the benefit of all home sales that transact in your local area.
We use the highly regarded “hedonic” house price indices licenced by RP Data Limited (ASX: RPX) for every local area, region, and city in Australia. These measures of house price movements are the preferred benchmark of the Reserve Bank of Australia and also used by the Commonwealth Treasury and most banks. They are published every quarter in the Reserve Bank of Australia’s Statement on Monetary Policy.
The term “hedonic” means that the index takes into account the specific attributes of all the properties included in it (eg, their location, landsize, number of bedrooms, bathrooms, etc).
There are other index providers, such as the ABS. But they do not publish house price indices for local areas, and use much less sophisticated index construction techniques.
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Are there geographic restrictions? |
EFMs are available in most mainland metropolitan areas of Australia. EFMs are not currently available in the Northern Territory or Tasmania, although this will likely change in the future. EFMs are not available in rural areas or non-residential areas.
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When will an index be used to value my home? |
For events where there is not an arms-length sales transaction, we will value your home using a local area residential property price index. At the current time, the local area property price index will be provided by RP Data. This is a more efficient, cost-effective and objective valuation process than subjective human valuations. The cost of these valuations are also significantly less. If an updated valuation is required by us due to an expiry of the valuation using the local area residential property price index approach, we will provide such update free of charge for a period of up to 30 days after such expiry.
If we or you do not agree with the value determined via the local area property index, an independent valuation from one of our panel of independent valuers can be requested by you or us, and if that value differs materially from the value determined using the local area property index, the applicable value will be the mid point of the two valuations.
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How can I compare an EFM with a normal home loan package? |
Please take advantage of our loan comparison calculator, which was developed by the leading consumer information company InfoChoice, which you can see by clicking here
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How can I work out my repayments on an EFM? |
Please take advantage of our repayments calculator, developed by InfoChoice, which you can see by clicking here
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Are there any other products like an EFM in the market? |
Not currently. There are some State Government shared equity schemes offered by HomeStart Finance in South Australia and KeyStart in Western Australia. There are also some other private sector shared equity programs that have been mooted in the past. However, to date these would-be entrants have failed to come to market.
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Why is the lender of an EFM willing to receive no repayments at all during the EFM loan term? |
The money raised by the lender to fund the EFM is sourced from investors who want to obtain very long-term, 25 year exposures to residential real estate. The capital the lender has raised is sourced on the basis of these investors making 25 year commitments to residential property. However, one must understand that these investors will have exposure to a "portfolio" of thousands of EFMs. Accordingly, some EFMs will be repaid earlier than others. The average life of an EFM is likely to be less than 10 years. With exposure to thousands of loans, the investors in the portfolio of EFMs will therefore expect to see cash-flows realised consistently over time throughout the course of the maximum 25 year loan life. So while there will be no interest or principal repayments made by the borrower under an EFM until they decide to repay the entire amount owing, the investor in a portfolio of EFMs will see cash-flows realized over the next 25 years as individual borrowers elect to repay their loans.
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Can I take out an EFM without a traditional home loan? |
An EFM is only available in conjunction with a traditional home loan. The product has been designed to allow you to reduce the burden of a traditional home loan or to purchase a more expensive property by using both products. In the future, as the EFM market evolves, it is possible that EFMs will be offered on a stand-alone basis.
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Monthly interest repayments are not made during the term of an EFM. Can this change during the life of the EFM? |
No. Under normal circumstances, the EFM loan does not carry any monthly interest or principal repayments throughout its maximum 25 year term. However, if you are in payment default on your EFM, default interest will apply at a rate of 2% above the Adelaide Bank Standard Variable Rate. The rate is subject to change at anytime by Adelaide Bank.
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Does having an EFM stop me from paying extra off my traditional home loan and later redrawing those extra repayments? |
You will be able to make extra repayments off your traditional home loan in the same way you could if you did not have an EFM. Having an EFM does not change this. You can also redraw any extra repayments you have made either by using on-line redraw or the manual redraw application. These facilities are obviously subject to the terms and conditions of your traditional home loan.
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What legal documents will I get when taking out an EFM? |
You will receive a Loan Offer, EFM Terms and Conditions Booklet, a separate EFM Disclosure Document that explains the difference between an EFM and a traditional home loan (the EFM Disclosure Document is also available for download on this website) and a mortgage over the property to secure the loan. You will also receive a complete set of documents for your traditional home loan. Both sets will be packaged together by the Solicitors so that you receive them at the same time.
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If I cannot make payments off my EFM why do I need statement? |
EFMs are regulated under the Consumer Credit Code. As a result we must provide you with a regular statement of your loan account. In most cases the statement will simply detail your loan balance outstanding and your security property details.
If your first mortgage is in default, this automatically puts your EFM loan in default. If the EFM has been or is in payment default you may be charged default interest. The statement will then include details of the default interest amounts debited to the loan monthly as well as any other enforcements costs.
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What if my house is destroyed by fire? |
You are required to maintain building insurance over your property at all times and have both lenders' interest noted on the policy. Failing to do so is an event of default.
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Can I purchase a property and later subdivide a portion of the land for sale? |
No, the EFM must be repaid in full if you sell or transfer all or part of the property that secures the EFM. This would include payment of any appreciation payment.
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Does the quality of the property affect my ability to obtain an EFM? |
When the property is valued, the valuer will make comment on the quality of the property. Where the quality is poor or if there are signs of some adverse circumstances such as termite damage, asbestos or poor workmanship, a more rigorous valuation will be required and the EFM may not be approved.
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How do I know if I will be better off with an EFM? |
A number of factors will influence whether you will be better off using an EFM with a traditional home loan rather than a traditional home loan alone. These include interest rate movements, the change in property values over time, and how long you have the EFM, amongst other things.
The Disclosure Document you receive with your EFM contract explains these factors and warns that the appreciation payment could be substantial (and more than you would repay using a traditional home loan alone) depending on how much your property increases by.
If in doubt you should obtain independent legal and /or financial advice.
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What happens if I do not get consent to my renovations? |
You will not be eligible for an improvement amount if you do not obtain consent for your renovations or home improvements before you commence. This means that the amount you repay on the EFM in due course will be based on the full value of the property at the time and not the value less the improvement amount.
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Why don't I obtain an improvement amount if I tell you about the renovations later? |
The improvement amount is the difference between the value of the property before and after you carry out the renovations. If you do not obtain consent to the improvements before you commence we will not be able to obtain a starting valuation and therefore will not be able to measure the increase in value attributable to your renovations.
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What happens if I do four separate renovations for a total value exceeding $20,000? |
Each renovation or home improvement project carried out must be for $20,000 or greater and comply with all requirements to be eligible for the improvement amount. A number of smaller renovations will not collectively qualify.
You would be best advised to do a series of projects as one to ensure they qualify.
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What do I do if renovations will take longer than 6 months? |
You can request an extension of time to complete your renovations if work is delayed. Depending on the duration of the delay, you may be required to obtain a further valuation before consent will be granted (this will usually only occur in extreme circumstances). You should apply for consent as close as possible to the date a builder would be available to commence work.
If you have not notified us that the renovations are complete 5 months after consent is granted, you will receive a reminder letter advising that you will need to apply for an extension if work is not completed within the next month.
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What happens if I disagree with a valuation of my property? |
The original EFM loan amount will be based on the lesser of the purchase price of the property (if applicable) and the current value of the property valued by an approved panel valuer. If you are not happy with that value, you can choose not to enter into the EFM.
If you disagree with a valuation during the life of the EFM (including at the time you are repaying the EFM) you can request a second valuation (at your cost), as can we. The valuation must be conducted by a panel valuer in accordance with the EFM valuation requirements. The terms and conditions of your EFM and the Disclosure Document outline the dispute procedures and how the value is agreed if this occurs.
Generally, the mid point of the two valuations will be used as the property's estimated value.
If you still do not agree with the second valuation you can request a third independent valuation from the panel of valuers, and the mid point of the closest two valuations will be taken as the property's estimated value.
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Why do I need to contact my Lender/Broker before repaying my EFM? |
The payout figure for a traditional home loan is readily available. The payout figure for an EFM requires a valuation of the property to be conducted so that the appreciation payment or depreciation allowance (if applicable) can be calculated.
You must contact us before you want to repay the EFM to allow us to obtain the valuation and explain the process to you. It also ensures that settlement is not delayed while a valuation is obtained.
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Is the property sale price controlled by the EFM lender in any way? |
The only requirement is that the property's sale be bona fide and at arms length and based on a fair market valuation; you cannot, for example, sell your property to a relative for a price lower than market value. If there is a substantial difference between the market price of your property (in the event that you sell it) and the independent valuer's estimate of the property's valuation, the EFM lender has the right to rely on the independent valuer's estimate. This is primarily to control for events of fraud.
You are required to provide the EFM lender with a copy of the sale contract once executed and a valuation of the property to confirm its market value.
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Will renovations affect the maximum credit increase or refinance amount I can get? |
The valuation we obtain before renovations commence will be done on a cost to complete basis. The completed value can be used to determine the maximum amount available on a traditional home loan under the "refinancing formula" that exists in the EFM contract (this provision tells you how much you can increase the size of the traditional home loan that sits alongside the EFM). Larger renovations may require progress payments from the traditional home loan as is the case with any standard stand alone traditional home loan.
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What happens if my EFM loan term reaches 25 years? |
Six months before the loan expiry date, you will receive a reminder letter advising you that the EFM is about to become due for repayment. It will recommend that you contact your accredited lender to discuss your options for repaying the amount due. A further reminder will be sent 3 months before the loan expiry date. A valuation will then be conducted to determine the repayment amount; this will include the appreciation payment (or depreciation allowance, if applicable).
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After making an offer on a property are there conditions I must advise the agent / vendor? |
After making an offer on the property you need to advise that the offer is subject to finance. This is important when you are looking to use the EFM to buy a more expensive property than you could with a traditional home loan.
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Who is Rismark International? |
Rismark is the group that developed the EFM product offering on the basis of the work of the 2003 Prime Minister’s Home Ownership Task Force, which Rismark’s founder led.
Established in 2003, Rismark has been responsible for pioneering the introduction of shared equity mortgage opportunities to Australian consumers.
Rismark has a team of experienced financial services executives from the funds management, research, investment banking and mortgage markets fields.
Rismark's shareholders include a number of major financial institutions, such as Adelaide Bank a division of Bendigo & Adelaide Bank, QBE Insurance and the LJCB Investment Group.
Rismark's commercial partners include Bendigo and Adelaide Bank Limited, QBE Lenders’ Mortgage Insurance Limited, RP Data Limited, the GFI Group and others.
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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.
