EFM cost's if a home value rises
Jack and Adrian took out an $80,000 EFM and a $300,000 traditional home loan to purchase a $400,000 property. Let’s assume that in 6 year’s time, Jack and Adrian’s property is worth $634,750.
To repay their EFM in year 6, Jack and Adrian must repay $93,900 on top of the $80,000 they originally borrowed. Jack and Adrian have made a capital gain of $140,850 and have $190,646 to contribute towards their next property purchase. They have gone from having 5% equity in their home to 30%.
In addition, they have saved $39,900 in repayments as compared to a traditional home loan over the same period.
Year 6
| Property value at sale: | $634,750 | |
| Less original property value: | $400,000 | |
| Capital appreciation: | $234,750 | |
| Original EFM amount (20%): | $80,000 | |
| plus appreciation payment (40%): | $93,900 | |
| Total EFM repayment: | $173,900 | |
| Traditional home loan repayment: | $270,204 | |
| 60% of appreciation for Jack and Adrian: | $140,850 | |
| Jack and Adrian’s equity after repaying the EFM and traditional home loan: | $190,646 |
Note: This example excludes application fees and other fees associated with the loans such as valuation fees, account keeping fees, transaction fees and lenders mortgage insurance (if applicable) as well as transaction costs associated with refinancing a home loan such as stamp duty, government fees, conveyancing fees and stamp duty on lenders mortgage insurance. The example assumes that the EFM loan is for 20% of the property’s value at the outset and that no default interest is payable at any time over the term of the EFM loan. The actual EFM loan may be for less than 20% of the property’s value and the outcomes may vary considerably if default interest becomes payable. The example assumes that the traditional home loan interest rate is 7.80% p.a, the loan term is 25 years, all principal and interest payments are made on time, the only repayments made are the required repayments – that is, no additional repayments or redraws are made, and no event of default has occurred and default interest is not incurred at any time during the term of the loan. All examples of an Appreciation Payment assume that the value of the property has increased by a nominal rate of capital growth of 8% p.a. Please note that these assumptions may not apply in your circumstances. Interest rates available on a traditional home loan may be lower than the interest rate on a traditional loan taken in conjunction with an EFM. Ask your lender to compare these costs for you, while taking your circumstances into consideration.
For any additional assumptions used in calculating this example please refer to the assumptions page.
We strongly recommend that you obtain independent legal and financial advice in relation to this EFM loan prior to entering into the EFM loan contract.