EFM costs if a home's value falls
If Jack and Adrian’s $400,000 property has decreased in value by 5% from when they purchased it to $380,000, on sale they may be eligible for a “depreciation allowance” (ie, the EFM lender may share in the realised capital losses).
Note that the EFM lender will not share in any losses if they are not fully realised by you when you repay the EFM (eg, if you refinance the EFM and there is no actual sale event).
While the property will sell for less than they purchased it for (ie, $380,000), Jack and Adrian are able to share with the EFM lender the $20,000 loss that they would have had to otherwise bear by themselves under a traditional home loan arrangement.
In particular, the EFM lender, having originally provided a 20% EFM, will bear $4,000 (or 20%) of their total $20,000 loss.
Because Jack and Adrian are selling the property they will not have to repay the full EFM amount and are therefore $4,000 better off.
Note that the depreciation allowance provided by the EFM lender may not always apply, for example if you are in default when the property is sold or if you refinance out of the EFM and do not actually realise a real capital loss (ie, because you have not sold your property).
Year 3
| Original property value: | $400,000 | |
| less property value at sale: | $380,000 | |
| Capital depreciation: | $20,000 | |
| Original EFM amount (20%): | $80,000 | |
| less depreciation allowance (20%): | $ 4,000 | |
| EFM less 20% of depreciation: | $76,000 | |
| Traditional home loan repayment: | $286,832 | |
Jack and Adrian’s equity after repaying the EFM and traditional home loan: $17,168
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. 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.