How an EFM works over time
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 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, an EFM allows you to share that loss and reduce the amount you have to repay by up to 20% of the decrease in the property’s value. The share of the losses borne by the lender will depend on how much you borrow in the first place and how much your property has decreased in value. The lender will not share in any losses if they are not fully realised by you when you repay the EFM.
The table at the bottom of the page sets out the percentage of the property value that you can borrow and the corresponding percentage of any increase or decrease in the value of the property you share in the future.
Remember Jack and Adrian – they took out an $80,000 EFM and $300,000 traditional home loan to purchase a $400,000 property. The following graph shows you what they would have to repay, and how much equity they would have in their property at 3, 6 and 9 years if its value increased by 8% per annum. Of course property values may increase more or less than 8% per annum and this will impact the outcomes.
This area shows the total amount owing on the EFM including the appreciation payment.
This area indicates the amount of equity Jack and Adrian have in their home and will keep.
This area shows the total amount owing on the traditional home loan.
Sharing the change in property value.
EFM as a % of property value
The share of any increase in value you pay in the future
The share of any increase in value you keep in the future
The share of any decrease in value you may be able to share in the future1
20%
40%
60%
20%
15%
30%
70%
15%
10%
20%
80%
10%
For the 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.