A shared equity finance mortgage (EFM) allows borrowers to buy property which they traditionally could not afford. Whilst the deal seems immensely attractive to aspiring homeowners desperate to get their own little piece of Australia, it comes with warnings that borrowers may not get the same return from their investment that those with traditional mortgages will
Under an EFM the borrower can borrow 20% of the property's purchase price interest-free and in return the lender gets 40% of any capital gain made when the property is sold or the borrower finalises the loan. The EFM is taken in conjunction with a standard mortgage and while borrowers pay interest on this loan, there is no interest or monthly repayments on the EFM part of the loan.
The products offer the combination of a better lifestyle and a cheaper loan upfront but in the long term the loan can incur greater costs.
The EFM segment of the loan has the common 25-year term but with no principal monthly repayments required until the loan is repaid by the borrower.
Yet, when used in conjunction with a traditional home loan, the EFM can be repaid in full by the borrower at any time.
If the value of the home increases, the borrower has to give the bank 40% of any capital gain made when the loan is repaid. If the value of the home decreases, the borrower will have to pay 20% of the capital loss.
If you are considering if this is the type of loan for you, why not talk to Melbourne Finance Brokers to review your options.
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