Midkey home loan doesn’t seek regular payments but cashes in when you finally sell up

Borrow money against your home, make no regular repayments and only pay it back when you decide to sell. So what’s the catch?

If mortgage pains are building and cost-of-living pressures are pushing your cashflow into the red, a pair of bankers formerly with Macquarie Capital and Credit Suisse may have come up with a ­solution.

In recent times we have seen a number of operators trying to grasp the clear opportunity the housing market presents; returns are good but cashflow is invariably a problem for homeowners and investors alike.

Midkey is a new financing venture offering loans designed for Australians in their midlife, when costs are at their highest due to raising a family and paying off debts.

Unlike a traditional mortgage, the borrower is not required to make regular loan repayments and there is no fixed loan term.

The maximum loan amount is 30 per cent of your home value if you already have a home loan in place, and 35 per cent if you do not currently have a home loan. The loan is paid back whenever the owner decides to sell their home in the future.

Sounds a bit like a reverse mortgage. But unlike a reverse mortgage where compound interest applies, Midkey only charges simple interest at a rate equal to the RBA cash rate plus 3.25 per cent on top, which currently works out at 7.35 per cent.

The loan balance does not grow exponentially like a reverse mortgage, where interest is charged on accumulated interest and the loan balance grows rapidly. The outstanding Midkey loan balance grows in a linear manner.

Midkey said the product is different from a traditional home loan as no regular repayment is required; however, there is the equity sharing on sale.

Midkey co-founder Richard Young says: “Despite having significant equity in their homes, we were noticing that friends and family were increasingly unable to access equity through traditional loans.

“We knew there had to be an innovative solution for this cohort.”

So far so good. Under the arrangement with Midkey you can borrow money against your home when you need it, make no regular repayment and only pay it back when you decide to sell your home at some point down the track.

So what is the catch?

In addition to you paying the loan and the accumulated simple interest upon sale, Midkey will take part of the increase in the value of your property.

Assume your home is worth $2m and you borrow $200,000 from Midkey, and decide to sell 15 years down the track. Also assume your home increased by 4.75 per cent in value each year; over the 15 years it would have doubled to $4m.

Since Midkey initially lent 10 per cent of the property value, it would also take 10 per cent of the increase in value, plus an additional amount at sale.

The additional amount is due to Midkey discounting your initial property value by a minimum of 5 per cent, which has the effect of increasing the 10 per cent fee it receives on the sale – known as the Midkey deferral fee.

Based on this example, and assuming a long-term RBA cash rate of 2.75 per cent, the yearly cost of the Midkey loan comes to 13 per cent.

On top of this, a loan establishment fee of up to 1 per cent is payable as well as valuation fees and at the start and termination of the loan, up to $3000 each time.

Ex-Franklin Templeton and Credit Suisse banker and Midkey co-founder Scott Collison says: “A Midkey loan can replace monthly paying debt so that the household is paying less or no regular payments.

“This is important in an environment of increasing interest rates and the rising cost of living.”

Clearly this is not for everyone. But on the other hand, as an adviser I can say there is no other product on the market like ­Midkey’s.

It is different from a traditional home loan as no regular repayment is required; however, there is the equity sharing on sale. It is different to a reverse mortgage as simple interest is calculated as opposed to compound interest.

It is a genuine innovation and that is always welcome in our tight market.

Overall, the Midkey loan is an interesting concept that may suit some. It really just comes down to doing a cost-versus-benefit analysis.

The question is: how important is it to maintain the status quo? What is the value of not having to sell the home and downsize to a cheaper property or not having to pull your kids out of private school and compromise on other aspects of life?

If you feel that it is worth a cost of 13 per cent per year payable when you sell your home, then Midkey might be worth having a look at.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au