The Midkey home loan was developed by former Macquarie and Credit Suisse bankers Richard Young and Scott Collison, and has the approval of Australian Securities and Investment Commission (ASIC).
It specifically targets property owners who may be considered as “asset-rich”, allowing them to take advantage of their equity to access funds for their financial goals.
“We do that in two main use cases: We’re either replacing part of a traditional interest loan and therefore reducing the regular payments on a traditional loan or the second way we help is when people are looking to increase their debt but their income is being assessed as not enough to afford additional monthly payments,” Mr Collins said in an interview with Infochoice Group.
What is a Midkey “no monthly payments” home loan?
Midkey’s “no monthly payments” home loan allows you borrowers to borrow against their value of their home loan without having to make regular monthly payments.
Instead, the borrower will only be required to settle the principal amount, along with simple interest when the loan matures.
While there is no predetermined repayment schedule, the loan is expected to be settled upon the sale of the home, the borrower’s passing, or other mutually agreed predefined circumstances.
How does Midkey work and how much can be borrowed?
A Midkey can either be a buyer’s first or second mortgage. Here are two separate cases to illustrate how Midkey works:
- When a borrower does not have a mortgage
Borrowers who own their home outright or do not have any current mortgage on their home can borrow from Midkey up to 35% of their property’s value.
- When a borrower has an existing mortgage
For borrowers with a traditional mortgage on their home, they can borrow up to 30% of their property’s value.
In both cases, the loan-to-value ratio of the property cannot exceed 80%, including the first mortgage if the Midkey home loan is the second mortgage.
Here’s an example of how it works: John, whose property is currently valued at $1m, still owes his current lender $800,000. This means that his current equity is at 20%.
If he is to apply for Midkey, he will need to agree to use the proceeds to pay off his first mortgage.
This is because John cannot exceed the 80% LVR requirement.
However, if John owes significantly less, say around 60% or $600,000, then his reusable equity is $400,000. In this case, he can borrow up to $200,000 under Midkey.
The larger equity John has, the bigger funds he can borrow under the “no monthly payments” home loan. The maximum amount mentioned earlier, however, must be taken into consideration.
How to qualify for the Midkey home loan?
To be able to apply for a Midkey home loan, borrowers must meet the following criteria:
- The eligible property for this program should be a house or townhouse located in Sydney, Brisbane, or Adelaide. Midkey is expected to be accessible to buyers in other cities soon.
- If applying for a second mortgage, the first mortgage must be a principal plus interest loan.
- A minimum of 20% useable equity in your home is required, where useable equity is calculated as the excess of the home's value over the existing home loan amount.
- Applicants must be Australian citizens aged 18 years or older.
How can Midkey be repaid?
There are no timeframes as to when Midkey is to be repaid. This means that borrowers have the option to partially or fully repay at any time.
However, as mentioned earlier, the Midkey loan can also be fully repayable when certain events occur such as the following:
- When the borrower sells the property.
- When the borrower dies.
- When the borrower defaults on specific terms in their contract with Midkey.
In terms of partial repayments, borrowers will need to make payments in the following cases:
- When the borrower increases the amount of their first home loan — they must use 25% of any increase in the first mortgage to partially repay Midkey.
- When the borrower’s LVR is greater than 100% — they must make a partial repayment to bring their LVR to below 100%.
In cases where the borrower wants to partially pay their Midkey loan, they will need to have a minimum repayment of $50,000.
They will also need to pay for new independent valuation of the property and a repayment fee of $200.
What fees are charged by Midkey?
Borrowers will need to pay the following fees at the beginning of their Midkey home loan:
Midkey’s initial fees |
|
|
Establishment fee |
Equivalent to 1% of the loan value (up to $500,000) + 0.5% for any amount above $500,000. |
|
Valuation fee |
Ranges from $330 to $2,650 |
|
Document preparation costs |
Around $450 |
|
Registration fee |
Around $187 |
|
Settlement rescheduling fee |
Around $200 |
These fees, excluding the valuation fee, can be deducted from the amount of the Midkey home loan.
At the end of the loan, the borrowers must pay the following on top of the principal amount:
Midkey’s end fees |
|
|
Simple Interest |
Roughly around 1% to 2% higher than a traditional home loan. Midkey charges variable simple interest that is a 3.25% premium to the RBA cash rate. |
|
Midkey Deferral Fee |
A proportion of any increase in the home’s value. The proportion is the the Midkey loan amount to the home’s value at the start of the loan. For example, if the loan is 10% of the home’s value, this fee will be equal to 10% of any increase in the property’s value. |
|
Valuation fee |
Ranges from $330 to $2,650 |
|
Discharge fee |
Around $500 |
Simple interest versus compounding interest
Midkey charges a simple interest — this means that the amount of interest charged to the borrower remains the same.
Simple interest is not added to the principal balance of the loan but is instead only charged on the original principal amount. This means the borrower is noy paying interest on interest.
With compound interest, each month, the interest accrued on the loan is combined with the principal balance of your home loan. This means that the interest also increases every month.
How does the Midkey deferral fee work?
The Midkey deferral fee is only charged when the value of the property increases. It serves as a fee the borrowers pay for the benefit of deferring the payments at the end of the home loan.
The deferral fee is a proportion of any increase in the property’s value.
The calculation of this fee involves dividing the Midkey home loan amount by the home's value — this proportion is established at the beginning of your Midkey loan.
As the property's value grows, the Midkey deferral fee also grows, impacting the final amount at the end of your home loan.
This could decrease when the borrower makes partial repayments.
How is Midkey different from a reverse mortgage?
While both home loans take advantage of the borrowers’ equity in their properties, there are some differences as to how they work.
For instance, Midkey is available to all Australians while reverse mortgages are traditionally only available for older borrowers.
Another difference is the interest charged to the loan — Midkey charges a simple interest unlike traditional reverse mortgages with compound interest.
Midkey’s interest is around 1% to 2% lower than the typical compound interest charged by a reverse mortgage provider.
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