Many Australians with a mortgage often lack access to additional finance because their income is stretched covering repayments and other costs of living. However, a new type of home loan affords cash-poor customers the ability to unlock equity in their home, deferring regular payments until the end of the loan.

Midkey, the brainchild of a pair of former Macquarie Capital and Credit Suisse bankers, is a home loan targeted at Australians in their mid-life. This is generally a period when you’re servicing large debts, such as the mortgage on a family home and costs associated with children’s schooling.

In this situation, getting a bank or lender to approve a second mortgage can be difficult as the majority of your income is going out as fast as it’s coming in. Midkey’s solution proffers no regular payments of principal or interest and no ongoing fees. Instead, these costs accumulate and are paid at the end of the loan period.

There’s no defined term for the loan. You can cancel at any time. The loan is fully repayable if the borrower decides they want to repay the loan, sells their property, dies or defaults. You can choose to make partial repayments, but the minimum amount payable is $50,000, and there are a number of rules and stipulations that apply.

How to apply for a Midkey home loan

You can apply for a minimum loan amount of $100,000 and a maximum of $5,000,000. The maximum loan-to-value ratio (LVR) is up to 35% if you don’t have a home loan on your property and up to 30% if you do.

Eligible Midkey properties include non-strata residential properties in Greater Sydney, Brisbane, and Adelaide. Midkey aims to offer access to loans in more cities soon, as well as the inclusion of apartments.

In order to successfully apply for a Midkey, you’ll need to meet some general application requirements, including:

• Providing residential and employment history.
• Declaring asset and liabilities position.
• Having your income and expenses verified.
• Providing three months' worth of personal bank statements to verify living expenses.
• Having a valuation firm conduct an onsite property valuation.

If you’re applying for a Midkey loan as a second mortgage, you’ll also be required to hand over your mortgage details from an approved bank partner, including proof of balance.

These loans are available for individuals and joint borrowers but not for companies, trustees, or private partnerships. Midkey home loans do not have an offset account or redraw facility, account splits, or portability features.

How do Midkey loan payments work?

Unlike other types of home loans, such as a reverse mortgage, Midkey borrowers pay simple, not compounding, interest at a margin of 325 basis points above the RBA cash rate, calculated daily, accumulated, and paid at the end of the loan.

This means that the Midkey loan's outstanding balance increases consistently in a linear fashion, rather than interest charged on accumulated interest, which can grow quite expeditiously.

While there are no ongoing fees associated with Midkey home loans, you will have to pay:

• An establishment fee of 1% and then 0.5% for any amount above $500,000 (with a minimum of $1,500).
• A valuation fee, ranging from $330 - $2,650 (quotes required for homes over $5 million), which is paid by the applicant directly to an approved valuer.
• Loan settlement and documentation fees, which cost approximately $450.

All fees, aside from the valuation costs, are deducted from loan proceeds at settlement. Additionally, a valuation discount of a minimum of 5% is applied to a property’s market value.

At the end of the loan, home loan customers will pay:

• The original loan amount.
• Simple interest (not compounding) accumulated throughout the loan period.
• A Midkey Deferral Fee that is a proportion of any increase in the home’s value, based on the Midkey loan amount to the home’s value at the start of the loan.
• A valuation fee (not in all cases) that ranges from $330 - $2,650 (quotes required for homes over $5 million), paid by the applicant directly to an approved valuer.
• A discharge fee of approximately $500.

With regards to the Midkey Deferral Fee, we can refer to an example where, if your Midkey loan was equivalent to 10% of your home’s value at the beginning of the loan, your Midkey fee will be 10% of any increase in your home’s value by the end of the loan.

So, what’s the hook?

In addition to the establishment fee, valuation fee, and loan settlement costs, at the end of the loan, Midkey borrowers will need to repay the loan amount in full, as well as the accumulated simple interest, discharge fee, and Midkey’s share of the property's appreciated value.

For instance, if your property's value is $3 million and you borrow $300,000 from Midkey, then choose to sell 20 years later—assuming a yearly property value increase of 4%—your property would have risen in value to $5.4 million over the two decades of ownership.

Considering Midkey lent you 10% of the property's value, you’d need to pay 10% of the increase in value—in this case $240,000—in addition to an extra amount during the sale. This supplementary amount arises because Midkey reduces your initial property value by a minimum of 5%, effectively amplifying the 10% fee they receive upon sale.

Don’t forget that the simple interest charged is calculated at a margin of 325 basis points above the cash rate. At the time of writing, the cash rate is 4.10%, so you’d be paying interest at a rate of 7.35%.

A case study: Chris’s experience

As part of a Midkey case study, an advertising executive, Chris, with a family home in Mosman, said he was knocked back by his current mortgage lender for a home equity loan.

“I kept thinking that logically I should be able to leverage the value I have built in my home and not have to sell the house to access it,” he said.

Chris asserted that Midkey was the only loan provider that focused on the equity he already had in his greatest asset, his home, instead of prioritising his current income and his ability, or not, to make additional monthly payments.

“Midkey is a much-needed no-brainer for us. Instead of our monthly payments increasing with a second mortgage on our house, Midkey showed us how we could reduce our monthly payments overall on our existing mortgage, by 10%. We did this by placing the cash from our Midkey into our offset account with our existing mortgage, and we will draw on it over time to fund our school fees,” he said.

While this type of loan worked for Chris and his family, it’s important to do your own research and compare a range of home loans before deciding on applying for a mortgage. What’s right for someone else may not necessarily be a good fit for you and your financial situation.

Consider discussing your options with a mortgage broker. These home loan experts can examine your finances and recommend mortgage deals that may suit your personal goals and financial needs.