When investment bankers Scott Collison and Richard Young took a close look at the reverse mortgage, they saw an opportunity to re-engineer it and design a loan with no monthly payments for people still working, who want additional finance or who want to free up their cash flow.
Collison and Young are the founders and joint chief executives of Midkey, which launched “the first ever no-monthly payment home loan for mid-life Australians” last month.
They have secured A$50 million of initial funding from a large institutional investor and are confident of securing further commitments.
Like a reverse mortgage, a Midkey loan contract defers payments until the loan is paid out or the home is sold, but there are some important differences.
Whereas annual interest on a reverse mortgage is capitalised and added to the principal, Midkey’s deferred interest accumulates on a simple interest basis, rather than compounding.
The loan has been launched with a rate set at the cash rate plus 325 basis points.
In addition, if the value of the dwelling has increased during the loan period, Midkey shares a part of that increase, based on the size of the loan. For example, if the loan represents 20 per cent of the value of the dwelling, the borrower will pay Midkey 20 per cent of the value of the increase over the life of the loan. This is called the deferral fee.
If there is no increase in value over the life of the loan, the borrower does not pay a deferral fee.
Loans are for a minimum of A$100,000. The maximum loan-to-valuation ratio is 35 per cent for a first mortgage and 30 per cent for a second mortgage. The total LVR (including other mortgages) cannot exceed 80 per cent.
Where reverse mortgages are designed for retirees, the Midkey loan is for people still working. Collison said the loan has been designed to unlock home equity for borrowers wanting to fund a renovation, purchase another property, pay large costs such as school fees, finance a small business, or meet unexpected expenses.
It could also be used to reduce the balance on an existing mortgage to lower monthly repayments or allow the borrower to take a career break.
Collison has spent his career running private credit, real estate investment, private equity, and hedge fund operations at a number of fund managers and investment banks, including Alceon Group, Franklin Templeton, Brummer & Partners, Millennium Management, and Credit Suisse.
Young spent 16 years at Macquarie Capital, mainly in Hong Kong and Shanghai, where his roles included head of financial sponsors and cross-border M&A.
Midkey will sell direct to borrowers and it is working with a small group of brokers to develop a broker distribution channel. Collison and Young also see a good opportunity in generating referrals from banks.
Young said: “We have had conversations with a number of banks. They want to see some data on originations and learn more about the kind of borrowers we are dealing with. But they recognise that they have borrowers with needs that we are satisfying.”
