There are many of Aussies who, despite having plenty of equity tied up intheir home, lack the income needed to service another loan. But thatdynamic has been disrupted.

Midkey – the brainchild of friends and former Macquarie and Credit Suisse bankers Richard Young and Scott Collison – offers ‘no monthly payment’ home loans.

The product allows those with mounting home equity but sluggish income growth to defer payments on a new loan until the end of its life.

That means those taking out a Midkey loan don’t have to pay back the borrowed cash, plus interest and a ‘deferral fee’, until they sell their property.

The pair conceptualised the first-of-its-kind Australian offering after noticing “asset-rich” friends and family – as Mr Young calls them – struggling to access new credit.

“It’s primarily to help mid-life Australians solve their financial issues and achieve their financial outcomes,” Mr Collison told Savings.com.au.

“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.”

As a Midkey loan relies on the equity in a person’s home, it can bypass income assessments that typically restrain traditional lenders.

The product – which has ASIC’s tick of approval – was tentatively offered to the public for the first time earlier this year. And it’s already pricked the ears of mid-life homeowners.

Messrs Young and Collison started with $50 million of capital – a sum they’ve nearly completely deployed. They expect to turn to investors for more funds shortly.

“One of our challenges is that we’re relatively new and the product hadn't been seen before in Australia,” Mr Collison said.

“But I think the use cases are so relevant for this environment that there has been very strong demand.”

What is Midkey?: The nitty-gritty

While the property market continues to broadly climb, cash-flow-challenged homeowners often struggle to make the most of their increasing wealth. That’s where Midkey is designed to come in.

Under the home loan product, a person can borrow funds against the value of their home without paying the cash back regularly, even if they already have a mortgage.

But that doesn’t mean they don’t pay interest.

In fact, the offered interest rate is slightly higher than those provided by some traditional lenders – at 3.25% above the cash rate (making it 7.35% at the time of writing).

Midkey will loan you up to 35% of your home’s value if you don’t have a mortgage, or 30% if you do. You’ll then pay back the borrowed funds, plus interest, when you sell the house.

On top of that, you’ll also provide Midkey with a portion of any capital gain you make on the sale of your house. It’s called a ‘deferral fee’ and it's directly related to how much you borrow and the ‘agreed initial value’ of your home.

It’s also worth noting that borrowers aren’t locked in to a Midkey loan. They can repay in part or in full whenever they wish (subject to a minimum $50,000 repayment). Though, doing so will demand a new property valuation.

For example...

It's a relatively simple, albeit likely foreign, concept, as per an example provided by Mr Young.

Let’s assume your home is independently valued at $1.052 million, you owe $500,000 on your traditional mortgage, and you wish to take out a $200,000 Midkey loan.

“We take a 5% discount to that $1.052 million value, so we have what is then called an ‘agreed initial value’, which in this instance is a million dollars,” Mr Young said.

Simple enough. Now, that $200,000 Midkey loan is equivalent to 20% of the agreed value of your home.

And let’s also assume you're faced with a 7% interest rate on that loan over the next five years. Then, in 2028, you decide to sell.

Flash forward and the gavel has fallen. Congratulations, you’ve sold your house for $1.2 million!

You pay back the $200,000, plus interest (which comes to $14,000 a year, or $70,000 in total). You also provide the lender with a deferral fee of approximately $40,000 – around 20% of your capital gain, based on the agreed initial value.

If your house doesn’t sell for more than the agreed valuation, you don’t need to pay the deferral fee.

You’ll also potentially face a fee to establish the loan (up to 1%) and shirt the cost of the independent valuation needed to kick start it.

With any luck, after all that, it’ll have been worth it to have the extra cash in your back pocket when you needed it.