Balloon Payments

Ballon PaymentWith more and more people deciding to sell their properties with vendor finance Instalment Contracts or Deposit Finance, quite a few are opting for relatively short terms, e.g. 5 years, with a large ‘balloon’ payment at the end of the term.

Our discussion here does not include properties being sold with a Lease/Option (Rent To Own) as the National Credit Code (NCC) doesn’t regulate Lease/Options.  However both Instalment Contracts and Deposit Finance are credit contracts and therefore regulated by the NCC.  It’s these two forms of vendor finance we’ll look at here in relation to ‘balloon’ payments.

The following example is an extract from ASIC’s Regulatory Guide 209.68 and relates to a consumer’s ‘capacity to repay and substantial hardship’.

“Example 10: Balloon repayments

Some products involve a large ‘balloon’ payment at the end of the loan term. While a consumer may be able to manage the regular repayments under the loan, whether the product is suitable for them also depends on whether they will be able to make the final, much larger, payment. We would expect the credit licensee to satisfy themselves that the consumer understands, and has the capacity to cover the final repayment before offering this type of product to the consumer.“

A New Way of Looking At It

Since the original Balloon Payments newsletter last year, we’ve run across a number of ideas that attempt to make it clear to VF purchasers that the intent of the Instalment Contract (IC) is for them to refinance within 5 years.

One idea from Tim Hart, the owner of the Vendor Finance Calculator, has caught our attention.  It goes like this:

The IC is still written up for a term of 30 years but, it is clearly spelt out that the intent of the Contract is for the purchaser to refinance within 5 years.  Accordingly the purchaser agrees to a penalty payment of $??? if they do not refinance by the 5th anniversary of the contract.

However to make this penalty payable at the 5 year point would mean the penalty would need to be taken into account in the client’s serviceability calculations, when they apply for a loan.  Not great.

However, if we add this penalty payment to the payout figure, at completion of the loan, the penalty payment may not effect the purchaser’s serviceability calculations, during the application stage.  Just as the old “early payout penalties” did not have to be included in serviceability calculations.

Check With Your Vendor Finance Specialist Lawyer

This is just one of a number of options being considered by your local VF friendly solicitor ;-)   Please only regard the above as a personal opinion and ensure you get appropriate professional advice on this matter from your solicitor.

Cheers,  Paul

Paul Dobson
Vendor Finance Institute

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