Vendor Finance – a How To wind it up please?

Hi everybody,

It's my turn to ask a question, so I hope you can help.

We have vendor finance issue: You may remember a post I made a couple of years ago about this. I've been merrily running my own business for the last 18 months, helping people add value to their own properties while getting to this point, and now that it's time to buy the mortgage out on our own property, and take it to our own bank, the bank is being difficult about

a) 5% genuine savings (with some banks only)
and/or
b) documentation showing where the deposit has come from.

The property was bought for $258,000 a couple of years ago with the help of my father, in my father's name, and has since had a ton of renovations done to it at our expense, bringing the value to between $290-300K.

I paid the original deposit, but due to income at the time (new baby, me at home, husband doing and apprenticeship), we could not put the house in our own name, hence the agreement. That's all changed now. My parents are moving to the UK permanently, and we want to take the pressure off family having to manage the house and take advantage of the boost to the FHOG (understandable, really!).

In the two years, we have paid down the original mortgage to approximately $246,000, which is all that Dad really requires to be paid out, plus his legal costs, which I am happy to do.

In theory, this means that we will have equity in the property of between $44,000-$54,000. Not a small amount! The plan now is to borrow a total of $261,000 (90% of $290,000) and combine the extra $15,000 we borrow over the $246K with the (by the time this goes through) $10,500 FHOG in order to complete some final work which will bring the value up to around $320,000, giving total equity of around $60K all up.

BUT, we never really got a proper vendor finance arrangement written out at the start, because back then we didn't know where to get one to work from (actually, I still don't, which is frustrating). It made sense with everything going on at the time, just trying to get a roof over our heads, not knowing what the renovations would make the property worth over the originally-planned 5 year timeframe (with a GEC in between…) to just worry about minimising the costs to Dad when the time came to buy it out, which turns out to be now… (Hey, we did well to get to this stage in two years and not five!)

It was a stupid thing to leave off, in hindsight, but most people will do anything to avoid themselves, their husband and a new baby from living with their parents!

Now we're trying to work out how to show our "deposit" (in the form of equity) is there for the benefit of the bank.

To cap it all, my broker is totally confused…

Does it require two contracts (one for the bank at $300,000 and one for the family at $246,000, which is all that is required to pay out the other mortgage) to be written up and a vendor finance agreement as well? Something to declare that a certain amount has been paid and the rest of the equity is there like a form of equity share loan?

We need to extract at least 90% LVR and cover the other mortgage for this to work properly. I will take just the $246,000 if I find I absolutely have to, but it won't be ideal because it will preclude us finishing the work we need to do on the house (re-cladding, weatherproofing and guttering – good for insulation and appearances!) and thus stop us building in further equity.

The help of someone with experience of the handover stage of a vendor finance agreement would be greatly appreciated at this point as I know the theory, but I know a lot more about design and increasing value through its use.

Thanks and regards,