Documente Academic
Documente Profesional
Documente Cultură
Section 1
From the inception of the mortgage broking industry in the late eighties,
there were very few lenders that were enticed into the third party
operation. These days there has been a great shift from the majority of
lenders towards the mortgage broking introduction of loan applications.
There are now many lenders from various sectors of the financial
services industry that are effectively utilising the broker market to
promote their products.
To gather funds for mortgage and credit facilities, the lenders will
generally operate as one of the following:
Securitisers
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Types of lenders
Let us now look at the different types of lenders in the market in which
the Finance/Mortgage Brokers operate.
Banks
Banks fund most of our residential mortgage loans in Australia.
Individual banks determine their own fee structures and policy
guidelines for their many different products. The state of the economy
and market conditions determines the interest rates although the banks
can load their own margins at their discretion.
With competition high, most banks have the same interest rates or there
is very little difference between them. Banks gain their funds from
depositors and shareholders.
Brokers have contracts with most banks some with up to 40 Banks.
This should be checked with your company.
Some of the major bank lenders in Australia are:
Bendigo Bank
ANZ Bank
Bankwest
Westpac
Citibank
Commonwealth/Colonial Bank
ING Bank
St George Bank
Suncorp Bank
Credit Unions
Credit Unions are one of a number of non-bank lenders. Credit Unions
tend to target specific employment groups as specified by their names
e.g. Police and Nurses Credit Union. They are not restricted to these
groups in most cases. To gain a loan with a credit union you must
become a member of that Credit Union by paying a nominal
shareholding of approximately $2$10. When the account is closed the
shareholding is repurchased for the amount paid.
Credit Unions are supervised by the Australian Financial Institutions
Commission (AFIC). Their lending criteria tend to be similar to that of a
bank although their policies in some circumstances may lead to more
flexible lending conditions than those of the banks.
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Credit Unions gain their funds from depositors and shareholders. Interest
on the members deposits is the largest income producing area for the
Credit Unions. The Credit Unions return much of the extra income
generated, after expenses are paid, to members by way of added benefits
such as lower interest rates on lending products, higher interest rates on
deposit products and one of the biggest single attractions of Credit Unions
is that most offer fee free banking to members.
There are over 180 Credit Unions operating in Australia with only a
limited number of them involved in origination. In May 2007 the
National Credit Union Association and its members joined Abacus,
creating a single, united voice for all credit unions and mutual building
societies in Australia.
Building Societies
Like the Credit Unions, Building Societies are also supervised by the
Australian Financial Institutions Commission (AFIC). Building Societies
were first introduced into the market mainly to lend funds for housing.
Building Societies, like Credit Unions, raise their funds predominantly on
individual deposits and investments from their customers. Their lending
criteria are also similar to that of Credit Unions.
With the deregulation of banking, a number of the Building Societies
became banks hence diminishing the number of Building Societies in
existence. A number of Finance/Mortgage Brokers use Building Societies
more particularly for the first homebuyers.
Commonly used Building Societies in Broking in Australia include:
B&E Limited
IMB
The Rock
Newcastle Permanent
Securitised lenders
In the early 1980s the process of securitisation was developed in the
United States. Australia adopted the technique a few years later.
Securitisation is the process of packaging similar assets and selling
Securities (Bonds) against them. The selling of these bonds raises more
funds, which are then lent out by way of mortgages and the cash flow
gained from this are then repackaged and then sold as bonds again. The
cycle repeats itself over and over again.
Mortgages are the most popular area of securitisation however; any
asset that generates an income stream can be securitised such as car
loans and credit card receivables. A special purpose vehicle, either a
trust or a corporate structure often appears on the mortgage
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Advantedge
First Mac
Macquarie Bank
Non-conforming lenders
Most of the Banks also raise funds in this manner and finance some of
their own products as well as products of other lenders and brokers.
Non-conforming lenders
Non-conforming lenders raise their funds mainly by securitisation and as
their name suggests, they lend money to people who do not qualify for
loans from the traditional lending sources or do not conform to the usual
lending criteria. There is usually a higher interest rate charged to reflect
the perceived risk in this type of lending. The interest rate is usually
determined by the LVR.
As a rule non-conforming lenders had only accepted loans from people
who did not qualify for loans through traditional sources because of
things such credit impairment, savings history, financials not completed,
recent employment history, debt consolidation, etc.
The reason for this was that under the former UCCC it may have been
considered unconscionable conduct to place someone into a loan with a
higher interest rate than they may have qualified for at a traditional bank.
However with the introduction of the National Consumer Credit
Protection Act (2009) (NCCP) the onus fits squarely on the shoulders of
the Authorised Credit Representative, the Credit Licence Holder to
ensure the loan offered is not unsuitable for the clients.
Non-conforming loans are generally not covered by Lenders Mortgage
Insurance.
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Liberty
LaTrobe
Pepper
Resimac
Credit impaired
Start-up businesses
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Those who wish to have the ability to roll funds from one project to the
next, such as property developers
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Types of loans
There are many types of finance products offered through banking and
non-banking institutions these days.
The following are the more commonly used types of finance. Some you will
need to know intimately, while others you will need to only be aware of.
Residential Investment
Bridging
Residential Business
Commercial
Personal
Consumer/Chattel Mortgage
Financial Lease
Novated Lease
Operating Lease
Rental Finance
Factoring
2.
Residential mortgages
A residential loan is the most common type of loan that we will deal with.
There are three core products:
1. Standard variable rate loans
As the name implies the interest rate charged on these loans may
move up and down. The rates usually move in line with the Reserve
Bank official interest rates. The Reserve Bank board meets on a
monthly basis and determines the need to move the interest rate up
or down, which is dependent on the performance of the economy.
2. Fixed rate loans
As the name implies the interest rate charged on these loans is fixed
for the term of the contractual period. This is usually set from one
year to 10 years. The borrower will nominate the fixed rate period at
the beginning of the contract and if they should break the contract
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period they will usually be charged a fee. At the end of the fixed rate
period, the borrower will have the option for refixing a new term (at
the discretion of the lender) or the outstanding balance would be
transferred to a standard variable rate.
3. Lines of credit
This type of credit facility works in the same manner as an overdraft.
We will now look at the varying types of residential mortgages:
Bridging finance
Reverse mortgages
Personal loans
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NCCP coverage
Security
Term of loan
Interest
Calculated on the daily
outstanding balance
Repayments
Redraw
Early payout
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NCCP coverage
Security
Term of loan
Interest
Calculated on the daily
outstanding balance
Repayments
Redraw
Early payout
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Bridging finance
This loan is the same as the residential mortgage only that it is used as
a short-term solution to enable the borrower to purchase or construct a
new home before the settlement takes place on his current home. They
are often referred to as a home to home loan. This type of loan is
usually sought by borrowers who are purchasing a new home or building
a home, to enable them to stay in their current property until the new
one has settled or been constructed. The borrower then usually sells
their current property and pays out the bridging finance amount leaving
an end debt.
Let us look at an example:
Current property value
Current mortgage
New property value
=
=
=
$350,000
$150,000
$450,000
The client in this case will want to borrow $450,000 to purchase the
new property while he sells his current property, or in the case of
construction, while it is being built.
Total property values
$800,000
=
=
$615,000
76.9%
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Purpose of loan
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NCCP coverage
Security
Term of loan
Interest
Calculated on the daily
outstanding balance
Repayments
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NCCP coverage
Security
Term of loan
Interest
Calculated on the daily
outstanding balance
Repayments
Redraw
Early payout
Reverse mortgages
From the last available figures, reverse mortgage out standings grew to
$2 billion between 2005 and 2007. Growth in this area will continue to
flourish as more and more cash poor retirees seek alternative funding
for their retirement income. Lending via this type of funding has already
proven very successful in the UK and USA and is currently experiencing
growth in Australia. These loans are designed for the retirees who own
their own home, who are cash flow poor and have not adequately
funded their retirement needs. Retirees use the equity in their homes
and are not restricted on the use of the funds.
A reverse mortgage requires no repayments to be made by the retirees
but they or their beneficiaries can meet the full repayments or interest
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only payments if they wish to keep the debt at the amount borrowed.
The loan will be paid out when the borrower sells the property; either or
both partners wish to move to an aged care facility or passes away. All
fees, charges and interest are added to the loan. Disbursements of the
funds are either via a bulk payment or monthly income streams and its
very important that the clients seek expert advice to ensure their
pensions or other payments are not affected.
Lenders provide calculators to enable the broker to give clients a
printout that shows all things remaining constant, such as what the debt
will be along with the future projected value of the property.
There are some restrictions on these loans including the LVR that is
dependent on the borrowers age. The borrowers age is also taken into
consideration when determining the loan amount available. If there are
joint borrowers then the lender will take into consideration the age of
the younger borrower when assessing the maximum lending amount.
There has been much discussion on the appropriateness of the reverse
mortgage. ASIC has issued a warning to lenders and brokers that they
should take extreme care when considering whether a reverse mortgage
is suitable and appropriate for their clients. You will find that this area
will fall under ASIC regulation in due course to ensure the borrowers
interests are looked after at all times.
There are obvious areas of consideration to be questioned and the main
area of discussion and argument has been in the inheritance factor. The
retirees borrow funds against the value of their home and inevitably the
equity in the home may decrease. This needs to be considered due to
the inheritance planning of the funds prior to taking out the loan. It is
advisable for the borrower to seek the advice of an accountant and/or a
lawyer before making a decision of taking a reverse mortgage.
There are more and more lenders now entering this market as they can
see it is a much-needed product by their aging clients and the large
growth being experienced in this area.
The borrowers sell their home to the lender and lease it back
2.
The borrowers sell their home to the lender and retain possession
of the house. The lender then places a caveat on the property to
protect their interest.
The funds under this scheme are dispersed in the same way as the
reverse Mortgage Scheme above in that the clients either receive a lump
sum or a monthly income stream.
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Background
Governments, the business sector and community organisations
recognise that housing affordability is an issue of significant community
concern. The growing cost of housing is having a serious impact on the
ability of many Australians to meet their financial commitments.
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The Scheme offers annual Incentives for ten years. The two key
elements of the Incentive are:
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Policy Guidelines
These guidelines provide details of the administration of the National
Rental Affordability Scheme to complement the Legislative and
Regulatory Framework. If there is any inconsistency between the
guidelines and the above-mentioned legislation, the legislation prevails
to the extent of the inconsistency.
Participation by charities
Charitable organisations can become involved in the Scheme in a range
of different capacities. They may:
Taxation enquiries
Interested parties with general taxation enquiries about the tax
implications of their involvement in NRAS should visit the ATO website
or contact the Australian Taxation Office on 13 28 66. This call centre
operates from 8am-6pm weekdays (AEST). If a potential applicant or
participant would like specific advice on the tax implications of the NRAS
arrangement they are entering into, they can seek advice from the Tax
Office. Binding advice can be sought in the form of a Private Binding
Ruling or a Product Ruling. The links will provide you with further
information to determine which type of advice is appropriate for your
Source: (http://www.fahcsia.gov.au/sa/housing)
needs.
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having the rentals paid direct from the business or renter into the SMSF,
and
Then the loan repayments being taken directly from the fund.
At this stage we believe there are a few lenders playing in this space
with more considering entering this area due to the large growth and
take-up of the SMSF.
The latest data released states there are around 460,000 Self-Managed
Super Funds in Australia with approximately 1.8 trustees per fund, which
by my reckoning is one very big opportunity awaiting those that choose to
increase their skills, knowledge and qualifications in this area. In addition, it
is noted that only 30% of the 16000 financial planners have the SMSF
qualifications and of those only 10% are actually active in this area, so
once again large opportunities exists for the qualified advisor.
As you would appreciate, funding these types of purchases varies from
lender to lender that play in this space so let us look at one particular
lenders view, guidelines and structures and documentation.
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Residential property
Product
$200,000
Interest Rate
7.46% pa variable
Term
Application Fee
$8
Commercial property
Product
$250,000
Interest Rate
Term
Application Fee
$35
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Application form
Security Deed between the Super Trustee and Property Trustee (Bare
Trust)
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New Dwellings
Non-resident foreign persons need to apply to buy new dwellings in
Australia. Such proposals are normally approved without conditions.
Vacant Land
Non-resident foreign persons need to apply to buy vacant land for
residential development. These proposals are normally approved subject
to conditions (such as, that ongoing construction begins within 24
months).
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Temporary residents
Established (second-hand) dwellings
Temporary residents need to apply if they wish to buy an established
dwelling. Temporary residents may acquire one established dwelling
only and it must be used as their residence (home) in Australia. Such
proposals normally meet with no foreign investment objections subject
to conditions (such as, that the temporary resident sells the property
when it ceases to be their residence).
Temporary residents are not permitted to buy established dwellings as
investment properties.
New dwellings
A 'new dwelling' is a dwelling, which is being purchased directly from the
developer and has not been previously occupied for more than 12
months in total.
Temporary residents need to apply to buy new dwellings in Australia.
Such proposals are normally approved without conditions.
Vacant land
Temporary residents need to apply to buy vacant land for residential
development. These applications are normally approved subject to
conditions (such as, that ongoing construction begins within 24 months).
Policies
Residential Real Estate for redevelopment
All foreign non-residents are required to notify of any proposed acquisition
of established dwellings for redevelopment (that is, to demolish the existing
dwelling and build new dwellings). Proposals for redevelopment are
normally approved subject to the following conditions:
2.
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Acquisitions by individual(s)
Foreign persons are prohibited from acquiring established dwellings for
investment purposes (that is, they cannot be purchased to be used as a
rental or holiday property), irrespective of whether they are temporary
residents in Australia or not.
However temporary residents in Australia can apply to purchase one
established dwelling to use as their residence in Australia. Approval is
usually provided subject to a condition that the temporary resident sell
the dwelling when it ceases to be their residence.
Acquisitions by companies
Proposals by foreign-owned companies to acquire second-hand dwellings
for the purpose of providing housing for their Australian-based staff are
normally approved subject to the following condition:
Vacant land
Proposed acquisitions of vacant land for residential development-are
normally approved subject to development condition(s) imposed under
the FATA.
Acquisitions of single blocks of vacant land (that is, land which is zoned
to permit the construction of no more than one residential dwelling per
block of land) for the purpose of building a single residential dwelling on
each block are normally approved subject to the following condition:
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Acquisitions of other vacant land (not single blocks) for the purpose of
building multiple residential dwellings are normally approved subject to
the following conditions:
at least 50 per cent of the acquisition cost or the current market value of
the land (whichever is higher) must be spent on development.
Once these conditions have been fulfilled, properties acquired under this
category may be rented out, sold to Australian interests or other eligible
purchasers, or retained for the foreign investor's own use.
New dwellings
New dwellings acquired 'off the plan' (before construction commences or
during the construction phase) or after construction is complete are
normally approved where the dwellings:
have not previously been sold (that is, they are purchased from the
developer); and have not been occupied for more than 12 months.
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the proposal must provide for an increase in the housing stock, that is,
an increase in the number of dwellings
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the trustee of a trust estate in which two or more persons, each of whom
is either a natural person not ordinarily resident in Australia or a foreign
corporation, hold an aggregate substantial interest.
Most banks require that 100% of rent received from the property will be
applied to loan repayment.
Remember by doing your own research you leave little room for
error.
Personal loans
Personal loans are commonly sought by borrowers who are asset rich,
income rich but cash flow poor. The uses for personal loan funds may
vary. The approval turn-around time for personal loans is usually much
shorter making them an attractive form of funding.
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Purpose of loan
1.
2.
3.
4.
5.
6.
NCCP coverage
Security
These loans are usually unsecured, but the lender does have the
option to use currently owned vehicles, caveats on properties
etc. as security.
Term of loan
Up to seven years
Interest
Repayments
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Examples
Normal Motor Vehicle Brokerage is between
Normal Plant & Equipment Brokerage is between
2.00 2.80%
2.50 3.00%
$57500
4 years
$23000
$1150 (excluding GST)
$350000
5 years
Nil
$9100 (excluding GST)
The fact that most people seeking this type of financing have other
financial needs will provide the Finance Broker with more opportunities.
Lenders provide the required product and accreditation training along
with the software to enable the Finance Broker to give quotes and lodge
the deal electronically.
It is currently not a requirement for general finance brokers to be
licensed outside of WA; however, it will no doubt be looked at in the
current national regulation process being undertaken. Car yards in
Australia still do not need to be licenced to offer finance. Lenders will be
more open to accepting writers that have undertaken some form of
accreditation training. As we know it is not in anybodys interest for the
Finance Broker to waste the clients time or the lenders time by
submitting deals that do not fit the criteria required by the lender.
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Aircraft
Engineering equipment
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Sale and lease back transactionsthis can be a way of capital raising for
the company.
Furniture is another asset purchase that loses its value very quickly once
installed and no doubt we have all been along to those closing down
sales that produce great bargains for the purchaser but not the seller.
Clients who rent their business premises are normally asked to obtain a
Landlords Waiver or Right of Entry Agreement in order for a lender
to take possession of the goods/chattels that are fixed, in the event of
default by the borrower. Alternatively you may have a truck with a crane
attached and the two items are financed by two different lenders. This
can create problems.
The location where the equipment will be situated needs to be taken into
account as the lender will also need to consider this in the approval
process. It is fair to assume that equipment located in isolated areas will
incur extra costs in the recovery process. Valuers are also faced with
this issue when placing a value on the asset.
The lender will record its interest over the asset on a register noting the
engine, serial, registration numbers and the VIN to assist with the
identification of the asset. This information can also be obtained from
the Register of Encumbered Vehicles (REVS), which is maintained by
each states respective DOCEP government department.
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Chattel Mortgage
Financial lease
Novated lease
Operating lease
Rental finance
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Ownership
At the date of the final payment of the loan title transfers to the
hirer.
Potential clients
Possible tax
benefits and
implications
Payments
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Security
Amount
financed
NCCPA
Early Payouts/
Extra Payments
Interest
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Chattel Mortgage
Preamble
Ownership
Potential clients
Possible tax
benefits and
implications
Payments
Fixed interest and principal payments apply for the term of the
loan.
Clients can choose a loan term of between one and five years.
The GST refund can be paid off the loan to reduce the loan
balance and therefore the interest commitment.
Repayments can be in advance or in arrears.
Security
Amount financed The amount of the loan can be 100% of the security or a lesser
amount if a deposit or trade in is involved.
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NCCPA
Early Payouts/
Extra Payments
Interest
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Finance Lease
A Financial Lease is a contract for business purposes whereby the lessee
(borrower) has the use of the equipment for an agreed period of time
whilst making lease payments to the lessor (financier).
Finance Lease
Purpose of loan
NCCPA coverage
Security
Term of loan
Interest
Lease payments
Finance options
General tax
implications
Early Payouts/
Extra Payments
Ownership
Amount financed
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Term
12 months
50% - 60%
60% - 70%
24 months
40% - 50%
50% - 60%
36 months
30% - 40%
45% - 50%
48 months
20% - 25%
35% - 45%
60 months
15% - 20%
25% - 35%
Lease Escrow
This facility is funded and managed in the same manner as commercial
hire purchase Escrow as described previously.
Novated Lease
This type of lease is a three way lease. This is generally between lender,
employer and employee. The employee signs a lease agreement with a
financier, and then sub leases the goods to the employer. They then
sign a Deed of Novation so that the employer makes the commitment
to pay the lease payments while the employee is employed. If for any
reason the employee is no longer employed by this employer, the Deed
of Novation becomes null and void. The employee then becomes liable
for the lease payments.
A fully maintained Novated lease covers ALL of the costs associated
with the item i.e. Maintenance operating costs such as petrol, tyres,
registration, RAC/NRMA, insurances etc. in the case of cars and all costs
of maintaining other items such as computers and office equipment.
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NCCPA coverage
Security
Term of loan
Interest
Lease payments
Finance options
General tax
implications
Ownership
Potential clients
Benefits to the
employee
Benefits to the
employer
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NCCPA coverage
Security
The contract for this type of loan is a mortgage over the goods
purchased. The document signed by the borrower gives the
lender security by means of an encumbrance on the purchased
goods. If the client defaults on the contract the lender is
entitled to sell the goods to regain the money still owing. The
borrower is liable for any shortfall. In most cases the item
being used for security will need to be registered to enable a
mortgage to be taken.
Term of loan
Up to seven years
Interest
Repayments
Finance options
Early payout
Operating Lease
The Operating Lease is a fully maintained lease generally including all
servicing items and running costs of the goods during the lease term.
Ownership of risk transfers to the lender along with the benefits of the
ownership and this also allows you to reduce your costs by not having to
purchase the fleet / equipment upfront. It also allows you to build in the
maintenance costs and spread them over the period of the lease term.
The most common example of this is Fleet Management Companies such
as Easifleet and companies that lease photocopiers or fax machines
where there is a maintenance component in the contract.
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Operating Lease
Purpose of loan
NCCPA coverage
Security
Term of loan
Interest
Lease payments
Finance options
General tax
implications
The borrower may claim tax deductions from having a lease. The
borrower would claim the repayment as an expense. These
amounts will depend on the ratio of business use to private use.
Benefits
Rental Finance
Rental Finance operates in a similar way to Leasing but the renting
company retains ownership of the equipment.
When capital expenditure is not a business advantage or equipment is
quickly outdated rental finance / lease may be suitable. The lender
retains full ownership of the goods / equipment and they are returned at
the end of the rental period or new terms negotiated.
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Rental Finance
Purpose of loan
NCCPA coverage
Security
Term of loan
Generally 24 36 months.
Interest
Rental payments
Finance options
General tax
implications
Debtor Finance/Factoring
Debtor Finance is a short term finance facility available to all businesses
with debtors who have sufficient credit standing to interest a third party,
such as a finance company, in the purchase and collection of debts owed
to the business, usually with recourse to the business if the debts
remain unpaid (costs vary from between 36% of the value of invoices
purchased and there could also be an establishment fee. Fees are a one
off cost paid at the time the factor financier purchases the invoices. The
borrower assumes the bad risk and there can be an agreed additional
cost.
Funds are injected by use of this facility into the working capital of the
business, thereby improving cash flow, and the administrative time
taken in following up for payment is reduced. The facility operates
through the sale by the business at a discount of the obligations of its
debtors to a third party, known as the factor who assumes the
responsibility for the collection of debt. The amount of discount is
usually charged according to an agreed schedule, which is often
calculated at a rate slightly higher than the overdraft rate, but this will
vary with the size of the debts and the credit rating of the debtors.
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Cash is usually made available within two working days and saves
administrative costs.
Ability to increase sales and profits without the need for extra capital to
finance it.
Debtor Finance is not a loan therefore fixed assets used to support Bank
loans and facilities are not affected.
Retail
Boat dealers are a good source of business and cater for those people
seeking pleasure craft/yachts for personal use.
These types of loans can be financed by way of leasing, commercial hire
purchase or chattel mortgage.
Aircraft finance
There are a limited number of lenders providing funding facilities for
financing aircraft. As with marine finance, this is a specialised area
where funds are available for a small single engine aircraft through to
helicopters and jet aircraft.
Loan arrangements can be made for single owner operators or
companies with a large fleet of aircraft. It is normal for lenders to seek a
30% deposit for this type of funding. However, this will be dependant on
the financial strength of the client.
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Aviation
High-tech sector
trade references.
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The usual maximum LVR for commercial property lending is between 60% to
70% depending on the financial strength and experience of the borrower.
Most commercial developments need to indicate their future viability by
means such as presale of a percentage of the units in unit developments or
presale of blocks of land in land developments. In factory or office
developments they may have to show evidence of pre-construction lease
agreements of prospective tenants to obtain finance approval.
Not all lenders allow brokers to submit commercial property loans as it is
a specialised field and they prefer to handle these matters in-house. As
Commercial Lending requires more expertise in many areas including
reading and understanding financials, we have developed a course to
further your education and knowledge in this area. Please ask your
facilitator or visit our website at www.aamctraining.edu.au for more
information.
Deposit bonds
What are deposit bonds?
Deposit bonds are a financial guarantee in the form of a bond that
allows an upfront deposit to be made on the purchase of a property
without having to use existing funds/cash. Your client may not wish to
outlay cash if funds are tied up in an existing property already or in
other investments.
Bonds cannot be issued for savings plans, rent to buy plans, private or
solicitor finance, and some off-the-plan purchases. Special conditions do
apply.
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Only approved assets may be used to assess the five (5) times equity
rule.
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Section 2
Loan characteristics
Learning outcomes
Upon completion of this section you will be able to:
analyse the loan requirement of your client and apply this knowledge to
the choice of mortgage loan product
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Unregulated
90% LVR
P&I
I/O
P&I
I/O
*Please ensure you check the LVR requirement with the individual lenders.
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Loan purpose
Loan amounts
Term
Repayments
Extra repayments
Redraw facility
Fees
Security
LVR
Regulated 95%
Unregulated 90%
LMI requirements
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Loan amounts
Term
Repayments
Extra repayments
Redraw facility
Fees
Security
LVR
Regulated 95%
Unregulated 90%
LMI requirements
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Loan amounts
Term
Repayments
Extra repayments
Fees
Security
LVR
Regulated 95%
Unregulated 90%
LMI requirements
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Loan amounts These are subject to the individual lenders discretion, but usually
the minimum amount would be $10,000 with no maximum amount
The maximum is dependent on the borrowers ability to repay and
the LVR.
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Term
Fixed period from one to five years. Longer periods are available
from some lenders. Including this period, the total period of the
loan can be written up to 30 years, more commonly 25 years.
Repayments
Extra
repayments
Redraw
Early payout
fees
Fees
Security
LVR
Regulated 95%
Unregulated 90%
LMI
requirements
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Line of credit
This type of loan is basically an overdraft using the home as security.
A limit is set (this is determined by the value of the property and the
ability for the borrower to repay) and the borrower may then deposit
and withdraw from this account staying within the limit. The interest is
calculated on the daily outstanding balance and is debited monthly to
the account. The minimum repayment on the account must therefore be
the interest charged.
The account is usually operated in a way that the borrower deposits
wages (income) to the account and then uses a credit card (up to 55
day interest free) for the monthly purchases. One withdrawal is then
made to pay off the credit card. This keeps the loan account balance as
low as possible for the month, and therefore the interest that has been
calculated throughout the month is on the reduced balance. The
sequence then starts again for the following month.
Loan purpose
Loan amounts
Term
Repayments
Fees
Security
LVR
Regulated 90%
Unregulated 90%
LMI requirements Lenders mortgage insurance is required for loans above 80% LVR.
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Loan amounts
Term
Repayments
Fees
Security
LVR
Regulated 95%
Unregulated 95%
LMI requirements
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Construction loans
Most lenders will finance properties under construction for owner
occupied or investment purposes. Construction loans may be a little
more complex than the standard residential purchase as they require
funding progressively. The lender will make payments to the builder at
various stages of construction.
Lenders will generally require borrowers to use any type of variable rate
loan product until the construction has been completed. At this stage the
borrower can switch to a fixed rate or line of credit type product. This
may incur a switching fee. This should be checked prior to the
application being lodged.
Clients usually purchase a block of land before entering into an
agreement with a registered builder. To secure the block of land, you
would make a loan application (Max LVR 90%) and go to settlement on
the block of land. At the same time it is sensible to request a preapproval for up to the total end value, (costs of Land and House
together max LVR 95%). Therefore, the clients secure the block of
land and then they know they can go shopping for a builder.
Once the clients have found a house they wish to build, in addition to
the normal loan application requirements, you must also supply the
following:
You will need to forward copies of these to the lender and ask for
unconditional approval. The bank will send these documents to the
valuer to make an on completion valuation and ensure the client is
going to have built what has been agreed to in the contract.
The banks insist the client use their agreed own funds first, usually
towards the purchase of the block of land. If the First Home Owners
Grant (FHOG) is being used, this will go to the builder in the first
progress claim. Usually there is four or five progress claims. Once the
builder has completed a stage of construction, they will send an invoice
to the lender & to the client. The client must inspect the construction
and usually advises the lender by signing an authority to authorise the
lender to pay the progress claim, drawn from the loan, to the builder.
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Lock up stage
On completion
In both scenarios our borrowers are first home buyers and they are
receiving the First Home Owners Grant
They have a contract of sale and full plans and specifications from the
builder.
$200,000
$180,000
Total Security
$380,000
$380,000 x 95%
$361,000
$380,000 x 5%
$ 19,000
In this scenario, the borrower would only need to submit one loan
application to cover both the house and land purchase as a package.
They would need to fund a deposit of $19,000 plus costs. (The funds for
costs can come from savings, first home owners grant or gifts.)
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$200,000
Total Security
$200,000
$200,000 x 90%
$180,000
$200,000 x 10%
$ 20,000
$180,000
$180,000
Land
$200,000
$380,000
$380,000 x 95%
$361,000
In this scenario, the borrower would need to submit one loan application
to cover the land principle purchase and would settle the land portion of
the contract. They would be wise at the application stage to apply also
for an approval in principle for the construction of the house. Although
the exact amount is unknown, an approximate figure can be approved
awaiting plans and specifications etc. The borrower would need to fund a
deposit of $20,000 plus costs. (The funds for costs can come from
savings, first home owners grant or gifts) Once the construction is ready
to commence, the land loan would be combined with the cost of the
construction and one loan would emerge.
This scenario demonstrates an excellent way for clients to secure a block
of land, especially when new land is released. This then gives them time
to decide on a house to build.
You will notice the difference in Scenario 2 where to purchase the land
first, then construct the house at a later date, clients will need to save
or have in their account the 10% deposit for the block of land (plus
costs), (5% of the value of the purchase price is still required to be
genuine savings). In Scenario 1, they actually needed 5% (which must
be genuine savings, $19,000) of the total land and house package
deposit to be able to purchase the land and construct the house via one
application.
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Family pledge/equity
Family pledge allows borrowers to access finance for the full property
purchase price, plus a further 10% of the costs involved. To enable this,
an immediate family member provides a limited personal guarantee for
the pledged amount, supported by equity in their existing property.
This type of loan is suited to first home buyers with no deposit, who
have an immediate family member that is willing and able to offer
security support. Its purpose is for purchase or construction of a
residential owner occupied or investment property.
In an environment of increasing home prices and declining affordability,
it is difficult for borrowers to save the required deposit to purchase a
home. The family pledge product allows borrowers to own their own
home sooner by allowing them to borrow the full purchase price plus an
additional 10% to cover costs.
Split facilities
This is not a type of loan, but more the different combination of loans.
Split facilities, as the name implies, allow borrowers to have a portion of
their loan as one type of loan e.g. Standard variable, whilst the other
portion can be another type e.g. Line of Credit.
The reasons for using this type of facility are many. Perhaps the client
wants to fix a portion of their loan to safeguard themselves in the event
of a rise in interest rates. They may wish to have the flexibility of a line
of credit, but they do not want the temptation of retaining a high loan
balance. They can therefore have a portion on line of credit and a
portion on another product.
Using a split facility gives you the benefit of having two or more loan
types with only one ongoing fee (with most lenders).
An example of a typical split could be for a $250,000 loan, the borrower
may decide that they would like to have the convenience of having
money at call and although they only need $220,000 to purchase their
home, they borrow $200,000 at a Standard Variable rate and then have
$50,000 on a line of credit. They could then use the $20,000 required
from the line of credit and have $30,000 available for personal use.
This may include such things as holiday, home improvements,
unexpected household or car repairs etc. The borrower would then have
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the major part of the loan at the lower standard variable rate and would
only be paying interest on the line of credit for the outstanding amount
not the credit limit.
Another popular split is that of having part of the loan standard variable
and part fixed. We learnt in an earlier section that standard variable
rates fluctuated with the economic environment but the fixed rates
remained constant for the term of the fixed rate contract. This gives the
borrower comfort in knowing that if rates rise it will only affect a portion
of their loan.
These combinations of products are extremely popular and brokers
should be very conversant with the various combinations available.
Mortgage offset
The Mortgage Offset account is an option available to certain types of
loans. It can have the same effect as a line of credit whereby the
balance of this account is offset against the loan balance thus saving
interest. This is often attractive for the borrower who still wishes to
operate a savings account to know how much money that they really
have saved. It works simply by linking a standard variable loan to a
standard cheque/savings account.
This means that if a borrower has a loan balance of $100,000 and a
savings account balance in a 100% offset account of $10,000 the
borrower will only be charged interest on $90,000 being the difference
between the two accounts. Some lenders will only allow part of the
savings balance to be offset against the loan balance. This type of loan
can work as effectively as Lines of Credit without the borrower feeling
that they have no money in the bank. Loan repayments must be made
on the full approved loan amount.
These offset accounts can be used for both owner occupier loans as well
as investment loans and can be tax effective in the way that the interest
that the borrower would normally earn on the savings account would be
classed as income and taxed accordingly. In this instance, there is no
interest earned on the offset account.
Note: Post March 2004, this product will be deemed a deposit product
and as such will be captured under legislation applicable to ASIC Public
Statement 146 (PS 146). In essence this means you cannot give advice
on this product unless you are licensed under the applicable code.
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Professional packages
These are usually packages put together by individual lenders to cater for
specific high net worth clients. They include combinations of loan types,
loan peripherals such as credit cards and accounts at favourable rates and
offers of other bank services. Eligible applicants may be categorised by
profession, income levels, and increasingly the level of borrowings.
The products used are normally a combination standard variable/
honeymoon rate products, mortgage offset or line of credit. The combined
total of the loan package decides the discounts applicable.
These products are generally discounted by around 0.5%1% and
usually have discounted or nil ongoing fees. A compulsory favourable
Credit Card may also form part of this package. Other features include
fee free banking and access to Financial Planners and Private Banking on
favourable conditions for an annual fee.
These packages vary from lender to lender.
Interest only
This is used mainly for investment purpose lending, e.g. purchasing a rental
property. The borrower may wish to pay interest only as this is more
advantageous for tax deductibility. This is normally available for most loan
types, standard variable, fixed rate loans and Equity Lines of Credit.
Interest in advance
This is also used for investment lending purposes where a borrower may
wish to pay up to 12 months interest in advance for the following tax
year to enable them to claim the interest in the current tax year. These
payments can only be made in June each year, for the following tax year
and claimable in year of payment. The rate is fixed for the next twelve
month period and is usually a discounted rate.
Bridging finance
This is short-term finance provided usually when a client is transferring
from one home to another and the new home is settling prior to the
settlement of the current home. The contract is usually written as a
standard variable loan and is reviewed after 12 months. The repayments
are usually interest only and are capitalised (added to the loan balance).
Calculating the loan amount and interest component of these loans is quite
different to standard loans and brokers are advised to check thoroughly
each lenders calculation method before writing these loans. Commission is
paid on the End Debt of the bridging loan after the original property is
settled and the bridging component of the loan is finalised.
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Lo-doc/No-doc loans
This is the term to describe loan facilities where the lending institutions
require minimal or no documentation to verify income for loan
applicants, who are self-employed. There are usually LVR limitations on
these loans but the main issue is that in most cases the client selfcertifies their income levels or the level of loan repayment they believe
they can afford for the loan they wish to borrow. In most cases they
sign a statement (or obtain one from their accountant) that they earn a
certain level of income or that they can maintain repayments at a
certain level and supply BAS statements to support their loan
application.
The reason for these types of loans can be many and varied such
as the clients financials may not be prepared yet or they may
have only been in business for a short period of time so there are
no financials available. The lenders are taking a commercial risk
that the clients understand their commitment and will meet their
repayments. They mitigate the risks by limiting the LVR or relying on
the clients previous good repayment history and the value of the
security property. In the case of non-conforming lenders they also
usually charge a higher interest rate to mitigate risk.
Feature
Max LVR
Loan Purpose
Credit History
Repayment Type
Other
Documentation
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Fees
With all loan types there are going to be fees attached. The following are
some of the fees that you will need to explain to your borrower. Actual
fees and calculations will be discussed in Section 9.
Ongoing fees
These fees are charged on a monthly basis i.e. added to the loan balance.
These fees are around $8.00$12.00 per month. It is advisable to take this
into consideration when comparing product costs over a particular term of
the loan. These fees can change throughout the life of the loan. Some bank
products opt for a once a year fee which at first seem expensive but they are
often offset by other features such as no transaction fees or lower rates.
These are mainly evident in Professional packages.
Establishment fees
These one off fees are charged at the inception of the loan. Some lenders
will discount or waive the establishment fee to entice potential customers.
Valuation fees
This is a one off fee that is often included in the lenders establishment
fee. If more than one property is required to be valued, a further fee is
usually required. Each lenders fee may differ and therefore must be
verified. An indicative figure would be $250$300.
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Title search
This is a one off payment required to be paid for the search of title to
the land titles office.
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The more products a client has with a bank the more reluctant a client is
to move elsewhere. It is always wise to market all the products you can
while you are involved to ensure the client will stay with you in the
future. The time the clients are writing the loan is the prime time to
establish all the other products and bed them down with a total range of
products.
This highlights your expertise and your interest in giving them a total
package. This in turn encourages the client to remain loyal to the person
who solved all their finance issues, not just their loan.
The broker should always be concerned with putting a protective screen
around their clients and the sale of as many products as possible is an
excellent way to achieve goals.
Credit cards
Most banks offer credit cards as a part of their total lending packages.
There are a number of home loan products that will include fee free
credit cards in the package. Most credit cards will have an interest free
period for up to 40 or 55 days.
The calculation of these interest free periods begins from the first day of
the billing cycle. For instance, if a billing cycle on the credit card begins
on the seventh day of the month, then anything purchased on that card
on that day will give clients the full benefit of the interest free period.
The cycle will then continue through to the 6th day of the next month.
At this stage a statement will be issued giving them (X) amount of days
to pay the account before incurring interest.
With a forty day interest free period, then the account is likely to be due for
payment nine days after the end of the monthly cycle, hence giving them the
31 days of the month plus nine days (total 40) to pay the account.
The usual operation of a credit card is that the interest free period is
applicable to purchases not to cash advances. Cash advances incur
interest charges immediately.
We should be able to advise our clients of the operation of the credit
cards attached to their lending facilities. In addition to this, we should
know if they have interest free periods available. It is also very
important for us to know what interest rate the client will be charged if
they do not clear their credit card balance in the required time or make
cash withdrawals.
Some banks will only offer debit cards. These cards will still be able to
be operated through the credit card networks, such as Visa. The cards
will have this branding stamped on them. The difference is that there is
no overdraft amount. The client can only draw upon the funds that they
have in their account. If a credit card does not come in the total loan
package, it is likely that the bank will charge an annual fee.
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This will differ between banks and this fee should be advised to your
client during the course of your presentation.
Cheque/savings accounts
As with the credit cards facility, a number of lenders will offer a fee free
cheque/savings account into the loan package. The individual banks will
have their own schedule of fees for each of the accounts. As an added
service to your clients, it is advisable to have brochures of fees and
charges for them. The clients would also be able to get this information
from the help lines, so have a list of these numbers available.
Term deposits
This type of account is for investors and is not something that we need
to discuss with our clients. This investment account allows clients to
deposit amounts of money into the bank at a higher interest rate than
the normal saving accounts as they are agreeing to have their money
invested for a certain period of time. These rates change regularly but
once the client is locked into a specific term, the interest rate would
remain constant for that period of time.
Financial planning
This service is generally offered by most banks and in particular with
some, is a major area of the bank. Again, you are able to advise your
clients that the bank or whoever you have an arrangement with, offer
this service and suggest that it would be in their best interest to discuss
their needs in this area with these financial planners. However you
cannot force them to follow your suggestion.
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Life insurance
Term life insurance
This is the simplest form of life insurance. It gives your dependents a
lump sum when you die. Like house or car insurance a premium is paid
each year for annual protection.
The policy has no savings value and unless the premium is paid each
year there is no further cover, and the policy will lapse.
The amount of insurance required will vary for each household
depending on the size of mortgage, other debts, provisions for children
and future income needs.
Having decided the amount of insurance required it is necessary to check
whether life insurance is provided as a part of your superannuation fund.
For example only, experts may recommend life cover of about 10-15 times
pre-tax income is required for both income earners.
If there have been no nominated beneficiaries, the insurer will pay the
agreed insured amount to your estate.
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Trauma insurance
In addition to Life or Life and TPD insurance you may apply for Trauma
insurance. The optional benefit is available for an additional premium.
This benefit eases the financial burden of the costs associated with
recovering from a medical crisis. The insurer will provide a lump sum
payment to you if you are diagnosed with a range of listed trauma
events under their policy.
One must remember due to medical advancements these days most
people survive the traumas and the average age for claims for this
policy is between 45-55 years old.
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Duty of Care
Under the Duty of Care a broker has a legal obligation to advise clients
of the availability of the risk management products to protect
themselves against unforseen events as described above. The courts in
Australia deem a broker to be a professional. By not raising the need for
financial protection, a broker can be judged negligent under the Duty of
Care.
Gearing
In this section, you will have a very basic look at gearing and when it is
used. Brokers without the proper qualifications are not allowed to give
any advice to their borrowers about gearing. It is pertinent to advise
your client of this and suggest that he seek advice from their accountant
or suitably qualified professional.
There are three types of gearing:
Negative
Neutral
Positive
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$300,000
$225,000
Income:
PAYG income
Rental income @ $250pw
Total income
$80,000
$13,000
$ 1,105
$15,750
$ 7,000
$ 2,000
$ 1,500
$93,000
Taxable income
$27,355
$65,645
The outcome from this scenario is that without the rental property, the
client would be earning $80,000 and would pay $23,136 in tax. This
would give him a net income of $56,864.
With purchasing the property the client would have a gross income of
$65,645; he would pay $15,750 in repayments, $1,105 in management
fees and $1,500 in maintenance costs and $2,000 in land and water rates.
He would pay $16,896 in tax. Net income would therefore be $48,749.
This example shows that through negative gearing our client is able to
purchase an investment property with the net difference to cash in his
pocket being approximately $156.00 per week.
This is a very basic example and is used only for the purpose of
demonstration. You must advise your client that they should seek their
accountants advice prior to making any decisions on Negative Gearing.
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Assessment
Now you have finished this section, Loan Applications MCQ 1 is to be
completed.
These multiple choice questions are found in the Online Content and
Assessments section of the AAMC Member Area. Once you have
completed each assessment, you will be immediately advised of your
competence via an automated email. Once you are successful you may
continue on to the next section.
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