CertIVFMB LearningGuideV2 Mod2 S1-2

FNS40811 Certificate IV in Finance & Mortgage Broking
Section 1
Lenders and loan types

Learning outcomes
Upon completion of this section you will be able to:
identify various types of lending institutions and the similarities and

differences between them
understand their various roles in the industry
identify the different types of loan types available in the market
analyse the loan requirement of your client.
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:
Deposit taking institutions (DTIs)
Securitisers
Private mortgage funders
Deposit taking institutions raise their funds by utilising deposits from

their clients or members. These are known as Authorised DTIs. These
corporations are authorised under the Banking Act (1959) to operate in
their current manner. These entities include banks, building societies
and credit unions. Australian Prudential Regulatory Authority (APRA)
sets, maintains and enforces the standards under which these lenders
operate. APRA plays an important role to ensure that the rules,
regulations & standards are maintained within the lending institutions
that the brokers operate and submit loan applications.
Securitisers and Private Mortgage Funders will be discussed later in the
section.
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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
Homeside Lending subsidiary of NAB
National Australia 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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documentation associated with a securitised home loan as the

mortgagor rather than the name of the originator from whom the
product was purchased. Special note of this should be made and
borrowers informed.
Securitised lenders, as distinct from banks, do not have to have 10%
capital requirement lodged with the Reserve Bank. However, because of
this they have stronger auditing requirements. All securitised loans must
be approved by and have Lenders Mortgage Insurance. Most securitised
lenders will not charge the borrower this premium until the borrowing
exceeds a loan to value ratio (LVR) of 80%.
Some Securitised lenders used in Australia include:
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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A number of non-conforming lenders will charge deferred establishment

fees. This means that if a loan is paid out within a certain period of time,
usually within the first three years, a fee will be charged. This fee is usually
highest in the first year and lessens throughout the term. These amounts
can be quite substantial but are stated in the contract. This type of finance
is usually only short term as the borrower will often seek traditional funding
once they have increased their equity in the home, proven their ability to
repay a loan, stability in their employment can be confirmed etc.
Some of the more prominent non-conforming lenders are:
Liberty
LaTrobe
Pepper
Resimac
The availability of non-conforming home loans may include the following

categories:
Credit impaired
Self-employed for less than two years
Start-up businesses
Inability to confirm stable income
Retired or elderly borrower
Private mortgage lenders

Private mortgage companies are not used as much as they were prior to
the introduction of a number of new non-bank lenders and onerous
legislation introduced in most states to control the industry.
Private mortgages are non-regulated loans. Most of these loans are arranged
by accountants and solicitors and specialised Finance/ Mortgage Brokers.
The funds raised for Private Mortgage Lending are gained from individual
investors making the funds available and a registered first mortgage is
taken by this investor over residential properties. The maximum LVR
generally is no greater than 66.6%.
The interest rate charged for these types of loans is generally quite
highapproximately 2%3% higher than the standard variable rate.
The applicants who this type of lending attracts are:
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Borrowers that are unable to secure bank or standard loans
Short term borrowers
Those requiring a speedy process
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 Owner Occupied
Residential Investment
Bridging
Residential Business
Commercial
Personal
Commercial Hire Purchase
Consumer/Chattel Mortgage
Financial Lease
Novated Lease
Operating Lease
Rental Finance
Commercial Property/Industrial finance
Factoring
These loans may be classed in two categories according to the National

Consumer Credit Protection Act (NCCP):
1.
Regulated (i.e. covered by the NCCP)
2.
Non-regulated (i.e. not covered by the NCCP)
This is further outlined in the section pertaining to legislation.
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:
Owner occupier loans
Residential investment loans
Bridging finance
Reverse mortgages
Personal loans
Real estate residential owner occupier mortgage

Purpose of loan
1. Purchase existing residential owner/occupied property

2. Construction of a residential owner/occupied property
3. Refinance a current residential mortgage
4. Debt consolidation or Home Improvements
5. Holiday
6. Personal requirements
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Loan to value ratio

(LVR).
These may vary from lender to lender. You will need to

check with each particular institution.
NCCP coverage
As this loan is purely for domestic purposes, it is covered

under the National Consumer Credit Protection Act
(NCCP) (i.e. it is a regulated loan.)
Security
Registered Mortgage over a property. The contract for

this type of loan is an accepted letter of offer and
executed mortgage documents. This means that the client
has given the lender security by means of an
encumbrance on his property. If the client defaults on the
contract, the lender is entitled to sell the property to
regain the money still owing. Properties suitable for
mortgage security would be residential homes, residential
home and land packages, strata titled units.
Term of loan
The loan term may vary from one year to a maximum of

40 years (subject to lenders criteria).
Interest
Calculated on the daily
outstanding balance
The interest can be calculated as either:

Fixed rate (i.e. it remains constant, along with the
repayment amount, for the fixed term of the loan).
Fixed rates are usually for terms of one to five years.
Variable (i.e. the rate may be reviewed on a regular
basis and adjusted according to the banks current
rates).
Repayments
Repayments can usually be made weekly, fortnightly or

monthly. There are products available that make interest
only payments available.
Redraw
Available on most loan products except fixed rate

products.
Early payout
Allowed, although there may be some fees. Fixed rate

loans may attract additional fees due to the original cost
of funds.
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Real estate residential investment mortgage

This loan is the same as the residential mortgage only that it is used for
investment purposes and is now considered a regulated loan under the
NCCP.
Purpose of loan
1. Purchase existing real estate residential property for

investment
2. Construction of a real estate residential investment
property
3. Refinance a current real estate residential investment
mortgage
4. Personal debt consolidation or improvements to real
estate residential investment property
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Loan to value ratio

(LVR).

NCCP coverage
Regulatory changes from July 1st 2010 now include Real

Estate residential property investment loans as regulated
and therefore mortgagors and guarantors have
protection under the NCCP Act (2009)
Security
Registered mortgage over a property. The contract for

this type of loan is a signed accepted letter of offer and
executed mortgage documents. This means that the
client has given the lender security by means of an
encumbrance on his property. If the client defaults on
the contract, the lender is entitled to sell the property to
regain the money still owing. Properties suitable for
mortgage security would be investment or residential
homes, including house and land packages and strata
titled units.
Term of loan

Interest
outstanding balance

Interest only repayments can be negotiated on most
fixed rate contracts.
Variable (i.e. the rate can be reviewed on a regular
rates).
Repayments

Redraw
Available on most loan products, except fixed rate

products.
Early payout

of funds.
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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
Loan required = $150,000 (existing loan) & $450,000 (new loan)

plus fees, lets say $15,000
Total loan
LVR
=
=
$615,000
76.9%
The bridging finance amount would be $450,000 plus the fees of

$15,000 = $465,000.
The original loan would remain the same as it is now. When the
current house is sold, the amount of $350,000 or thereabouts
(value of current house), would be paid off the bridging loan and an
end debt of $265,000 would remain.
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Purpose of loan
1. Purchase existing residential owner

occupied/investment property
2. Construction of a residential owner
occupied/investment property
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Loan to value ratio

(LVR).

NCCP coverage
The purpose of the loan would determine if the loan was

to be regulated or non-regulated.
Security
Registered Mortgage over a property. The contract for

this type of loan is a signed accepted letter of offer and
regain the money still owing to them. Properties suitable
for mortgage security would be investment or residential
homes, including house and land packages and strata
titled units.
Term of loan
The loan term may vary from lender to lender, but it is

usually to a maximum of one year. At the end of this
period, the lender will review the status.
Interest
outstanding balance
The interest is calculated at a variable rate on the daily

outstanding balance.
Repayments
The payments (interest only) are usually added to the

loan balance (capitalised) if there is enough equity in the
property. It is usually a stipulation of loan approval that
there is enough equity in the two properties to cover
capitalised interest for at least six months. If the
borrower wishes to make repayments, these may usually
be made weekly, fortnightly or monthly.
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Residential business loan

This loan is the same as the residential mortgage only that it is used for
business purposes. The business operator is able to utilise the equity in
the residential property for expansion or to purchase a new business.
Purpose of loan
1. Purchase equipment or an investment

2. Purchase a new business
3. Expand an existing business
4. Inject funds into the cash flow of an existing business
5. Purchase shares or other investment
Loan to value ratio

(LVR).

NCCP coverage
As this loan is purely for business purposes, it is not

covered under the National Consumer Credit Protection
Act (NCCP) (i.e. it is a non-regulated loan).
Security
Registered mortgage over a property. The contract for

this type of loan is an accepted letter of offer and
regain the money still owing to them. Properties suitable
for mortgage security would be residential homes,
residential home and land packages, strata titled units.
Term of loan

Interest
outstanding balance

Variable (i.e. the rate may be reviewed on a regular
rates).
Repayments

Redraw
Available on most loan products, except fixed rate

products.
Early payout

of funds.
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.
Home reversion scheme

These types of schemes operate in two different ways:
1.
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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Shared appreciation mortgage

The borrowers give up right to part of the future growth in the security
property in return for a discounted interest rate. This type of lending is
not well used compared to the Reverse Mortgage lending products.
The National Rental Affordability Scheme

(NRAS)
The National Rental Affordability Scheme (NRAS) is a long-term
commitment by the Australian Government in partnership with the
states and territories, to invest in affordable rental housing.
The Scheme, which commenced in 2008, aims to address the shortage
of affordable rental housing by offering financial incentives to the
business sector and community organisations to build and rent dwellings
to low and moderate-income households at a rate that is at least 20 per
cent below the prevailing market rates. NRAS aims to:
increase the supply of new affordable rental housing
reduce rental costs for low and moderate income households
encourage large-scale investment and innovative delivery of affordable

housing.
The Australian Government is committed to stimulating the construction

of 50,000 high quality homes and apartments, providing affordable
private rental properties for Australians and their families.
The National Rental Affordability Scheme (NRAS) is an Australian
Government initiative to stimulate the supply of 50,000 new affordable
rental dwellings. Successful NRAS applicants are eligible to receive an
Incentive for each approved dwelling where they are rented to eligible
low and moderate-income households at a rate that is at least 20 per
cent below the prevailing market rate.
Potential investors in investment vehicles involving the NRAS should
note that the allocation or reserved allocation of NRAS Incentives does
not constitute Government endorsement of the development proposal as
an investment opportunity.
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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Under NRAS, the Australian Government is providing Incentives to:
increase the supply of affordable rental dwellings;
reduce rental costs for low to moderate income households; and
encourage large-scale investment and innovative delivery of affordable

housing.
The Scheme offers annual Incentives for ten years. The two key
elements of the Incentive are:
A Commonwealth Government Incentive currently of $7,143 per dwelling

per year as a refundable tax offset or payment; and
A State or Territory Government Incentive currently of $2,381 per

dwelling per year in direct or in kind financial support.
So potentially this could equate to $9,524 (CPI Indexed) Tax Free

Incentive per property, per year.
NRAS is designed to pool significant resources from a range of

participants including financial institutions, non-profit organisations and
developers which, when combined with the Incentives from the Scheme,
will increase the supply of lower-rent housing. These resources could
include loans; equity investments; capital grants by Commonwealth,
State and Territory or Local Governments; donations by charities; free
or discounted land by churches; or contributions by developers in
accordance with planning requirements.
The tenant eligibility criteria ensure the Scheme is open to a range of
household types on low and moderate incomes.
Implementation and administration of NRAS

The Department of Families, Housing, Community Services and
Indigenous Affairs (FaHCSIA) is responsible for the management of
NRAS, in consultation with the Australian Taxation Office. The
Commonwealth is working with State and Territory Governments,
investors and not-for-profit housing providers in the ongoing
management of NRAS, which commenced on 1 July 2008.
Legislation, regulations & guidelines

The legislative framework for the Scheme is provided through the
National Rental Affordability Scheme Act 2008, the National Rental
Affordability Scheme (Consequential Amendments) Act 2008 and the
National Rental Affordability Scheme Regulations.
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National Rental Affordability Scheme Act 2008
National Rental Affordability Scheme (Consequential Amendments Bill)

Act 2008
National Rental Affordability Scheme Regulations
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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.
National Rental Affordability Scheme Policy Guidelines (source from

http://www.fahcsia.gov.au/sa/housing/)
Participation by charities
Charitable organisations can become involved in the Scheme in a range
of different capacities. They may:
be contracted by investors to provide tenancy and property management

services for participating NRAS dwellings;
team up with other partners in joint ventures or consortia arrangements

to construct and manage new dwellings; or
apply for NRAS incentives to help construct and manage dwellings

themselves.
The Australian Government's Department of the Treasury has advised

the High Court Word Investments decision determined that where an
organisation raised funds exclusively for a charitable purpose, the fact
that it did so through a commercial enterprise did not preclude it from
being a charity. The Department has been advised that the High Court
Word Investments decision now provides further certainty for charitable
organisations participating in NRAS. Treasury has confirmed that the
Word Investments decision replaces the need for an extension of the
temporary safety net that was put in place to provide certainty that
charitable Community Housing Organisations will retain their charitable
status if participating in NRAS.
The Australian Taxation Office can provide information and clarification
on your charitable status in relation to NRAS. For more information visit
theAustralian Tax Office website.
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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Self-Managed Super Funds

Traditionally Finance Brokers have funded their clients borrowings for
Properties (Residential and/or Commercial) for Investment or Business
purposes via stand-alone or structured lending. Whilst this has assisted
many investors and business owners in obtaining their respective
properties, the way of funding and structuring these types of loans has
changed. Self-Managed Superannuation Funds are now able to borrow
to assist with the purchase of these properties.
At this stage of the journey it would be just pure folly for Finance
Brokers to ignore this type of funding arrangements. It should be
mentioned to all clients that there are other ways of funding such
purchases, because to ignore may see legal action being instigated
against the Finance Broker. Why, you may be asking yourself? The
simple fact is there may be many more investment benefits and taxation
strategies for the clients to fund via their current or yet to be formed
Self-Managed Super fund.
Whilst this type of lending strategy may sound exciting there are also
pitfalls that have to be observed and hence you must ensure that the
clients are referred to a qualified advisor who operates in this area.
AAMC Training Group offers the full training course for this subject
matter so we will now look at some of the benefits and pitfalls worth
noting, notwithstanding it is just a few and not extensive..
According to the latest ATO statistics for SMSFs, real property makes up
15% of the sectors assets. This is twice the property weighting for
regular super funds where only about 7% is invested into real property.
With residential property already making up one quarter of SMSF real
property assets, the ATO said trustees should avoid transferring
residential property to a fund unless it is income generating and
effectively a business asset with proper arms length arrangements in
place.
The only real estate you can transfer into your SMSF is business real
property. You cannot transfer a residential investment into your SMSF.
You also cannot transfer a property that has both business and nonbusiness uses.
Before you transfer a business real property into your SMSF, make sure
you understand and comply with the super laws concerning the property
transfer, both before and after the event. The real estate must be
business real property both at the time and after it is transferred into
the SMSF,
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According to the ATO, transfers become complicated if the property

transfer is done off-market as the onus is on the trustee to ensure the
arrangement is on commercial terms.
You must have a legally binding lease between your SMSF and your
business. If you do not have a lease in place you will be breaching the
super laws. The lease must be on arms length terms at market rent,
For example, if the rent is below market it could be viewed that the
SMSF is giving an advantage to the tenant at the expense of the fund
members but if it is above the market it could be viewed as being an
attempt to circumvent the excess contributions tax, they explained.
Illustrating the ATOs concern about property investments into SMSFs, they
expressly cautioned that capital improvements should not be done.
There are also heavy penalties for those trustees that make
contributions in excess of the allowable yearly contributions amounts
and sadly this is one major area of the breaches and has been a very
expensive lesson for many.
There may be taxation advantages when the client reaches age 60 in
regard to capital gains tax and also other benefits from:
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
Investment Property Loan
Minimum Loan Amount
$200,000
Interest Rate
7.46% pa variable
Term
Maximum 30 years with up to 10 years interest

only available
Application Fee
$1,500 flat fee
Monthly Service Fee
$8
Loan to value ratio
80% with corporate trustee or 72% with

personal trustees
Estimated solicitors costs to

prepare loan documentation
$1,430 inc GST
Commercial property
Product
Bank Bill Business Loan
Minimum Loan Amount
$250,000
Interest Rate
8.25% pa variable Indicative - fixed rates

available upon request
Term
Maximum 15 years with up to 10 years interest

only available
Application Fee
$1,600 flat fee
Monthly Service Fee
$35
Loan to value ratio
65% with corporate trustee or 58.5% with

personal trustees
Estimated solicitors costs to

prepare loan documentation
$2,200 inc GST
Serviceability is calculated at 1.5 times interest cover using the rental

income from the subject property and past / future contributions. If
serviceability is not met from these sources then we can look at the
customers whole situation.
In order to proceed with an application for SMSF lending, the customer
is required to provide the following documentation:
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Application form
Undertaking to pay solicitor's cost
Security Deed between the Super Trustee and Property Trustee (Bare
Trust)
Offer & Acceptance
Superannuation Trust Deed
Company searches for both Property Trustee and Super Trustee
A statement of advice from a financial planner or a written advice from

an accountant is required from an RG146 accredited financial
planner/accountant, which will certify that the appropriate strategy of the
SMSF is to invest in the purchase of the property.
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Please note the important different lending requirements for

Corporate Trustees and Personal Trustees.
It would be fair to say that a lender would consider a Corporate Trustee
(Qualified Investment Advisor) has more business and investment
acumen than a Personal Trustee (normally Mum and Dad), so therefore
the greater the loan.
Should a fund have a personal trustee and your clients are seeking a
higher LVR, then they will need to consult with their accountant or
another authorised trusted advisor who will get the paper work
undertaken via the respective professional.
Hopefully the above overviews has been of assistance for you in gaining
a brief knowledge and understanding of the funding channels where
clients can avail themselves of the benefits of utilising their SMSF to
their own advantage.
Please also note that none of this material can be considered as advice
so you must consult a qualified professional and/or inform your clients
to do the same. This material is stated for general information only as
we do not know your personal circumstances and none of the above
information can be relied upon as advice.
Non-resident lending (FIRB)

Housing loan applicants do not have to be citizens of Australia, however
to purchase residential property in Australia there are certain guidelines
that have to be met.
The governments approach to the Foreign Investment Policy is to
encourage investment consistent with community interests. In
recognition of the contribution that foreign investment has made and
continues to make to the development of Australia, the general stance
of policy is to welcome foreign investment.
The government recognises community concerns about foreign
ownership of Australian assets. One of the objectives of the
governments foreign investment policy is to balance these concerns
against the strong economic benefits to Australia that arise from foreign
investment.
The foreign investment policy provides for government scrutiny of many
proposed foreign purchases of Australian Business and properties.
The Government has the power under the Foreign Acquisitions and
Takeovers Act 1975 (the Act) to block proposals that are determined to
be contrary to the national interest. The Act also provides legislative
backing for ensuring compliance with the policy.
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By far the largest number of foreign investment proposals involves the

purchase of real estate. The government seeks to ensure that foreign
investment in residential real estate increases the supply of residences
and is not speculative in nature. The governments foreign investment
policy, therefore, seeks to channel foreign investment in the housing
sector into activity that directly increases the supply of new housing (i.e.
new developments house and land, home units, town houses, etc.) and
brings benefits to the local building industry and their suppliers.
In short the Foreign Investment Review Board will approve applications
for real estate purchases as detailed below:
Foreign non-residents or short term visa holders can invest in Australian
real estate only if that investment adds to the housing stock. This
generally occurs by acquiring new dwellings, off-the-plan properties
under construction or yet to be built, or vacant land for development.
Established (Second-Hand) Dwellings

Non-resident foreign persons cannot buy established dwellings as
investment properties or as homes.
Foreign companies with a substantial Australian business, acquiring
second-hand dwellings for the purpose of providing housing for their
Australian-based staff normally meet with no objections subject to the
condition, the company undertakes to sell the property if it is expected
to remain vacant for six months or more. In remote and rural locations
foreign companies may rent out dwellings acquired under this category
only where they are unable to sell the property.
Whether a company is eligible, and the number of properties it may
acquire under this category, will depend upon the scope of the foreign
company's operations and assets in Australia.
Foreign companies would not be eligible under this category where the
property would represent a significant proportion of its Australian assets.
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:
the existing residence, once purchased, cannot be rented out prior to

demolition
the existing dwelling must be demolished and continuous substantial

construction of the new dwelling(s) must commence within 24 months.
Redevelopment, which does not include refurbishing an existing

dwelling, can be done in the following two ways:
1.
Replace a habitable dwelling with multiple dwellings

A redevelopment proposal is normally approved where an existing
habitable dwelling is demolished and replaced with multiple
dwellings (that is, more dwellings can be built than will be
demolished)
2.
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Replace a derelict or uninhabitable dwelling with a new one
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A redevelopment proposal is normally approved where it can be

shown that the existing dwelling is at the end of its economic life
(that is, derelict or uninhabitable)
To demonstrate that the dwelling is derelict or uninhabitable, a valuation
of the existing structure(s) by a licensed valuer and/or a builders report
is required. Photographs and other forms of evidence, including council
development approval, may also be required
Once these conditions have been fulfilled, the new dwellings that have
been constructed may be rented out, sold to Australian interests or
other eligible purchasers, or retained for the foreign investor's own use.
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:
the company undertakes to sell or rent the property if it is expected to

remain vacant for six months or more.
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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continuous substantial construction must commence within 24

months.
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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:
continuous substantial construction must commence within 24

months; and
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.
There are no restrictions on the number of such dwellings in a new

development which may be sold to foreign persons, provided that the
developer markets the dwellings locally as well as overseas (that is, the
dwellings cannot be marketed exclusively overseas).
This category includes dwellings that are part of extensively refurbished
buildings where the building's use has undergone a change from nonresidential (for example, office or warehouse) to residential. It does not
include established residential real estate that has been refurbished or
renovated.
A property purchased under this category may be rented out, sold to
Australian interests or other eligible purchasers, or retained for the
foreign investor's own use. Once the property has been purchased, it is
second-hand real estate and is subject to the restrictions applying to
that category.
Residential Real Estate for redevelopment

Established dwellings may be acquired for the purpose of redevelopment
(that is, to demolish the existing dwelling and build new dwellings). This
does not include refurbishing or renovating the existing dwelling.
Proposals for redevelopment are normally approved subject to the
following conditions:
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the proposal must provide for an increase in the housing stock, that is,
an increase in the number of dwellings
the existing residence cannot be rented out prior to demolition and

redevelopment
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the existing dwelling must be demolished and continuous substantial

construction of the new dwellings must commence within 24 months.
A redevelopment proposal which does not increase the number of

dwellings may be approved where it can be shown that the existing
dwelling is at the end of its economic life (that is, derelict or
uninhabitable), since constructing a new dwelling would effectively
increase the housing stock.
To demonstrate that the property is uninhabitable and must be
demolished, a valuation of the existing structures by a licensed valuer
and/or a builder's report is generally required. Photographs and other
forms of evidence may also be required. Approval of such proposals
would be subject to the same conditions outlined above.
Once these conditions have been fulfilled, the new dwellings that have
been constructed may be rented out, sold to Australian interests or
other eligible purchasers, or retained for the foreign investor's own use.
Advanced off-the-plan approval for developers

Developers of 10 or more dwellings may have previously applied for
advance approval to sell up to 50 per cent of new residences to foreign
interests. If such pre-approval was granted, the developer is required to
provide a copy of their pre-approval letter to each prospective purchaser
and to report all sales (that is, Australian and foreign) to FIRB on a 12
monthly basis until all the dwellings in the development have been sold
or occupied.
As the administrative procedures are streamlined, the current system
for developers seeking advance approval to sell new dwellings to foreign
persons will be discontinued. Until further notice, the pre-approval
arrangements that have been operating for some time will continue to
operate on a case-by-case basis. Please contact FIRB for specific advice.
All current pre-approvals remain valid. Where such approval has been
granted, foreign purchasers should not apply for individual approval. If
the developer has not been granted advance approval, then the
individual investor must seek approval.
Who should apply?

The FATA and the policy apply to certain acquisitions by foreign persons.
A foreign person is defined as:
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a natural person not ordinarily resident in Australia
a corporation in which a natural person not ordinarily resident in Australia

or a foreign corporation holds a substantial interest
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a corporation 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
the trustee of a trust estate in which a natural person not ordinarily

resident in Australia or a foreign corporation holds a substantial interest
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.
Application for Foreign Investment Review Board approval

The board is unable to give In Principle approval to persons wishing to
acquire property, so an application for foreign investment approval must
specify the particular property to be acquired.
Most banks will give Conditional Approval of the loan application prior
to and subject to FIRB approval.
Approval can take some time, so it is important to submit the
application for FIRB approval as soon as possible. The real estate agent
or developer is responsible for the FIRB submission.
Application to the lenders

Loan application forms are to be completed in the same manner as for
Australian residents. All details are required to be completed in full along
with supporting documentation (see Section 8).
Most banks will lend up to 70% LVR for non-residents. Mortgage
Insurers will not insure these loans. The other lending criteria are the
same for all borrowers.
Most banks require that 100% of rent received from the property will be
applied to loan repayment.
Some banks require six months loan repayments to be deposited in trust

prior to loan settlement.
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.
Purchase motor vehicles

Home Improvements
Debt consolidation
Holidays
Household goods
Other general domestic uses
NCCP coverage
As this loan is purely for personal purposes, it is covered under

the National Consumer Credit Protection Act (NCCP) (i.e. it is a
regulated loan.)
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
The interest may be calculated as a variable rate or a fixed rate.
Repayments
Repayments can usually be made weekly, fortnightly or monthly.
Equipment finance overview

Equipment and motor vehicle financing is one area that most finance
brokers avoid as they feel the actual process of financing is too difficult.
When in fact it is not and this area of financing can be very lucrative due
to the high turnover and quick results. The leasing and equipment
finance broker Industry has grown considerably large in some overseas
countries and this has been driven by the fact that most large finance
companies have reduced their own work forces and rely mostly on
Finance Brokers for their business.
One could say that the Australian commercial market has started to
mirror that of the residential loan market, which is already seeing ever
increasing housing mortgages being written by brokers. Lenders have
relied more and more on brokers to increase their overall mortgage
portfolio. However when there is a downturn in the property market due
to economic circumstances, opportunities must arise for brokers to
increase their income streams.
If, as is mooted, lenders from time to time decide to limit any
commissions paid, brokers have the opportunity to charge their clients a
fee for service.
Finance brokers entering the plant, equipment and motor vehicle area
normally already have a very good client base that they previously
serviced in the mortgage or other financial services areas and hence
they are now realising that most of their clients either have business or
personal equipment requirements.
This type of funding enables businesses to access equipment, vehicles
and technology that may not have been available through more
traditional forms of finance. It allows them to spread their repayments
to match their cash flows.
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Payments of brokerage can range from 1% to 8% or a dollar amount as

set by you, but you must remember that this type of financing is very
price sensitive and competitive.
Brokers in this area of finance have the potential to earn excellent
income and, if they service their clients properly, will have an excellent
ongoing income stream. The advantage of Leasing/CHP business is the
short waiting period to be paid, as most lenders pay the brokerage
entitlement to introducers on the settlement of the transaction.
The brokerage on a motor vehicle finance deal could well be in the
vicinity of $1000 and that is a good return for the work involved as
compared to mortgage loans when payment of commission usually takes
place in the month following settlement.
If a broker was active in the bigger ticket items such as Plant and
Equipment, the potential brokerage earnings are far greater.
Examples
Normal Motor Vehicle Brokerage is between
Normal Plant & Equipment Brokerage is between
2.00 2.80%
2.50 3.00%
Suggested earning from a motor vehicle loan

Amount financed
Term
Balloon Payment 40%
Brokerage @ say 2.00%
$57500
4 years
$23000
$1150 (excluding GST)
Suggested earning from a plant & equipment loan

Amount financed
Term
Balloon Payment
Brokerage @ say 2.6%
$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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Typical client profile - equipment finance

One tends to think that only companies require equipment financing
when in fact clients can be an individuals, Sole Traders, Partnerships or
Public or Private Companies. As we know in selling, it is always
dangerous to make assumptions.
Lenders normally require the clients, if self-employed, to have been
operating their business for a minimum of two years. They are not
averse to reviewing this requirement if the story and evidence presented
is strong enough to allow a waiver to their lending criteria.
Clients applying for the finance are also required to have a good credit
history, trade references and Credit Reference Reports. Here again there
are new lenders that will approve finance to clients that have an adverse
Credit History as long as the full facts are known. Normally these types
of approvals have an extra risk margin in the charged interest rate.
If the applicant is a company, Directors are required to guarantee the
loan. They should normally have asset backing, such as real estate or
the financier will consider on a case by case basis and may require a
deposit of up to 20% before they will approve the balance for the
purchase. An individual or sole trader applicant may, in the opinion of
the lender also require a guarantor.
To prove serviceability borrowers are required to provide the last two years
financial statements along with company and personal tax returns. You will
find most lenders provide a calculator, which will demonstrate that the
client meets their lending requirements. Low documentation loans are now
also becoming available through some lenders.
Assets that can be financed - equipment finance

There is quite an extensive list of assets that can be financed but
remember that clients do not actually have to mortgage their house
when seeking this type of finance. The financier normally relies on the
guarantees signed and the security taken over the assets being
purchased. Typical assets that can be financed are as follows:
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Aircraft
Boats (commercial and pleasure)
Commercial vehicles, trucks, trailers, boats
Earth moving and agricultural machinery
Engineering equipment
Fishing licences (cray boats)
General business equipment
Medical and dental equipment
Motor vehicles and motor cycles
Office equipment (computers, hardware, printers, copiers etc.).
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You must also be aware that caution is required in financing or seeking

finance for the following, and reasons why.
Specialised equipmentthe lender must consider resale in the event of a

default. Specialised Equipment can be described as equipment built for a
special purpose, for example mining equipment.
Sale and lease back transactionsthis can be a way of capital raising for
the company.
Fixtures and fittingsshop or restaurant fit out. As you can imagine a

lender would have great difficulty in selling the second-hand equipment
and if used as security for a loan via a fire sale would be lucky to
produce 25% of its true value. In addition, you can imagine the cost of
the labour and other material used to install these fixtures and fittings
would not be recoverable.
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.
Asset inspection and valuation - equipment finance

Lenders will require the Broker to inspect the goods and complete an
inspection report particularly if the Supplier is not known to the
Lender i.e. not a recognised Supplier or the transaction is classified
as a private sale or as part of the Lenders policy. The Broker will
need to complete and sign an inspection form that will include
verifying such details as serial number, chassis number,
registration number etc.
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Other Lender policies such as amount of borrowing may require the

Broker to obtain an inspection and valuation from the Lenders preferred
Valuer.
This is an important aspect of equipment financing as frauds can evolve
through the lack of due diligence. It is important that the correct item is
being offered as security and that the goods do actually exist.
Suite of equipment finance products

The following types of loans are loosely termed Commercial Lending. In the
past only a very small number of broking companies were involved in this
type of lending. Today, there are more brokers being accredited to market
commercial loans. Some of the lending institutions are requiring two years
experience for some of the commercial lending areas.
Loan types generally classified as commercial include:
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Chattel Mortgage
Chattel Mortgage - Consumer
Financial lease
Novated lease
Operating lease
Rental finance
Debtor financing / Factoring
Commercial property/industrial finance
Residential business loans
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Commercial Hire Purchase

Preamble
Commercial Hire Purchase (CHP) has the same principle as

leasing except the customer can claim the allowable depreciation
on the goods financed as a tax deduction. This is distinct from
leasing where the lessor (owner) claims the depreciation tax
deduction.
You will need the clients to seek accounting advice as to what is
the best option for his business. If disposal occurs midterm it
may have capital gain tax ramifications.
Ownership
At the date of the final payment of the loan title transfers to the
hirer.
Potential clients
This form of finance is generally suitable for business owners or

individuals who use the accrual method of accounting for GST. A
sales representative who uses his car for business would find
this beneficial.
Possible tax
benefits and
implications
Interest paid and depreciation may be claimed as a business tax

deduction provided the goods are used to earn an assessable
income. Where there is a balloon payment there are no tax
guidelines. It may be written as a nil amount.
If the asset is sold at a higher value than the balloon payment
Capital Gains tax may apply.
GST may be claimed upfront if the borrower is on an accrual basis
GST may be claimed over the term if the borrower is on a cash
basis
If balloon payments are factored into the midterm of the
contract professional tax accounting advice should be sought.
Payments
Payments of principal and interest remain constant over the

term of the loan.
A balloon payment can be structured into the loan to reduce the
payments, which assists the cash flow of the business.
The goods may be refinanced for a further term.
Loan terms are generally between one and five years.
Structured payments are available for those clients that have a
seasonal income (rural and fishing industries)
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Security
A charge is taken as security over the goods being financed.
Amount
financed
The amount of the loan can be 100% of the security or a lessor

amount if a deposit or trade in is involved.
NCCPA
As this loan is purely for business purposes, it is not covered

under the National Consumer Credit Protection Act (NCCPA) (i.e.
it is a non-regulated loan).
Early Payouts/
Extra Payments
Early payouts will incur break costs. Refer to your Lender

regarding extra payments.
Interest
Fixed rate (i.e. it remains constant, along with the repayment

amount, for the term of the loan.
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Commercial Hire Purchase Escrow

This facility provides interim finance to allow progress payments, made
by the lender on behalf of the borrower, on equipment being constructed
or installed over a period of months. The lender makes the progress
payments upon receipt of authorisation from the hirer.
Once the hirer confirms that the equipment is constructed or installed
satisfactorily, a standard hire purchase agreement can be entered into
with the lender.
Chattel Mortgage
Preamble
There is really no difference between a Commercial Hire

Purchase and a Chattel Mortgage other than ownership.
Ownership
The borrower owns the goods/vehicle under a chattel mortgage.
Potential clients
This is a flexible product that suits businesses that use the

cash method of accounting for GST.
Possible tax
benefits and
implications
The interest component of the loan and depreciation may be

claimed as deductions provided the goods are used for earning
an assessable income.
The upfront ownership allows the client an ABN holder on a
cash arrangement can obtain a full input tax credit for the GST
paid on the purchase price of the goods.
Because of the upfront GST claim this product has become popular.
Balloon payments are allowable but clients should seek
accounting advice on the GST 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
The lender takes a mortgage or charge over the goods financed.
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

under the National Consumer Credit Protection Act (NCCPA)
(i.e. it is a non-regulated loan).
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
Lease business equipment including motor vehicles, trucks,

plant equipment and smaller items. The equipment is
purchased by the lender and then leased to the business.
NCCPA coverage

Security
This contract gives the lender security by means of an

encumbrance on the goods purchased. If the client defaults on
the contract, the lender is entitled to sell the goods to regain
the money still owing to them. The borrower would still be
liable for any shortfall. The lender is the owner of the goods.
Term of loan
Usually one to five years.
Interest

Lease payments
Repayments are usually made monthly.
Finance options
Leasing may be financed with a residual balance at the end of

the term. This is calculated as a percentage of the purchase
price. The amount of the residual will generally stay within the
Taxation Guidelines.
General tax
implications
The borrower may claim tax deductions from having a lease.

The borrower would claim the lease payments as an expense.
These amounts will depend on the ratio of business use to
private use.
Early Payouts/
Extra Payments

Ownership
The lessor is the owner of the goods.

The lessee pays for the use of the goods by manual regular
monthly payments.
The ownership transfers once the residual / balloon payment
has been made at the end of the lease.
Amount financed
The lease amount is for 100% of the value of the goods. No

deposit or trade in can be taken into account.
Residuals: The table below gives an indication of the residual values

allowable by the Taxation department. It shows the decline in the value
as the term of the lease lengthens. These values are determined at the
commencement of the contract. You will note that there are different
percentages allowed depending on the kilometres travelled per annum.
Please note below figures are for training purposes only and not to be
used for taxation advice.
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Term
Sales Reps. Travelling more

than 30,000 km per annum
Residual value range
Sales Reps. Travelling less

than 30,000 km per annum
Residual value range
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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Novated lease (motor vehicles only)

Purpose of loan
Lease motor vehicles.
NCCPA coverage

Security

encumbrance on the goods purchased. The contract is written in
the name of the employee. If the client defaults on the contract,
the lender is entitled to sell the goods to regain the money still
owing. The borrower would still be liable for any shortfall. The
lender is the owner of the goods.
Term of loan
Usually one to five years.
Interest

amount, for the term of the loan).
Lease payments
Payments are usually made monthly.
Finance options

Taxation Guidelines (see table under Financial lease).
General tax
implications
The borrower may claim tax deductions from having a lease.

The borrower would claim the lease payments as an expense.
These amounts will depend on the ratio of business use to
private use.
Ownership
The lender (lessor) owns the motor vehicle.

The employer is the payee.
The employee is the lessee.
Potential clients
Employees who are seeking an alternative, beneficial way of

financing a motor vehicle.
Benefits to the
employee
Payments can be structured to suit the clients individual

needs, with your budget and cash flow taken into consideration.
With fixed rentals the lessee is protected against market
fluctuations.
Tax effective as payments are made from pre-tax earnings.
Can be portable should the client change employers.
Benefits to the
employer
If the employee leaves the company, the car is no longer the

employers responsibility.
Payments can be made easily via direct debit.
Can claim on tax deduction for the lease rentals.
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A consumer chattel mortgage is similar to a hire purchase, but is
designed for funding items for personal use. They are used most
commonly for purchasing motor vehicles

Purpose of loan
Purchase of goods for personal use. These may include motor

vehicles, motorcycles, registered boats, caravans etc.
NCCPA coverage
As this loan is purely for personal purposes, it is covered under

the National Consumer Credit Protection Act (NCCPA) (i.e. it is
a regulated loan.)
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
Calculated on the daily outstanding balance.

repayment amount, for the term of the loan.
Variable rate.
Repayments

monthly.
Finance options
Consumer Mortgage may be financed in the following ways:

Balloon payment at the end of the contract period (the
amount of the balloon payment usually a percentage of
the amount financed will depend on the term of the loan,
the age and the type of goods financed).
Fully amortised i.e. paid out in full via equal monthly
repayments over a specific period.
Early payout
There is usually an early termination charge for a fixed term

contract that is paid out early, but not for the variable rate
product.
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
Lease business equipment including motor vehicles, trucks,

plant equipment and smaller items. The equipment is
purchased by the lender and then leased to the business.
NCCPA coverage

Security

encumbrance on the goods purchased. If the client defaults on
the contract, the lender is entitled to sell the goods to regain
the money still owing to them. The borrower would still be
liable for any shortfall. The lender is the owner of the goods.
Term of loan
Generally 24 36 months. Most Operating Leases will have a

limitation to the number of kilometres allowed to be travelled (in
motor vehicle leasing cases) or photocopies to be made, etc.
Interest

Lease payments
Payments are usually to be made monthly.
Finance options

Taxation Guidelines.
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
These leases are only available through businesses. The

benefits to the business include:
Working capital remains free
Tax implications as above
No unexpected servicing/maintenance costs
Ability to upgrade machines at the conclusion of the lease
No risk of resale value of the equipment.
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
Examples of rental purposes can include:

Installation of security systems
Renting office equipment/computers.
NCCPA coverage

Security
This contract gives the rental company security by means of

ownership of the goods. If the client defaults on the contract,
the renter is entitled to retrieve the goods and to collect the
rental money still owing. The borrower would still be liable for
any shortfall.
Term of loan
Generally 24 36 months.
Interest

Rental payments
Payments are usually to be made monthly.
Finance options
There are generally three options at the end of the rental

period. These are:
Return the goods to the renter
Re-write the rental agreement with new goods
Purchase the current rental goods.
General tax
implications
The borrower may claim a tax deduction by claiming the rental

payments as an expense.
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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Some benefits of factoring are:
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.
Cash to invest in appreciating assets instead of non-productive money

tied up in debtors.
Cash available to take advantage of bulk buying opportunities or

favourable terms for early payment.
Cash available for contingencies.
Debtor Finance eliminates the need to offer customers discounts and

incentives for prompt payment of accounts.
Debtor Finance is not a loan therefore fixed assets used to support Bank
loans and facilities are not affected.
Equipment finance - specialist areas

Marine finance
Commercial
Lenders provide funding facilities for companies/sole traders for
trawlers, recreational cruisers and fishing vessels.
This is a specialised area and education and product knowledge is highly
essential to enter this area of finance.
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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Equipment finance other product features

Structured quote
A structured quote is anything that is outside a standard monthly
instalment. You are now able to generate quotes on quarterly, semiannual and yearly payment structures.
You also have the ability to load one-off lump sum payments into the
contracts payment schedule. There are now two options available:
1. You can load in a specific amount to be paid off the contract during
the term
2. You can specify a month where the GST will be paid back into the
contract.
Please note: these new quoting structures are only available on CHP
and Chattel Mortgage deals. If a structured quote is required for a Lease
please contact the lenders Business Support area.
Revolving or bulk limit

Having this facility approved allows the clients to draw funds for financing
of goods up to the approved lenders limit. A revolving limit allows the client
to re-draw funds that have been repaid, up to the current approved lenders
limit. These limits are reviewed on an annual basis. Please note that the
equipment being finances still needs to be approved by the lender.
Sale and lease back facilities

Commercial leasing lenders will offer sale and lease back (or hire
purchase back) facilities on many types of assets. This type of funding
allows a lender to acquire the existing assets and lease them back to the
client with the benefits of a new lease, provided however they have
been purchased within the last three months (maximum).
The client must show the lender evidence of being able to satisfactorily
service the agreement and have acceptable asset backing.
Cross border leasing

This type of lease is for deals of USD $10 Million+ and is used to fund
large deals either nationally or internationally and no doubt would not be
part of the everyday finance brokers portfolio, but we have inserted this
in the notes to make you aware that the facility is available.
Infrastructure and asset leasing

This type of finance enables expensive infrastructure establishment to
be funded that frees up the cash flow of the corporate or government
entities.
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Such areas that require this type of funding are:
Aviation
High-tech sector
Public utilitieswater, sewerage, electricity and gas.
Motor vehicle fleets

This type of funding allows the corporate sector or governments to free
up their cash flows and spread the cost of maintenance over the life of
the lease. The fleet managers manage the vehicles on the clients
behalf. Normally this type of financing is looked at by the lender when
there are five or more cars with the fleet.
Low doc financing - commercial and

equipment finance
Low doc loans may be arranged for business clients seeking funding for
purchases from say, $3000 to $25000.
At times up to $50000 may be available but this is solely dependent on
the strength of the client.
This means of course that no financial statements need to be produced,
but lenders are very strict on the credibility and serviceability of the
clients. In turn the lender will charge a higher than normal rate to offset
the potential risk involved in this area of lending.
The lenders requirements would normally be:
the joint and several guarantees of the Directors
a statement of the Directors personal financial position
a minimum of two years in the current business
a clear report from a credit agency
previous/current loan statements showing good conduct
trade references.
Commercial property lending overview

Commercial Property Lending is where the security is held over property
zoned commercial i.e. shops, shopping centres, factories, offices and
office buildings, warehouses, etc. Most banks will also treat most
development projects such as land subdivisions and residential
developments such as blocks of strata units or blocks of flats as
commercial property. The usual rule is that if there are more than four
units in the development then it is treated as commercial property.
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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.
Why use a deposit bond?

A deposit bond may act as a short term alternative to cashing in existing
investments or applying for bridging finance when a deposit is required.
A once-only fee is payable
How is a deposit bond obtained?

Deposit bonds may be arranged by phone and issued within 24 to 48
hours, subject to normal terms and conditions. The clients existing
funds remain untouched with nothing more to pay until the settlement
date arrives. They are an alternative sometimes preferred by some
buyers.
Who can apply for a bond?

Any purchaser of a property may apply for a deposit bond including:
existing property owners who wish to purchase property
investors who wish to expand their property portfolio
first home buyers
commercial property purchasers.
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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Can the bond be used at auctions?

Auctions require a deposit to be organised before bidding. A deposit
bond could be used to give flexibility to bid on a property without a cash
deposit. A bond could be issued prior to the auction sale. The maximum
bond amount is fixed but the property details are not fixed so it is
possible for the potential purchaser to attend a number of auctions. The
method is to complete the vendor and property details once the
successful purchase is arranged.
Are vendors willing to accept the bond?

The vendor will usually be anxious to sell their property as soon as possible
and secure a deposit from the purchaser. The bond can be organised within
24 to 48 hours and coupled with the security provided under the bond by
the Insurance Company, it will give comfort to the vendor enabling
contracts to be signed, and the property sold. Bonds are available
throughout Australia and are readily accepted by vendors; however it is at
the vendors discretion whether to accept the bond.
Recommendation: If your client is not purchasing property in NSW then
a solicitor or agent should be used to ensure the special condition on the
reverse of the Bond is inserted in, or annexed to the Contract of Sale, to
amend the deposit provisions. In NSW, the standard 1996 contract
includes provision for use of a Deposit Bond.
Does a deposit still have to be paid at settlement?

The bond simply acts as a substitute for the deposit stated in the Contract
of Sale, enabling the purchase of the property to be carried out more
quickly than otherwise possible. It does not remove obligation to pay a
deposit to the vendor on the contract settlement date.
What happens if there is a default under the Contract of

Sale?
If there is a default under the Contract of Sale the vendor can claim the
bond amount from the Insurance Company. Once the deposit has been
paid to the vendor, the Insurance Company will then recover the deposit
amount from the person who defaulted.
Why is an indemnity signed before the bond can be issued?

The indemnity is the legally binding right given to the Insurance
Company by the client, to recover any part of the bond amount paid to
the vendor if there is a default under the contract.
When does the bond terminate?

The bond terminates when the Contract of Sale is completed, terminated
or rescinded.
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Can a refund be obtained if the bond is not used?

If the unused original bond is returned within 30 days of issue then the
fee will be partially refunded. There is typically an administration charge
of approximately $220 deducted then a cheque for the balance is mailed
to the client.
Applicant approval guidelines
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Every applicant must be able to demonstrate a minimum of five (5)

times the Deposit Bond value in approved equity. Special conditions
apply for First Home Buyers whereby only two (2) times cover needs to
be demonstrated.
Only approved assets may be used to assess the five (5) times equity
rule.
Applicants must be able to clearly demonstrate their ability to settle the

purchase.
Applicants must be able to clearly demonstrate satisfactory income to

support all existing and future borrowings.
Every applicant must have a clear credit history.
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Section 2
Loan characteristics
Learning outcomes
Upon completion of this section you will be able to:
identify various types of mortgage loans and the similarities and

differences between them
understand and apply the generic loan fundamentals
analyse the loan requirement of your client and apply this knowledge to
the choice of mortgage loan product
understand the working of loan serviceability
understand the basics of negative gearing
have knowledge of the peripheral products offered by lending

institutions.
Core lending products

There are many different types of mortgage loans in the market. The
lenders have different policies and guidelines for the individual products
and they often vary from lender to lender. Finance/Mortgage Brokers
will be constantly questioned on the terms and conditions of the various
Bank products and it is extremely important for the broker to be up to
date with product specifications.
Brokers should also be advised that the banks change their product
specifications often. If you are using prescribed software from your
aggregator or franchisee, or if you lease a system, the changes should
be managed by the IT departments. However the lender will notify the
broker by regular bulletins and it is extremely important that you allow
time in your schedule to absorb the changes.
Many of the lenders also run up-date sessions or in conjunction with
your aggregator or franchisee. It is important to attend as many as you
can to keep yourself up to date with the changes. The BDMs for the
lenders also give you excellent assistance if you are in doubt as to a
product specification and how to structure loans to give you the best
chance of a successful submission. If in doubt, always check before
submitting the loan.
The following are outlines of the three core products currently in the
market.
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Standard variable rate

As the name implies this product caters for the clients wanting a loan
that has a variable interest rate. This means that the interest rate
fluctuates with changing market conditions. As outlined previously, this
is determined by the economic climate and is administered by the
individual lenders. This products rate may move when the Reserve Bank
of Australia (RBA) makes interest rate adjustments. Although this
change in official cash rates may happen, any changes are at the
lenders discretion. All other variable rate products may then be adjusted
accordingly.
Standard variable rate home loans are the most common home loans in
the market. There are slight variations to the basic standard variable
home loan such as honeymoon rate loans. These will be discussed
further in this section.
When taking out a standard variable rate loan, the borrower takes on
the risk that the rates may increase or to their benefit, may fall. Back in
the 90s interest rates soared to around 18% which forced many people
to sell their properties as they could not afford the repayments.
Standard variable home loans can be either regulated or unregulated
under the NCCP depending on the purpose of the loan. As we have
learned in the earlier sections, if the loan funds are being used for the
purchase of property predominantly for personal or domestic use or
residential real estate investment and improvement, it is covered by the
NCCP making it a loan. If a residential real estate property is being used
a security to provide funding predominantly for business/investment
purposes (residential real estate excluded), it is not covered under the
NCCP and is deemed an unregulated loan. Let us have a look at the loan
types available:
Regulated
*95% LVR
Unregulated
90% LVR
P&I
Honeymoon Rate Loan

Basic No Frills Loan
Standard Variable Loan
I/O
Honeymoon Rate Loan

P&I
Honeymoon Rate Loan

I/O
Honeymoon Rate Loan

*Please ensure you check the LVR requirement with the individual lenders.
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Loan purpose
SVR loans can be used for personal or investment

purposes. These may include:
purchase residential owner/occupier property
purchase residential investment property
purchase vacant land
construct a residential home
purchase motor vehicle
purchase shares for personal investment
holiday
other personal requirements
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.
Term
Up to 30 years, more commonly 25 years.
Repayments
The repayments are usually calculated as principal and

interest repayments and can be paid weekly, fortnightly
or monthly.
Extra repayments
Usually allowed without penalty.
Early payout fees
There is usually no penalty for paying out a SVR loan.
Redraw facility
Generally available some lenders will charge a fee.
Fees
Usual fees paid on a SVR contract may include:

Loan establishment fee
Government required fees such as stamp duty
(Depending on State), title search and registration of
mortgage document
Valuation fees
Progress inspection fees (construction)
Ongoing loan maintenance fees.
Security
Registered first or second mortgage over a residential

property.
LVR
Regulated 95%
Unregulated 90%
LMI requirements
Lenders mortgage insurance is required for loans above

80% LVR.
This information is general and the individual lender criteria should be

consulted for each loan application.
Let us now have a look at the options available for the SVR loans.
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Basic variable rate loan

As the name implies, this type of loan has most of the characteristics of
the standard variable rate loan, but is offered by some lenders as a
budget or economy style loan. The main feature of this loan type is the
reduced interest rate. This loan is often referred to as a no frills or
basic loan. In some cases, there is no ongoing fee per month (please
check with the individual lending institutions). There are fewer features
than those applicable to the SVR products. There is usually no redraw
facility.
Loan purpose
Basic variable rate loans can be used for personal or

investment purposes. These may include:
holiday
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
Term
Repayments

or monthly.
Extra repayments
Early payout fees
There is usually no penalty for paying out a Basic

variable rate loan.
Redraw facility
Generally not available.
Fees
Usual fees paid on a Basic variable rate contract may

include:
Government required fees such as stamp duty,
(depending on State) title search and registration of
mortgage document
Valuation fees
Ongoing loan maintenance fees
Security

property.
LVR
Regulated 95%
Unregulated 90%
LMI requirements
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80% LVR.
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Introductory/honeymoon rate loan

Lenders often offer teaser rates to encourage borrowers to use their
funds. These loans operate the same as the standard variable loans but
they have a period in the beginning of the loan where the interest rate is
lower than the standard rate. This is usually somewhere around 1%
lower for a period usually no longer than 12 months.
One specific area to note is that some lenders will impose payout
penalties if the loan is paid out within the first three years.
Loan purpose
Introductory/Honeymoon rate loans can be used for

personal or investment purposes. These may include:
holiday
Loan amounts
These are subject to the individual lender discretion, but

usually the minimum amount would be $10,000 with no
maximum amount The maximum is dependent on the
Term
Repayments

or monthly.
Extra repayments
Early payout fees
Allowed, some lenders will charge a fee i.e. 30 days

interest penalty based on the current SVR and original
amount financed. A sliding scale bases, percentage of the
loan amount.
Fees
Usual fees paid on an Introductory/Honeymoon rate

loans contract may include:
mortgage document
Valuation fees
Ongoing loan maintenance fees.
Security

property.
LVR
Regulated 95%
Unregulated 90%
LMI requirements
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80% LVR.
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Fixed rate loan

As the name implies these loans have the interest rate fixed for a
certain term and therefore the repayments remain constant. This loan is
available for the borrower who wants certainty in their interest rate and
repayments for a certain period of time, thus protecting themselves
from any increase in rate. These loans can usually be fixed for
somewhere between one and five years although there are products
available for seven and 10 years.
At the end of this fixed period, the lender will renegotiate another fixed
period at their discretion and at the current lending rates. If the
borrower wishes, they can at this stage, convert the loan to a variable
rate. Lenders have made some changes recently where clients can
change and increase their payments, but not to exceed $5,000 in any
one year (check individual Lenders policies).
Loan purpose
Fixed rate loans can be used for personal or investment purposes.

These may include:
holiday
other personal requirements.
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
The repayments are usually calculated as principal and interest

repayments and can be paid weekly, fortnightly or monthly. It is
quite common to have interest only payments available in
particular for investment borrowing.
Extra
repayments
Some lenders will allow up to a specific amount of extra

repayments per annum.
Redraw
Some lenders will allow but will charge a fee.
Early payout
fees
There will usually be a fee charged for early termination of a fixed

rate contract.
Fees
Usual fees paid on a fixed rate loan contract may include:

Government required fees such as stamp duty, (depending on
State) title search and registration of mortgage document
Valuation fees
Ongoing loan maintenance fees
Security
Registered first or second mortgage over a residential property.
LVR
Regulated 95%
Unregulated 90%
LMI
requirements
Lenders mortgage insurance is required for loans above 80% LVR.
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In many cases borrowers, because of interest rate fluctuations, choose

to operate split facilities (part of the loan amount fixed rate and/or, part
of the loan amount variable rate and/or part of the loan amount, line of
credit) to reduce the impact should this type of situation occur with
increased interest rates.
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
Line of credit loans can be used for personal or investment

holiday
Loan amounts
These are subject to the individual lenders discretion, but

maximum amount. The maximum is dependent on the
Term
Evergreen or commonly 25 years.
Repayments
Repayments on a line of credit can be interest only or principal

reductions. Payments can be made at any time.
Early payout fees
Normally no check with lender.
Fees
Usual fees paid on a line of credit loan contract may include:

Government required fees such as stamp duty, (depending
on State) title search and registration of mortgage
document
Valuation fees
Ongoing loan maintenance fees usually $8$15 per
month. Some lenders will charge annually or six monthly.
Security
Registered first or second mortgage over a residential property.
LVR
Regulated 90%
Unregulated 90%
LMI requirements Lenders mortgage insurance is required for loans above 80% LVR.
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Amortising line of credit

These loans operate in the same manner as an Equity Line of Credit with
one main difference. The Equity Line of Credit requires a minimum
monthly payment of interest only whereas the amortising Lines of Credit
require a minimum monthly payment equalling that of principal and
interest. This means that if the loan is written over a term of 25 years,
then the calculated principal and interest repayments for this term
would apply. The borrower may however pay in excess of this and
redraw on the account only up to the limit now determined by these
principal and Interest (P&I) repayments.
Loan purpose
Line of credit loans can be used for personal or investment

holiday
Loan amounts
These are subject to the individual lenders discretion, but

maximum amount. The maximum is dependent on the
Term
Repayments
Repayments on a line of credit can be interest only or

principal and interest. Payments can be made at any time.
Early payout fees
Normally no check with lender.
Fees
Usual fees paid on a line of credit loan contract may include:

mortgage document
Valuation fees
Ongoing loan maintenance fees usually $8 - $15 per
month. Some lenders will charge annually or six monthly.
Security

property.
LVR
Regulated 95%
Unregulated 95%
LMI requirements
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Lenders mortgage insurance is required for loans above 80%

LVR.
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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:
Registered Builders Certificate
Fixed Price Building Contract
Council Approved Plans
Specifications and schedule of progress payments.
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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The valuer would normally make two inspectionsone at about mid

construction stage and one on completion. The final progress payment is
not usually made until after the final inspection. There are usually four
progress payments made to the builder over the term of construction.
The general stages of payment may differ, dependent upon the state
and may also be referred to differently as follows:
Pad (slab) down or foundation stage
Walls constructed plate high, frame stage
Lock up stage
On completion
During the construction period, the clients payments will be interest

only, calculated on the current outstanding debt. When the loan is fully
drawn their repayments of P&I will commence. If clients have chosen a
Fixed Rate Loan, this rate and term will commence at the time of final
draw down.
Below are two scenarios to assist with you understanding construction
loans.
Facts to take into consideration:
In both scenarios our borrowers are first home buyers and they are
receiving the First Home Owners Grant
They have genuine savings as deposits
They have additional funds for miscellaneous costs
They have a contract of sale and full plans and specifications from the
builder.
Scenario 1Purchase a house and land package

Value of land:
$200,000
Price of house to construct
$180,000
Total Security
$380,000
Maximum LVR = 95%
$380,000 x 95%
Maximum loan amount
$361,000
Deposit required = 5% (genuine savings)
$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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Scenario 2Purchase vacant land and begin construction

within 12 months
Value of land:
$200,000
Total Security
$200,000
Maximum LVR = 90%
$200,000 x 90%
Maximum loan amount
$180,000
Deposit required = 10% (genuine savings)
$200,000 x 10%
$ 20,000
Within the 12 month period, the borrower must:
$180,000
Find a registered builder

Arrange plans, specifications and price of home
Sign a fixed price contract
Commence construction
Value of:
House
$180,000
Land
$200,000
New total security
$380,000
LVR = 95% (house and land)
$380,000 x 95%
Maximum loan amount
$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.
Popular loan features/packages

With many of the loan types that we have discussed previously, the
lenders can offer certain features and benefits and also package the
various loan types together. The following will give a general outline of
some of those features and packages offered.
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.
Parenting Repayment Break (PRB)

Borrowers who are on/or planning to take maternity/paternity leave will
have the ability to take a brief break in repayments.
Feature
Product Parameters (Summary)
Max LVR
90% - at time of request.
Loan Purpose
Owner-occupied loans only.
Credit History
Minimum of 12 months of satisfactory loan repayment

prior to allowing a Parenting Repayment Break
Repayment history must be clear of missed/late payments
for at least 6 months.
Repayment Type
Interest only is not permitted.
Other
Parenting Repayment Break may be taken as either:

o
3 months 'no repayments' or
o
6 months 'half repayments'.
Maximum of 2 Parenting Repayment Breaks during life of
loan
12 full monthly payments must be made between each
subsequent Parenting Repayment Break
Repayments to be re-amortised over remaining term
following a Parenting Repayment Break.
Documentation
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Lender is to retain evidence of:

o
Evidence of maternity/paternity leave approval
o
Lenders approval of Parenting Repayment Break
o
Re-amortisation, serviceability calculations and
o
Income evidence (if applicable).
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Other loan features

Redraw facilities
Some loan types allow you to pay extra funds into the loan to reduce
the loan balance and then should the need arise; you are able to redraw
the extra funds that you have paid. The lender may stipulate a minimum
amount able to be redrawn and charge a fee for the service.
Fee-free savings/cheque accounts

Some loan packages offer a fee free transactional account
(savings/cheque) allowing unlimited deposits and withdrawals. The
terms and conditions of these accounts should be checked with each
lender. Some lenders also offer fee free credit cards. Interest is still
charged after the interest free period of the account, but there are no
other account keeping fees, etc.
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.
Property purchase stamp duty

This is a one off fee paid to the government and depending on the state
that the transaction is in, can be calculated on the purchase price or the
market value of the property, whichever is greater.
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Mortgage stamp duty

This is a one off government fee charged as a percentage of the loan
amount. (Depending on which State)
Solicitor/settlement agent fee

This is a fee charged by the solicitor or settlement agent to prepare
documents, attend and finalise settlement on your behalf. The fees can
vary significantly from agent to agent and state to state.
Registration of mortgage fee

This is a fee to register the mortgage with the land titles office.
Discharge of mortgage fee

This is a one off payment required to register the discharge of mortgage
to the land titles office.
Register of transfer of title

This is a one off payment required to be paid to register the transfer of
ownership to the land titles office.
Title search
This is a one off payment required to be paid for the search of title to
the land titles office.
Bank peripherals and our obligations

In this section you will learn of the other types of bank products
available and our obligation to advise the clients of their availability.
Bank peripherals refer to the bank products other than loans, about
which a broker may not have informed the client. While there is
generally no obligation for the broker to sell these other products it is
very much in their interest to do so.
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Knowledge of the peripheral products increases the credibility of the

broker and enhances the sale of the loan product. For example with the
popularity and availability of professional packages there is an
expectation that these products go with the package.
If the broker does not involve himself/herself with the peripheral

products the bank certainly will and this can give the client the
impression that the broker either did not know, or care about selling the
product. The broker, must at all times maximise the experience for the
client to ensure an ongoing relationship and advising them of the very
favourable products that may go with their package will enhance that
relationship.
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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.
Other lending departments

Other lending areas such as personal loans, business loans and
commercial loans are also part of the banks portfolio of products. These
areas are used by a number of Finance/Mortgage Brokers as additional
products for their clients. You would need to discuss the availability of
these products with your own company managers.
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.
Risk management products

General insurance
A number of banks offer general insurance products (i.e. home and
contents, motor vehicle, personal valuable insurance etc.). You are obliged
to advise your client that they will be required to obtain insurance to
protect their home. This will be required prior to settlement of the loan and
a certificate of currency will be required noting the banks interest in the
property. You are able to advise them that the bank offers this service or
whoever you may have an arrangement with, but you cannot force them to
use either source. They must be free to make their own choice but with the
knowledge that this insurance is a requirement.
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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It is our experience that client loyalty is best served by referring them to

a Financial Planner or Insurance Broker with whom you have reciprocal,
loyal relationship and you can vouch for the professional ethical
standards they exhibit. If the clients choose to accept advice from a
bank employed financial planner the planners may understandably be
more inclined to direct the clients to bank lenders for future
transactions, in spite of your good service.
It is the usual practice of a number of banks to do follow up calls with
their clients in order to assist them with Financial Planning or Insurance.
If you have already passed their details onto an external Financial
Planner or Insurance Broker it would be advisable to let your client know
that the bank is likely to contact them anyway.
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.
Total and permanent disablement insurance

In addition to Life Insurance you may also apply for Total Permanent
Disablement (TPD) insurance. This optional benefit is available for an
additional premium. If you obtain TPD Insurance in the event of you
becoming totally and permanently disabled, the Insurer will pay you the
agreed insured amount as a lump sum. It depends on whether you take
cover for you own occupation or any occupation and what the insurer
considers relevant to their policy when assessing a claim.
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Income protection insurance

This gives you financial protection if you are disabled through injury or
sickness and are unable to work. If this happens, the insurance
company pays you a portion of your monthly income, normally 75% of
your annual gross income, which is calculated to a monthly amount.
Cover can be taken out for certain waiting periods of 14, 30, 60; 90
days and cover can range from two years to age 65 years. Naturally the
longer the term of cover and the shorter the waiting period the higher
the premium costs. Your occupation and smoking or non-smoking habits
along with any other known illnesses are taken into account when
assessing your application and the premium. This type of cover is also
sometimes referred to as Salary Continuance Insurance.
Taxation benefits are available for this type of cover and you should
consult your accountant in regards to these.
Business expenses insurance

If you are self-employed, this insurance covers the business expenses
that you must pay each month even if you are unable to work because
of illness or injury.
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.
Mortgage protection insurance

Mortgage Protection Insurance is specifically designed to protect the
borrower against death, disability and involuntary unemployment. Cover
varies quite markedly between providers of this type of insurance
protection. However, usually on death the payout is limited to the
outstanding amount of the loan at the time of death. (Some companies
have level cover and will pay any extra amount over the debt owing to
the clients estate, e.g. initial mortgage of $250,000; MPI cover provided
at $250,000; current mortgage debt at $200,000. The debt is fully
repaid and the extra $50,000 is paid to the clients estate.)
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Disability benefit is limited to the mortgage repayments up to a

maximum figure of approximately $4000 per month (varies between
companies) and covers loan repayments for a limited time of around
2 years (varies between companies).
Involuntary unemployment cover meets loan repayments for up to three
months.
Lenders may make insurance cover a condition of the loan. What they
cannot do is force the borrower to take out their insurance product. As
such they cannot make MPI mandatory but can insist that the borrower
obtain cover prior to releasing the funds.
MPI is generally more expensive yet does not provide the full protection
that standard life insurance covers, such as Death, Permanent Disability
and Trauma cover, and Income Protection.
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
Negative gearing is an accounting term used when an asset is

purchased for investment purposes and is returning an annual loss. This
annual loss amount is then offset against annual income with the result
of decreased tax assessments.
Neutral gearing applies when the annual cost of investment is equal to
the annual income generated.
Positive gearing applies when the annual income generated is greater
than the costs and returns an annual profit for the investor.
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A common form of gearing is a client purchasing a rental property. The

customer will usually borrow the maximum amount possible. The
interest paid on this loan transaction along with other fees such as
management fees (approximately 7% - 8% of rental income),
maintenance costs, depreciation and other costs are then offset against
the rental income. When there is a shortfall in the income received
compared with the expenses incurred negative gearing results. This loss
amount is then carried forward to the clients income to decrease the
amount of their taxable income.
For example, our client has purchased a property for $300,000 and has
borrowed $225,000.
Purchase price of property
Amount of loan
$300,000
$225,000
Income:
PAYG income
Rental income @ $250pw
Total income
$80,000
$13,000
Rental property expenses:

Management fee @ 8%
Interest (calculated @ 7% interest only)
Depreciation
Land and water rates
Maintenance
Total expenses
$ 1,105
$15,750
$ 7,000
$ 2,000
$ 1,500
$93,000
Taxable income
$27,355
$65,645
Without rental property

Tax payable on total income of $80,000 = $23,136
Net income = $56,864
With rental property
Total income = $93,000 - $27,355 (expenses) = $65,645
Tax payable on total income of $65,645 = $16,896
Net income = $48,749
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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Learning guide V2
AAMC Training Group
313
An important reminder: Finance/Mortgage Brokers are not permitted

to advise clients on negative gearing issues unless they have the
necessary qualifications to do so. These qualifications are those
requirements specified by the Australian Securities and Investments
Commission (ASIC) as per ASIC Regulatory Guide 146 (RG146).
Other considerations would need to be made in respect to Capital Gains
tax.
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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Learning guide V2

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FNS40811 Certificate IV in Finance & Mortgage Broking

Lenders and loan types

identify various types of lending institutions and the similarities and

understand their various roles in the industry

identify the different types of loan types available in the market

analyse the loan requirement of your client.

Deposit taking institutions (DTIs)

Private mortgage funders

Deposit taking institutions raise their funds by utilising deposits from

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

Homeside Lending subsidiary of NAB

National Australia Bank

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

documentation associated with a securitised home loan as the

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

A number of non-conforming lenders will charge deferred establishment

The availability of non-conforming home loans may include the following

Self-employed for less than two years

Inability to confirm stable income

Retired or elderly borrower

Private mortgage lenders

Borrowers that are unable to secure bank or standard loans

Short term borrowers

Those requiring a speedy process

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

Residential Owner Occupied

Commercial Hire Purchase

Commercial Property/Industrial finance

These loans may be classed in two categories according to the National

Regulated (i.e. covered by the NCCP)

Non-regulated (i.e. not covered by the NCCP)

This is further outlined in the section pertaining to legislation.

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

Owner occupier loans

Residential investment loans

Real estate residential owner occupier mortgage

1. Purchase existing residential owner/occupied property

Loan to value ratio

These may vary from lender to lender. You will need to

As this loan is purely for domestic purposes, it is covered

Registered Mortgage over a property. The contract for

The loan term may vary from one year to a maximum of

The interest can be calculated as either:

Repayments can usually be made weekly, fortnightly or

Available on most loan products except fixed rate

Allowed, although there may be some fees. Fixed rate

AAMC Training Group

FNS40811 Certificate IV in Finance & Mortgage Broking

Real estate residential investment mortgage

1. Purchase existing real estate residential property for

Loan to value ratio

These may vary from lender to lender. You will need to

Regulatory changes from July 1st 2010 now include Real

Registered mortgage over a property. The contract for

The loan term may vary from one year to a maximum of

The interest can be calculated as either:

Repayments can usually be made weekly, fortnightly or