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to switchbanks.
Please
note, the information contained
on this site is meant as a general
guide only. We make no guarantee
at Switchbanks that the information
provided is accurate or up to
date, and people using the information
should not rely on the information
when conducting their day to day
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banks or anything.
Principal
and Interest Loans
Inertest Only Loans
Variable Rate Loans
Fixed Rate Loans
Split/Combined Loans
Loan Value Ratio
Debt Servicing Ratio
Basic Home Loans
Early Repayment Theory
Standard Variable Rate
Introductory or 'Honeymoon' Rate
Loans
Redraw Facility
'All-in-one' Account Loans
100% Offset Account Loans
Partial Offset Account Loans
Interest Offset Loans
Professional Packages
Construction Loans
Bridging Loans
Consolidation Loans
Lines of Credit/Equity Loans
Reverse Mortgage Loans
Compulsory Comparison Rate (CCR)
Legislation
Australian Federal Privacy Act
2004
Financial Transactions Reporting
Act 1988
NSW Finance Brokers Contract (FBC)
Survival Tips
Principal
and Interest (P&I) Loans
Every loan, regardless
of which product or loan type,
is made up of two elements; principal
and interest. The principal is
the actual amount of money borrowed,
and the interest is the extra
money a client has to pay back
on top of the loan for the privilege
of borrowing it. This is, the
fee they pay for the use of that
money (think of it as money being
just another commodity that can
be bought and sold, and the interest
paid is the fee for using that
commodity).
A
Principal and Interest loan is
probably the most utilised loan
of all. This type of loan allows
a client to make regular repayments,
which consist of two portions.
One portion of the repayment is
paying off the principal, and
the remainder is servicing the
interest that has accrued on the
balance of the principal (what's
left to pay off). Basically it
means that the client is paying
off the loan as well as servicing
the interest on that loan. It
looks like this:
A
P&I loan allows a client to
build up equity in the property
by paying off the loan (the principal)
as well as servicing the interest.
The equity is that portion of
the property value that has no
money owing on it. For example,
if the security property was worth
$200,000 and the client owed $150,000
on it, they would have $50,000
equity in their property. This
type of loan is particularly useful
when purchasing an owner occupied
property, as it will allow a borrower
to build up equity to use later
on if they want to cross-secure
(use more than one property as
security for the loan) a loan
to purchase an investment property.
You would generally give a client
a P&I loan on a property that
they don't intend to sell in the
immediate future, or if they were
taking a mortgage on their property
to pay off another type of loan,
say a car loan for example, which
would originally have had a higher
interest rate, and has had no
capital gain (increase in value),
when they sell the car.
P&I
loans are generally taken over
a term of 25 years to 30 years
(the term is the time that the
loan repayments are calculated
over, which will also be the maximum
time to pay off the loan if the
client just paid their minimum
monthly payments and nothing extra).
The longer the term the less the
minimum monthly repayment amounts
will be. If they are an older
borrower, or their loan presents
a higher risk for one reason or
another, some lenders may require
them to take a P&I loan over
a shorter term, like 15 or 20
years etc. Just because the loan
has a nominated term (say 25 years)
it doesn't mean that they have
to take that long to pay out the
loan. It simply means that the
repayments have been calculated
over that period of time.
Interest
Only Loans
As previously discussed,
all loans consist of two portions;
principal and interest. However
not all payments have to consist
of both elements. An Interest
Only (IO) loan will only make
payments that service the interest.
Repayments on these loans ONLY
SERVICE THE INTEREST AND DO NOT
PAY OFF ANY OF THE INITIAL AMOUNT
BORROWED. Basically an IO loan
looks like this:
An
IO loan is generally taken out
for investment purposes. This
is because the repayments will
be less than those of a P&I
loan for the same amount, as there
is no 'principal' portion in the
repayment, and the borrower is
relying on the capital growth
(increase in value) of the property
(or shares, or investment) to
result in an amount larger than
the initial borrowed amount to
gain a profit. An IO loan can
usually be taken out for a period
of 1 - 5 years, over a 25-year
term. You should always be very
careful when arranging an IO loan
for a client, and make sure that
the term allows the client enough
flexibility to pay back the loan
at a time convenient to them.
For example, if a client takes
a five-year IO out for a term
of five years, they will have
to pay the complete amount of
the initial borrowings back at
the end of five years. If they
take a 5-year IO loan out over
a 25-year term, it means that
they've got a maximum of 25 years
in which to pay back the principal.
After the initial 5 years (or
what ever period they had the
loan as Interest Only) the loan
will generally revert to the lender's
standard variable rate product
(explained later) or principal
and interest on the same product,
or they can renegotiate another
IO term of up to five years. Interest
only loans can usually be done
with both fixed rate and variable
rate products, depending on the
lender (please see below for Fixed
and Variable rates).
Variable
Interest Rate Loans
There are two types
of interest rates available to
the educated borrower. The first
type we'll discuss is the variable
rate. As the name implies, this
rate will vary from time to time
as the market fluctuates (goes
up and down). Most lenders have
a suite of variable rate products,
with their most expensive one
called The Standard Variable Rate.
The Standard Variable Rate is
generally slightly lower than
the 2-year fixed rate, however
this varies from lender to lender,
and some lenders may even have
it lower than their 1 year fixed
rate. A variable rate loan has
many pros, and really just one
con. The con is that if interest
rates rise, then the loan interest
rate will rise along with the
loan repayments. The interest
rate is not 'locked in' for a
specific period of time, meaning
that as the interest rate market
changes, the repayments will change
with them. The good thing is,
that if the rates go down so will
the repayments.
A
variable rate loan's main benefit
is that it will generally allow
some options for making extra
repayments, which in turn allows
a borrower to pay off their loan
more quickly, saving them more
money. These loans generally have
the 'bells and whistles' options,
and will sometimes have discounts
attached. An example of what a
variable rate may look at over
the course of twelve months is
shown below:
Fixed
Interest Rate Loans
As the name implies,
this sort of loan allows a borrower
to fix their interest rate for
a set period of time. It's usually
between 1 and 5 years, however
some lenders will allow the clients
to fix for up to 10 years. The
benefits of this is that they
have the peace of mind knowing
exactly what their repayments
are going to be month in and month
out for the amount of time that
they have fixed their loan for.
What
happens when the fixed period
expires? There are a couple of
options. One is to renegotiate
another fixed rate at the then
current market rates, i.e., the
new fixed rate will probably be
different than the old fixed rate
as the market will probably have
fluctuated by this time. If a
client chooses not to re-fix their
interest rate, the loan will generally
rollover (turn into) to the current
standard variable rate product.
An example of what a 5 Year fixed
rate loan may look like over 5
years is shown below:
A
client can take a fixed rate loan,
fixed for a set amount of time,
over a specific period of time
or term. For example, a client
could take a four year fixed rate
loan over a 25-year term. This
means that the loan repayments
for a P&I loan would be calculated
at the interest rate that they
fixed at, over the term of the
loan. To look at it in slightly
more depth, a loan taken at a
fixed rate of say 7.85% for 4
years over a term of 10 years
will have greater repayments than
a loan fixed at the same rate
for the same time taken over a
term of 25 years.
Split/Combined
Loans
A split or combined
loan is a facility that allows
a client to take the benefits
of one or more types of loans.
For example, they may want to
hedge their bets with interest
rates, so may want to borrow a
portion of the loan under a fixed
interest rate and a portion of
the loan under a variable rate.
This means that if interest rates
rise, then portion of the loan
that is fixed will remain the
same for the duration of the fixed
period, however if the rates go
down, then only the variable portion
of the loan will go down with
it.
A
client can also split between
loan products.
Loan
Value Ratio (LVR)
When considering
a loan application the Loan to
Value Ratio (LVR) needs to be
determined. The LVR is also known
as a LSR or Loan Security Ratio.
It means the same thing, however
is basically a figure expressed
as a percentage or how much the
borrowed amount is in relation
to the value of the security property.
LVR
= LOAN AMOUNT
VALUE OF PROPERTY
The
Value of the Property is determined
as the purchase price or value
as determined by an independent
valuer appointed by the Lender
- whichever is the lesser.
The
LVR needs to be calculated for
all loans to determine:
Whether
the Lender can lend the amount
required.
Where required, the Mortgage Insurance
premium.
Some Lenders will lend up to 95%
of the value of a property if
it is to be used for owner/occupied
purposes. Those who do not lend
up to 95% will lend a maximum
of 90%. Lenders will generally
lend a maximum of 90% on investment
property.
These
maximum amounts may be reduced
depending on the quality of the
property and the applicant. The
maximum amount that can be lent
to a foreign investor, in most
instances, is 70%.
When
the loan amount exceeds $500,000,
mortgage insurance is generally
unattainable and a 20% deposit
therefore will more than likely
be required. Individual circumstances
may be considered, however, and
cover may be possible for a particularly
strong applicant. A reduction
in the maximum amount that can
be financed usually coincides
with an increase in the potential
risk to the Lender.
Debt
Servicing Ratio and Surplus Income
When assessing whether a client
can service a loan, some lenders
measure the borrower's capacity
using a Debt Service Ratio (DSR)
calculation. The DSR is calculated
by dividing the applicant's financial
commitments (including the repayments
on the proposed loan) by the verifiable
income. A representation is below:
DSR
= Financial Commitments (annually)
Gross Taxable Income (annual)
The
Ratio should not exceed 35% and
the lower the Ratio, the stronger
the application. On occasion this
figure can be greater, particularly
when the applicants are on a high
income. This will normally mean
that their surplus income remains
high despite their commitments.
Their surplus income is calculated
as follows:
Surplus
Income = Gross Taxable Income
- Financial Commitments
Most
Lenders require a minimum annual
surplus income of between $12,000
and $15,000, however this is not
a firm requirement, and varies
from loan to loan and lender to
lender.
Basic
Home Loans
Interest rates
are very much 'you get for what
you pay for'. A client might get
a cheap variable rate for a very
basic home loan that offers limited
opportunity to pay off the loan
earlier, or they may go for a
little more expensive loan which
allows them to pay off their debt
quicker and over all save them
potentially thousands of dollars.
A
basic home loan is one that really
offers none of the extras that
will be discussed in the paragraphs
below. They will usually have
very low interest rates, and should
have little to no regular fees,
though usually won't allow a borrower
to pay any extra off the loan
or will only allow them to vary
your repayments once per year
or so. Because they are cheap,
the lenders don't make much money
from these loans, so may load
up 'deferred establishment' fees
etc - i.e., paying off their loan
early, say if they refinance for
example. (The Uniform Consumer
Credit Code [UCCC] does not allow
a lender to charge fees for repaying
a loan early, or charging 'early
repayment fees', however a lender
may charge 'Deferred Establishment
Fees' instead.)
These
types of loans are best suited
to those will never need or want
any flexibility with their loan,
aren't able to pay any thing extra
off their loan, or who may want
to use their extra income for
other investments etc.
Early
Repayment Theory
The idea behind
taking any flexible product should
be how it's going to allow a borrower
to pay their loan off early through
options for bringing down the
balance more quickly. The reason
a borrower should want to pay
a loan off as early as possible,
is that the earlier they pay it
off, the more money they will
save. By way of example, let's
say a client has taken a variable
'principal and interest' loan
for $150,000 over a term of 25
years. Let's also say that their
interest rate was 6.50%, and that
through some wonderful chain of
events, their interest rate didn't
change during the entire term
of the loan.
Upon
their 300th payment, which would
be the last payment they make
after 25 years of mortgage they
would have paid $150,000 back
of the principal, and approximately
a total of $153,843 in interest.
Lets say now, that they took less
time, and managed to pay pack
the loan in say 20 years. After
paying back the original amount
of $150,000, they would have paid
approx $118,406 in interest, which
would be a saving of approx $37,437
in interest repayments. To take
that even further, let's say they
only took 10 years to pay off
their mortgage. On top of their
initial borrowed amount of $150,000,
they would only have had to pay
back approx $54,487 in interest,
which would be a saving of approx
$99,356 than if they had taken
the full 25 years to pay back
the loan. Put simply, the sooner
a borrower can pay a loan off,
the more they will save in interest.
The
basic concept for putting more
into a loan to pay it off quickly
is simple. If interest rates didn't
change, neither would the repayments.
The only thing that would change
is the relationship between the
Principal portion of the repayment,
and the Interest portion of the
repayment. When a borrower begins
repaying a loan, a very small
portion of each repayment is paying
down the principal of the loan,
while the vast majority is servicing
the interest that's been calculated
on the balance of the loan. This
means that as borrowers pay more
and more off the loan, the interest
portion of the payment will be
less as the interest has been
calculated on a lesser amount,
which also means that the principal
portion of the repayment will
be greater. This means that a
borrower will be paying more off
the principal amount with each
repayment. Don't forget, repayment
amounts are calculated at repaying
the loan over 25 years. By owing
less, interest being calculated
is less, which means that each
repayment is paying more off the
principal, and thus reducing the
balance that is owed.
Standard
Variable Rate
Each lender will normally offer
a number of loan products. The
'all singing all dancing' product
is generally the one that is calculated
at the Standard Variable Rate,
and is usually the most expensive
of the variable rate products
(with the exception of a Line
of Credit). The loan product with
the Standard Variable Rate usually
has all the 'bells and whistles'
attached so is usually more expensive
than the more simpler variable
rate loans, and as such may be
the bench mark you use when comparing
how much margin each lender has
put on their loans.
Introductory
Rate Loans
Most lenders will
offer an Introductory Rate Loan.
These are also known as 'Honeymoon'
loans, due to the honeymoon period
of a heavily discounted rate.
Generally lenders will offer a
very cheap rate for a period of
usually one year, though some
may do as little as six months,
while others may offer the discounted
rate for up to three or fours
years. The introductory rate can
take one of two forms, the first
being a fixed discount, and the
second being a discounted fixed
rate. The fixed discount is a
rate that will be variable, but
fixed at a certain level, or margin,
below the standard variable rate.
This means that for the introductory
period, the discounted rate will
move with the market. If the standard
variable rate rises by say, 0.50%,
so will the discounted rate, if
the standard variable rate drops
by 0.50% so will the discounted
rate. The discounted fixed rate
is a discounted rate, fixed at
that rate for the introductory
period. Regardless of what the
market does, the discounted fixed
rate will remain the same for
the introductory period.
Whilst
these loans are sometimes quite
popular, there are a number of
things to look out for. Most of
these loans will roll over into
the standard variable rate or
even a higher variable rate than
the standard variable rate (usually
the major lenders won't do this,
however some of the smaller ones
may…) after the initial
introductory period. This means
that any benefit a borrower may
have had by way of cheap rate
for the introductory period, may
be negated by the fact that they
are now paying the most expensive
rate in the lender's variable
suite. Some lenders may also 'cap'
or limit the amount of extra money
a borrower can pay off the loan
during the introductory period,
which in turn may limit the benefit
of having the introductory period
in the first place. You should
also check what sort of exit fees
a borrower might have after any
period of the loan, for example
they will more than certainly
have to pay an exit fee of some
description if they pay out the
loan or refinance at the end of
the introductory period. This
basically encourages borrowers
not to jump from honeymoon product
to honeymoon product, and allows
a lender to cover costs incurred
during the introduction period.
If
a borrower is considering a honeymoon
product, you should consider what
their financial goals are. This
will allow you to compare how
much they will pay over a set
time, and work out which is the
better deal i.e., you need to
work out how long they intend
to pay a mortgage for. Let's say
your borrowers get an introductory
rate loan that rolls over into
a standard variable rate. Work
out your average monthly repayment
over different periods of time
(say 5 years, 10 years, 15 years,
and 25 years). Now compare this
to the repayment amount the client
would be making if they took a
product with a lower interest
rate than the standard variable
rate (one that still meets their
requirements though) to see which
works out cheaper. Although they
might be making very small repayments
during the honeymoon period, they
will be making the maximum payments
afterwards. This will more than
likely work out more expensive
(especially as more time goes
by), than if they had taken a
product with a rate higher than
the introductory rate, but less
than the standard variable rate,
that remains relatively constant
(and consistent with the market
fluctuations) throughout the loan
term.
Another
suggestion you may want to make
to a client is that when they
take on an introductory rate loan
they may want to consider making
repayments at the roll over rate
(if their loan product allows
it) rather than at the introductory
rate, from day one. This will
allow them to get into the habit
of making repayments at the higher
amount, so they shouldn't have
to change their financial exposure
or disposable income when their
honeymoon period is finished.
It will also allow them to build
up equity in their property a
lot more quickly.
Redraw
Facilities
This type of loan allows a borrower
to put extra funds into the loan
to bring down the principal amount,
but also allows them to 'redraw'
those extra funds at any time.
Let's say they have a loan of
$200,000 and savings of $10,000.
The borrower could put their savings
directly into the loans redraw
facility, and would then only
be paying interest that's been
calculated on $190,000.
Most
redraw facilities are fairly cheap
by way of interest rates and fees.
They are usually well below the
standard variable rate, and most
don't incur regular monthly or
annual fees. It is not unusual
however, for most lenders to have
a minimum redraw amount, usually
around $2000, though some may
be lower or have no minimum at
all. Most lenders will also charge
a fee whenever you redraw, usually
around $50 or so, but again this
varies from lender to lender.
Something you should be aware
of is an activation fee. This
may apply to a variety of facilities
attached to the loan depending
on the chosen lender, and is basically
a fee to 'switch on' or activate
a facility such as a redraw. A
client should only have to pay
the activation fee once for each
facility, however may still have
to pay a fee each time they use
the facility such as redraw etc.
The
redraw facility is probably best
suited for low to medium income
earners, who manage to put a little
extra away each month. You should
think of the redraw facility as
a savings account, not an account
for everyday transactions. It's
a good way of saving up for a
holiday, car, or other property
etc, while using these savings
to pay off a loan more quickly.
The clients only put in what money
they have left over at the end
of the month after their mortgage
repayment and living expenses,
or they can nominate to pay extra
each month if they are direct
debiting from their salary. If
they perhaps get a cash bonus,
a return from their tax, or some
unexpected windfall, they could
also consider putting this into
their redraw facility. By having
the money in the loan account
they are not earning interest
on it, therefore won't have to
pay tax on any interest etc, however
will be getting the same interest
rate benefit of what ever their
loan interest is.
All
in One Accounts
An all in one account allows a
borrower to pay their salary and
extra income such as rent etc,
directly into the loan account,
and effectively combines all their
accounts such as loan, cheque,
and savings accounts into one.
This obviously brings down the
amount they owe and as such, reduces
the amount that interest is calculated
on and allows them to pay off
their loan more quickly. Amounts
above what is required for their
minimum monthly repayment amount
can then be accessed from their
all-in-one account, much the same
as normal transaction accounts.
To
take advantage of this system
even further, most lenders will
allow a borrower to connect a
credit card to their all in one
account. By paying as many expenses
as possible on the credit card
and utilising the interest free
days, the borrower then tries
to keep the maximum amount of
money in the loan account for
the maximum amount of time, as
interest is calculated daily but
charged monthly. The borrower
could pay most of their major
bills and expenses etc by credit
card and take full advantage of
the interest free period (30,
44, or 55 days etc). They then
clear the credit card once per
month, preferably just before
or just after the next lot of
income has been added to the all
in one account. This means that
they have kept the majority of
their income in the loan account
for the longest time, have gained
some more frequent flyer points,
and have effectively used a credit
facility to pay their expenses
while not paying interest on their
credit card bills.
Normally
these loans will be either at
the standard variable rate or
higher (sometimes up to 1.50%),
and may incur monthly fees. You
should also make sure that the
client can access their funds
directly from the loan account,
and don't have to set up 'satellite'
accounts to transact from. If
they do, you need to make sure
that these accounts don't incur
any costs etc. Some lenders allow
a borrower to put all their income
into the loan, however make the
borrower set up the satellite
accounts that sit off the loan
account in order for to get access
to these accounts. This means
that the borrower may have to
nominate how much they are going
to spend from each satellite account
each month. Their income goes
into the loan account, and then
their allocated monthly spending
amounts are allocated to their
respective satellite accounts
for them to access, such as below:
If
this is the case with the all
in one account, you will need
to make sure the satellite accounts
don't incur any fees, and that
the clients have the ability to
transfer extra funds across at
anytime without penalty. The offshoot
is, that if a borrower under-spends
for the month, there is all that
time that the extra funds could
have been sitting in the all in
one account reducing the amount
of the loan that interest is being
calculated on.
Most
lenders will let a borrower transact
directly from the all in one account.
You should check how your client
can access their funds (ATM, over
the counter, internet, credit
card, cheque book, phone bank
etc), including how they put lump
sums into the all in one account
(most lenders will let them use
Giro-post etc at the post office
for deposits), how many free transactions
per statement period (normally
one month) they are allowed and
of what type, and what associated
fees the loan may have as a result
of having an all in one account.
These
types of loans are usually better
suited to medium to high-income
earners, as the fact that a borrower
is paying a higher interest rate
than say a redraw facility, will
be offset by the fact that a higher
salary is being credited directly
into the loan account. This means
that the higher their salary and
rental income going into the loan,
the lesser the amount of the loan
that interest is being calculated
on. Just like a redraw facility,
a borrower should be able to get
access to funds that have built
up in their account above what
the minimum repayments have been.
100%
Offset Account Loans
These loans are very similar to
the All in One Account loans,
however rather than a borrower
putting their salary and other
income directly into the loan;
it goes into an offset account
that's linked to the loan. What
ever is in the offset account
comes directly off the loan, or
'offsets' the loan amount for
interest calculations. Perhaps
best described as follows:
A
borrower will still have access
to all the usual savings account
facilities such as ATM, Cheque,
Credit Card, and Internet or phone
banking etc, however, they are
effectively not earning any interest
on what's in their savings, now
offset, account. Similar again
to the all in one, this facility
is best utilized with a credit
card to maximize the amount of
time the largest amount of extra
money possible stays in the offset
account for the maximum amount
of time, and as such reduces the
amount of the loan account for
interest calculations.
An
un-stated feature of the off set
account is that normally the minimum
monthly loan repayments come out
of this account. This means that
whatever amount has been saved
in the offset account is now in
reserve as monthly payments. By
way of example, let's say a borrower
has $10,000 in their offset account,
and their minimum monthly repayments
are $1000. If for one reason or
another the clients have less
disposable income than when they
initially got the loan (job loss,
more expenses for new family members
etc), or they need to divert the
money that they usually put into
the offset account to somewhere
else, they now have enough in
their offset account to effectively
meet the minimum repayments every
month for ten months. This gives
the borrowers a little more flexibility
in relation to squirreling money
away, or spending it in other
places when needed.
In
relation to the offset account,
most lenders will charge a monthly
account-keeping fee, (usually
between $5.00 and $10.00), so
don't forget to add this to your
client's monthly repayments during
the interview. Some lenders won't
charge the account-keeping fee,
but may limit the amount that
a borrower can draw at any time,
for example minimum $500 draw,
which may decrease their flexibility,
or the lender may charge the client
a monthly fee on the loan.
These
loans are sometimes explained
as having interest calculated
on what's in the offset account
at the same interest rate as the
loan amount, then having that
interest offset against the interest
that would normally have been
charged for that month on the
loan. By way of example, let's
say the principal and interest
repayments on a loan are $1800
per month, and that the break
up of the next payment is $1000
interest and $800 principal. Let's
also say that during that month,
$50 would have been earned in
interest on what was in the offset
account if it was being calculated
at the same interest rate as the
loan. The lender would take the
$50 that had been earned in interest,
off the $1000 that they were charging
in the interest part of the repayment,
so that now $950 in interest would
be paid. As the total repayment
is $1800 per month, and $950 in
interest is being paid, the remaining
$850 would be coming off the principal
portion of the loan. Even more
basic, is that interest is only
charged on the balance of the
mortgage minus the balance of
what's in the offset account.
If a borrower had a $200,000 mortgage
and had $50,000 in the offset
account, interest would only be
being charged on $150,000.
A
borrower could also use the 100%
offset account to inadvertently
pay off some principal from an
interest only loan. They can do
it with just about any interest
only loan that has the facility
to pay extra, however the 100%
offset is the easiest to use as
an example. Using the last few
paragraphs explanation of how
the offset works, think now that
that $1800 repayment is made up
entirely of interest repayments
for interest only loan. $50 has
still been earned in interest
on the money that was in the offset
account, which means that $50
will come off the interest repayment.
Remembering that the payments
of $1800 would stay the same if
interest rates didn't change,
and that $50 has now come off
the interest repayment (the repayments
are still $1800), it now means
that the $50 earned in interest
has now actually come off the
principal of the loan. The more
money in the offset account, the
more interest that will be earned,
and the more money that will be
coming off the principal with
each repayment.
Like
the all in one account, a 100%
offset account loan normally has
a higher interest rate and may
have higher fees due to its flexibility,
including bells and whistles.
Also like the all in one facility,
100% Offset account loans are
usually better suited to medium
to high-income earners. The more
disciplined they are in their
spending, the more benefit a 100%
offset account will have in reducing
the time it takes to pay off their
mortgage.
Partial
Offset Account Loans
Some lenders offer partial offset
account loans, though these are
becoming a rarity of late. These
loans offer the same benefits
of the 100% offset account loans,
with the major exception being
that only a portion of what's
in the offset account is coming
off the loan amount for interest
calculation. By way of example,
say a client has a loan for $150,000
with a 40% offset account, and
they have $10,000 in that account.
Taking into consideration that
only 40% of what ever is in their
offset account will be used to
offset the loan amount for interest
calculation, interest will be
only charged on $146,000 of their
loan.
These
loans are obviously not as beneficial
as a 100% Offset account loan,
and therefore are usually cheaper
by way of interest rates and fees.
They provide a good mix of cheaper
rates and fees, and a little more
flexibility when it comes to ways
of paying out a mortgage sooner
than a very basic loan.
Interest
Offset
Some times this type of loan may
be sold as something similar to
a 100% or partial offset account,
however they are quite different.
The way they work is rather than
have the amount that's in an offset
account come off the loan for
interest calculation, the interest
that would usually be earned on
the money in the offset account
as though it were a normal deposit
account (depending on what interest
rate has been given on this account;
it will usually be significantly
less than the interest rate of
the loan.) goes straight into
the loan itself. Its only benefit
is that a borrower doesn't have
to pay tax on the interest earned
on their savings, as essentially
they haven't earned any. Instead,
what they would have earned has
gone straight into their loan
to reduce the principal by the
amount that would have been earned
in interest at the normal transaction
account interest rate. These are
very simple loans, and not really
that effective anymore. The majority
of lenders have either ceased
to offer these types of products,
or have modified them to make
them more competitive.
Professional
Packages
Most of the major lenders will
offer special packages for higher
income earners or borrowers in
a specific profession. These are
commonly known as 'Professional
Packages' and will require a borrower
to meet certain requirements before
qualifying for the package. These
might be such things as having
a minimum income amount (usually
around $50,000 or $75,000 for
singles or $80,000 for couples,
though you should check with the
various lenders as to whether
they will include rental income,
including potential rental income
from the new property, as part
of a borrowers annual income),
a minimum borrowing amount (usually
$150,000 or $250,000), and/or
employment in a specific capacity,
such as a doctor/medical practitioner,
engineer, solicitor, accountant
etc. In recent times, employment
type has become less important
when going for a Professional
Package, and generally meeting
the minimum income and borrowing
above the minimum amount should
suffice.
The
packages vary from lender to lender,
and may not always have the word
'Professional' anywhere in the
package name. Generally the packages
will package all the fees such
as establishment fee, monthly
fees, associated account keeping
fees, annual credit card fees
etc into one annual fee, usually
between $250 and $300. Depending
on which lender you are using,
a discount off the variable interest
rate for the life of the loan
may apply. It may be anywhere
between 0.20% and 0.50%, and may
depend on how much is being borrowed.
For example, if a client is borrowing
over $250,000 with a specific
lender, they may be eligible to
get a discount of 0.50% off the
standard variable rate for the
life of the loan, however if they
were to borrow under $250,000
with that same lender, they may
only be eligible for a 0.20% discount
off the standard variable rate
for the life of the loan.
One
or two lenders have been known
to pay the mortgage insurance
premium on a loan, instead of
reducing the rate, as part of
a Professional Package. This however,
is an exception rather than the
rule.
The
Professional Package can generally
only be packaged with the Standard
Variable Rate loan the lending
institution offers. It will usually
be the loan with all the bells
and whistles, and by getting a
discount off the rate the client
should be getting a pretty good
deal. The question you need to
ask the client is 'Do you really
need all the bells and whistles?'
The same lender might offer a
more basic product that suits
the client's needs and will be
cheaper by way of interest rates
and fees than the discounted variable
rate loan under the professional
package.
Construction
Loans
When building a new home, a borrower
will not need the entire amount
of the loan drawn down all at
once. If they did this, they would
be making repayments on the entire
amount right from the start, and
not just on the amount they had
needed at the time or had drawn
down. Construction of a dwelling
is generally divided into five
stages. These are usually as follows:
Purchase
of the land
The Pad (floor - used to be known
as "bearers and joists"
for wooden floors,)
Roof (usually including frames)
Lock Up
Final
With a construction loan, you
can break up the drawn down of
the loan amount into five progressive
draws, that parallel the construction
phases. As one phase of the construction
is complete, the borrower draws
down the next portion of the loan.
This means that interest is only
being calculated on that amount
on which has been physically drawn
down, and that the borrowers are
only making repayments on the
portion they have used. When construction
is complete, the borrowers can
nominate (usually when setting
up the loan) which product or
loan type their loan will revert
to.
Most
lenders will normally lend only
around 60% -65% of the land value
for purchase, and this is usually
done as a land loan. More and
more however are lending up to
90% or 95% of the land value.
When a client decides to build
and apply for a construction loan,
the lenders will need to see at
least council approved plans and
a fixed price building contract,
before they will unconditionally
approve the construction loan.
If
a client has borrowed to purchase
the land, and is looking at obtaining
a construction loan, the value
at which most lenders will estimate
the completed package on will
only be the value of the land,
plus the cost of the building
materials for the dwelling. For
example, if they are building
a house on land that had been
purchased for $150,000, and the
cost to build was estimated at
$80,000, the lender would put
the total value of the house and
land at $230,000, where as an
identical 'completed' house on
an identical piece of land next
door to you may be worth $300,000.
This means that if the maximum
Loan to Value Ratio (LVR) the
lender will give is 90%, then
they will only lend 90% of $230,000.
Once the house is complete, the
borrower can then get it re-valued
if they prefer, to bring it up
to market value. Using the same
lender, the clients may then borrow
a total of 90% of $300,000, which
may be the sale value of the completed
package. Some lenders will lend
on the estimated resale value
of the completed dwelling and
land at the current market value,
however you will need to ask each
lender if they do this.
After
each phase is completed, a valuer
will normally go out to inspect
the property to make sure that
the respective phase is complete,
according to the requirements
set out in the fixed-price building
contract. Once the valuer is satisfied,
they will contact the lender and
authorize the next payment to
the builder's account. If a borrower
has concerns that things will
not go according to plan, and
that they may need money to pay
contractors etc before the set
phases are complete, you may want
to suggest looking at getting
a very small line of credit as
part of the loan to cover the
borrowers during those times.
That way they will be able to
pay any urgent bills from their
line of credit before the appropriate
phase is complete, and then pay
their line of credit balance to
zero from the construction loan,
once the appropriate phase is
complete and the money has been
drawn down.
To
ease the financial burden during
the construction phase, construction
loans are usually 'Interest Only'.
The interest rate may be slightly
higher than the normal residential
loans, however should be less
than that of a line of credit/equity
mentioned below.
At
the end of the construction period,
the borrower can get the property
re-valued as a complete house
and land package, and may be able
to increase their borrowings if
they decide they need more money.
The completed package should be
worth more than the original valuation
used for the construction loan,
and as such the borrowers may
be able to refinance or increase
their loan based on an increased
security value.
Bridging
Loans
In many instances, vendors (the
sellers) selling their homes will
be selling with the intention
to purchase another property,
or buyers may be waiting upon
completion of the sale of an existing
property prior to purchasing a
new one. If there is a mortgage
on either of the existing properties,
things can get a little tricky
if the sale of the existing property
will not take place until after
settlement of the new one. To
ease the strain, and allow completion
of purchase for the new property,
Bridging Finance may be arranged.
Bridging
finance allows a borrower to obtain
finance to 'bridge' the gap between
having to pay for a new property
and receiving the proceeds from
the sale of their existing one.
What will normally happen is that
a lender will take security over
both properties until the sale
of the existing one is complete.
Usually the bridging amount or
'peak debt' will not be allowed
to be above 80% of the value of
both properties. Some lenders
will allow a borrower to capitalise
the interest payments (add them
on to the loan) for a period of
time or until the 80% limit is
reached, to ease the financial
burden on the borrowers. The bridging
loan is usually separate from
the lenders normal products, and
may be slightly more expensive,
however the borrowers nominate
which product their loan defaults
to after the bridging period is
over. When they sell their existing
property they simply pay the proceeds
from the sale off the balance
on the bridging loan, and revert
to their nominated loan product.Consolidation
Loans
Most types of loans and most lenders
will let a borrower use their
mortgage to consolidate other
debts such as credit card debts,
personal loans, or car loans etc.
You will generally find that the
interest rates on these other
types of debt are much higher
that the interest rates being
charged on a residential home
loan, so it makes sense to shift
the debt into a vehicle (such
as a home loan) where the interest
on those debts are being calculated
at a lesser amount.
If
a client is considering this,
there are a couple of things they
should consider. You should make
sure that by adding personal debt
to their home loan, they don't
cross the barrier in relation
to LVR where they have to pay
mortgage insurance which is usually
above 80% of the value of the
security property. If they are
clearing their credit card debt,
they should also then either cut
them up or lower the limits on
them. By clearing the debt on
the credit cards, they shouldn't
trick themselves into thinking
that they have paid them off (remember,
they have only transferred the
debt. It's still there and they
still have to pay it off), and
thinking that they can then go
and run them back up to their
limits. If your client does this,
they will find themselves on the
debt merry-go-round where they
build up debt, transfer it to
their property, then build up
more debt etc, without ever paying
any of it off. You clients should
want to consolidate their debt
with the intention of reducing
it and the financial burden, not
increasing them.
Lines
of Credit/Lines of Equity
Lines of Credit are similar to
having a big cheque book, with
a borrower having to pay interest
on the total amount of cheques
they've written. A line of credit,
or equity line as they're sometimes
called, is an approved limit of
borrowings that a borrower can
use a piece at a time or all at
once. Let's say a borrower has
a line of credit for $200,000.
This means that they can use up
to a total of $200,000 either
all at once or a little bit at
a time. They could for example
invest $50,000 of it in the share
market, and then only pay interest
on that $50,000. Taking or receiving
money from a loan or line of credit
is called 'drawing it down'. As
soon as a client does this they
will be making repayments on interest
calculated on the $50,000, not
$200,000. If they were to use
a further $70,000 for house renovations
for example, then they would be
paying interest calculated on
$120,000 ($50,000 for shares +
$70,000 for investment) leaving
them $80,000 that they could use
if they wanted to or need to.
If they don't use the remaining
$80,000, then they won't have
to make repayments on it.
Some
lines of credit will allow a borrower
to capitalise the interest until
they either reach the limit of
the line of credit, or a set percentage
of the limit. This means that
the repayments can be added to
the amount they have already 'drawn
down'. Say they've drawn down
$75,000 of their $200,000 line
of credit, and the repayments
are $800 per month. In the first
month after they've drawn down
their $75,000, a further $800
(their first repayment) will be
drawn down from their line of
credit. The next repayment will
be calculated on $75,800 so might
be $812 which will be drawn down
to cover the repayment, making
the total amount drawn down $76,612
and so on right up to the time
that the borrower has drawn down
the total limit, or the set percentage
(normally 80% or 90%). After this
occurs, the borrowers have to
start to service the debt themselves,
or pay off a portion of the loan.
Lines
of Credit/Equity are by their
nature Interest Only (IO), with
the borrower once again relying
on the capital growth or gain
from the investment etc to pay
out the loan and make a profit.
They pay off their loan by putting
funds directly back into the facility.
Lines
of Credit are usually one of two
types. They are 'Revolving' or
for a set period of time. A Revolving
Line of Credit allows a borrower
to maintain the facility for a
set number of years. In effect,
they can draw up to their limit
and pay it down as many times
as they want within those years,
and not have to worry about a
re-assessment etc. These are sometimes
also known as "evergreen".
The lines of credit for set period
of time, offer the same sort of
facility, but only for the negotiated
period of time - normally one
to five years.
Lines
of Equity or Lines of Credit are
usually more expensive interest
rate wise, and will often have
a monthly, ½ yearly, or
annual fee attached to them. This
may be from $10 per month to $600
per year, though most seem to
be in between the $120 - $350
per year category.
Reverse
Mortgage Home Loan
The reverse mortgage loan was
introduced to the market to cater
for retirees to take advantage
of the equity in their home and
use it to supplement their retirement
income. Basically retirees can
use this type of loan to borrow
money against the equity in their
property, and have it paid to
them in either lump sum or in
installments depending on the
lending institution involved.
Generally all repayments, fees,
and charges etc will be added
to the loan balance each month
so that the borrowers don't have
to make any payments what so ever.
The lender recoups the repayments
and fees etc when all borrowers
pass away, the property is sold,
or the borrowers no longer live
in the property. Having said this,
generally the borrowers may make
payments at any stage if they
wish to reduce the loan balance.
There
will normally be a minimum borrow
of around $10,000 and quite often
a maximum borrow that will be
expressed as a dollar figure ($80,000
- $100,000) or as a percentage
of the value of the property (15%-20%
depending on borrowers age). To
qualify, the borrowers will generally
need to be over 65 years of age.
Some lenders will wear the risk
if the end debt amount is more
than the property is worth, however
this will vary from lender to
lender.
These
loans are obviously great for
older people who may be doing
it a little tough financially
after retirement, or who may need
a large amount of money is a relatively
short time for something like
a caravan trip to the outback
etc. One thing to be wary of is
the 'all care no responsibility'
method of repayment. Basically,
the debt is left to the beneficiaries
of the borrowers to pay, which
might come as a nasty surprise
should they be expecting a clean
inheritance.
Compulsory
Comparison Rates (CCR)
On 1st July 2003 the UCCC was
updated to include Compulsory
Comparison Rate legislation for
those loans that fall under the
UCCC regime. This means that from
this date all credit providers
and finance brokers are required
to provide Compulsory Comparison
Rate information to prospective
borrowers/debtors.
A
compulsory comparison rate is
a way of assisting consumers to
compare the true cost of different
loans, allowing for the different
interest rates, fees, and charges,
of the different credit providers.
The rates are calculated by adding
fixed fees and charges (monthly
account keeping fees and application
fees etc) to the interest rate,
and expressing the total as an
annual interest rate.
Note:
that the discharge costs are not
included and the CCR does not
take into account the period that
the loan will be in place. i.e.
The average time that a loan is
held.
CCR
information must be provided or
available in the offices of credit
providers and finance brokers,
on any internet site that advertises
credit products, when any application
form is sent or given to a prospective
borrower, and in any advertisement
that contains an annual percentage
rate.
When
displaying CCR information in
the office, finance brokers must
display the Comparison Rate Schedule
(CRS) for each credit provider
they deal with. If the broker
deal with more than six credit
providers, then only schedules
for the main six need to be provided.
When
displaying CCR information on
a website or any other public
electronic system, CRS's for ALL
credit providers must be displayed,
where the website advertises consumer
credit products however general.
This is because the electronic
environment is considered infinite
and therefore able to 'store'
CRSs for all credit providers.
When
sending or completing application
forms, a copy of the relevant
CRSs must accompany and credit
application(s). If credit applications
are sent for a variety of credit
providers, a CRS for each credit
provider must also be sent.
A
comparison rate must also be supplied
in any advertisement that contains
an annual percentage rate, including
print, TV, radio, or internet
advertisements. The amount and
term for which the comparison
rate needs to provided will depend
on the typical amount and term
of the contract being advertised.
The
Comparison Rate Schedule (CRS).
The Comparison Rate Schedule must
specify the comparison rate for
the following amounts and terms.
Amount
Term Comparison Rate
$200
2 weeks
$600 8 Weeks
$1,000 6 months
$1,500 1 year
$2,500 2 years
$5,000 2 years
$10,000 3 years Secured / Unsecured
$15,000 4 years
$20,000 4 years
$25,000 5 years
$30,000 5 years Secured / Unsecured
$50,000 7 years
$70,000 7 years
$100,00 25 years
$130,00 25 years
$150,000 25 years
$200,000 25 years
$225,000 25 years
$250,000 25 years
$275,000 30 years
$300,000 30 years
For
the most part, credit providers
will be responsible for providing
updated CRSs for all their products.
You should be able to contact
your respective lender Business
Development Managers (BDMs) to
obtain updated CRSs.
Overview
The
Legislation started on 1st July
2003
The law has a sunset date of 1st
July 2006.
The law only applies to UCCC regulated
lending and does not apply to:
• Regulated continuing credit
contracts
• Unregulated credit
The Six Basic Rules
An
advertisement must state an annual
percentage rate if the amount
of any repayment is stated in
the advertisement.
If the advertisement contains
an annual percentage rate, the
advertisement MUST, if any credit
fees and charges are payable:
• State that fees and charges
are payable; or
• Specify the amount of
the fees and charges payable;
or
• Specify the amount of
some of the fees and charges that
are payable and state that other
fees and charges are payable.
If an advertisement specifies
an interest rate, you MUST specify
a Comparison Rate (CR)
You Must display a Comparison
Rate Schedule (CRS) in premises
at which:
• You display or make available
for collection by members of the
public copies of documents advertising
consumer credit products; or
• Customers may lodge applications
for credit in person, or
You must enure access to the CRS
on any internet site that advertises
customer credit products.
A
CSR MUST accompany any application
for credit that is sent or given
to a prospective customer.You
are never obliged to provide a
CR for a specific loan amount,
but only for the loan amounts
and terms specified in the legislation.The
CR MUST be clearly identified
as the Comparison Rate and Must
be accompanied with this Prescribed
Warning no smaller in font than
10
WARNING: This Comparison Rate
applies only to the example given.
Different amounts and terms will
result in different Comparison
Rates. Costs such as redraw fees
or early repayment fees, and costs
savings such as fee waivers, are
not included in the Comparison
Rate but may influence the cost
of the loan.
Australian
Federal Privacy Act 2004
The Act deals with various acts
of privacy over personal information
including solicitation, use, storage,
access, alteration and credit
reporting, and was introduced
on the 21st of December 2004.
The act is referred to as the
National Privacy Principals (NPP).
The
NPP is a direct result of concerns
within Australia about the lack
of trust held in organisations
about the way that they deal with
personal information. The Act
imposes significant obligations
on a broker or lender in relation
to the collection, storage, accuracy,
use, disclosure, retention, and
security of personal information,
and embraces any information that
would enable an individual to
be identified.
In
its simplest form, the Act covers
three main rules. They are as
follows:
The
information obtained from an individual
cannot be used for any other purpose
other than the primary reason
it was given for, unless prior
approval has been given by the
individual.
The individual must give signed
approval for the information to
be disclosed to different agencies
or individuals.
All steps must be taken to limit
the risk of the individual's personal
information being accessed by
anyone other than those persons
or organizations that the individual
has authorised to view the information.
If you would like to find out
more information about the Privacy
Act, go to the website www.privacy.gov.au
Financial
Transactions Report Act 1988
This Act was introduced to assist
the Federal Government with the
detection of tax evasion and other
criminal activities. The onus
is on the 'Cash Dealer' to report
suspect transactions. It means
that if an originator or broker
identifies fraudulent actions
by a borrower, the originator
or broker are obligated to inform
the relevant Lender immediately.
An FTRA Report will be required.
Examples of suspect transactions
may include but are not limited
to:
Instances
where stock on hand has been undervalued.
Cash takings have not been banked.
Duplicate tax documents have been
tendered showing different sets
of figures.
4.48 In general terms anyone can
complete a 'Suspect Transaction'
report document if they believe
that a transaction or information
that they have is of a suspicious
nature, within the requirements
of the Act.
NSW
Finance Broking Contracts
From 1 August 2004 the Consumer
Credit Administration Act (NSW)
requires a finance broker who
negotiates UCCC regulated credit
for a resident of NSW to enter
a Finance Broking Contract (FBC)
with the borrower prior to undertaking
any work. The Act prescribes significant
detail which must be included
in the FBC including details of
commission (irrespective of who
pays the commission), and the
finance broker's panel of lenders.
The Act does not introduce any
licensing regime.
The
legislation applies to any finance
broker who arranges consumer credit
for a commission irrespective
of who pays that commission. The
definition of finance broker will
catch most, if not all kinds of
intermediaries, including mortgage
managers and program managers.
It is not limited to mortgage
broking and will include intermediaries
arranging personal loans (such
as car finance).
Although
the law only applies to UCCC regulated
loans made to residents of NSW,
it is likely that many finance
brokers will adopt this regime
for unregulated loans and loans
made to non-NSW residents, so
that there is a single uniform
national work practice.
Key
provisions.
The
key provisions of the Finance
Broking Contact (FBC) are as follows:
a.
An FBC must be entered into prior
to commencing work whether or
not a commission is payable by
the borrower.
b. The FBC must be signed by the
borrower and a copy of the contract
must be given to the borrower.
c. The FBC must contain prescribed
information (see below).
d. No commission may be paid before
obtaining a credit approval.
e. No commission is payable by
the borrower unless the credit
approved is in line with the written
FBC. However, brokers may charge
borrowers if the credit is approved
and the borrower elects not to
proceed, but only if the FBC says
so.
f. Finance brokers must retain
"full particulars" of
a transaction, including a copy
of the relevant FBC for 7 years
after settlement of the loan.
It is unclear what comprises "full
particulars", but it appears
that a copy of the relevant FBC
is not sufficient because of the
term "including". What
is sufficient will need to be
determined having regard to specific
business models.
g. Brokers must not collect valuation
fees, credit application fees,
or credit establishment fees unless
it is by cheque made in favour
of the valuer (for valuation fees),
the credit provider, or the credit
provider's representative (eg
mortgage managers).
h.
Borrowers can apply to the Tribunal
if there is a breach of the FBC
or the legislation. The Tribunal
can make broad ranging orders
including refund of commission.
The legislation makes it clear
that these orders cannot affect
any underlying loan contract.
The
FBC must set out the following.
a.
The name and address of the finance
broker and if the finance broker
is a company, the ACN.
b. If the finance broker trades
under a business name - the name
and address of the principals.
c. The date by which finance is
to be secured.
d. The details of the loan as
required.
e. The broker's panel of lenders.
f. A statement that the panel
of lenders do not necessarily
represent all lenders who offer
credit of the type required.
g. The amount of commission payable
by the borrower or, if the exact
amount of commission is not known,
the method of calculating the
commission and an estimate of
the amount and when and how such
commission will be payable.
h.
If commission or other benefits
are to be received from somebody
other than the borrower:
a statement that the broker will
receive that benefit;
a statement of the highest and
lowest remuneration;
an undertaking by the finance
broker that the broker will, after
recommending to the borrower a
particular product, and before
the borrower enters into a loan
contract, disclose:
i i. the benefits payable by the
lender;
ii whether the finance broker
can determine or recommend conditions
of the credit contract (eg interest
rate, fees or term) and, if so,
the affect of that on the amount
the finance broker will receive
from the credit provider;
iii i. the amount of a financial
or other benefit that anybody
else will receive which could
reasonably be expected to influence
the finance broker's recommendation
(eg family companies - employers);
iv i. any interest or relationships
of the finance broker that can
be reasonably expected to influence
the finance broker's recommendation.
Note: The benefit in (i) and (iii)
above may be expressed as a dollar
amount, or if not ascertainable,
by a description of the method
of calculating the benefit. In
either case, include GST and disclose
benefits that cannot be readily
expressed in monetary terms (for
example benefits comprising tickets
to sporting events, holiday offers,
or the provision of services).
Generally disclosure is at the
loan writer level and is not necessarily
the full commission payable by
the lender.
i. a. Any referral fees.
Loan
Details to be Included in the
FBC:
a.
Amount of credit, or if not ascertainable
the maximum amount of credit.
b. If for a fixed term, the term.
c. If to be repaid at regular
intervals, the maximum payment
the client is prepared to make
(including the repayment of any
credit application fee, credit
establishment fee, or other fee
- but only if these fees are payable
periodically, ie regularly).
d. If the loan is not to be repaid
at regular intervals - the repayment
arrangements which are acceptable
to the client, including any fees.
e. The maximum interest rate.
f. Any special loan features (such
as redraw facilities) that are
required by the client.
