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 taking IO, and make sure that the term allows you enough flexibility to pay back the loan at a time convenient to you. For example, if a borrower 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 you 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 borrowers 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.

A borrower can take a fixed rate loan, fixed for a set amount of time, over a specific period of time or term. For example, a borrower 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.

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 borrower 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:

Split/Combined Loans

A split or combined loan is a facility that allows a borrower 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 borrower can also split between loan products. Further below we discuss the different types of loan products a borrower can choose from and what they may consider using them for. Most lenders will let you split between most 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. 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 borrower 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 borrower 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 probably best suited to those will never need or want any flexibility with their loan, aren’t able to pay anything 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 borrower 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 you are considering a honeymoon product, you should consider what your financial goals are. This will allow you to compare how much you will pay over a set time, and work out which is the better deal i.e., you need to work out how long you intend to pay a mortgage for. Let’s say you 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 borrower would be making if you took a product with a lower interest rate than the standard variable rate (one that still meets your requirements though) to see which works out cheaper.

Although you might be making very small repayments during the honeymoon period, you will be making higher payments afterwards. This will more than likely work out more expensive (especially as more time goes by), than if you 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 is that when you take on an introductory rate loan you may want to consider making repayments at the roll over rate (if your loan product allows it) rather than at the introductory rate, from day one. This will allow you to get into the habit of making repayments at the higher amount, so you shouldn’t have to change your financial exposure or disposable income when your honeymoon period is finished. It will also allow you to build up equity in your 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 borrower 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 borrowers 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 you access your funds directly from the loan account, and that you don’t have to set up "satellite’ accounts to transact from.

If you 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:

Income & Rental Income

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 you 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 you can access your funds (ATM, over the counter, internet, credit card, cheque book, phone bank etc), including how you put lump sums into the all in one account (most lenders will let you use Giro-post etc at the post office for deposits), how many free transactions per statement period (normally one month) you 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 borrowers 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 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 borrower 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 borrower 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 include 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 borrower 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 borrower should be getting a pretty good deal. The question you need to ask yourself is "Do I really need all the bells and whistles?" The same lender might offer a more basic product that suits the borrower’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 borrower 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 borrower 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

Compulsory Comparison Rate (CCR) Legislation

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 must specify the comparison rate for the following amounts and terms

For the most part, credit providers will be responsible for providing updated CRSs for all their products.

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

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.

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.

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.

Key provisions.

The key provisions of the Finance Broking Contact (FBC) are as follows:

1. An FBC must be entered into prior to commencing work whether or not a commission is payable by the borrower.
   
2. The FBC must be signed by the borrower and a copy of the contract must be given to the borrower.
   
3. The FBC must contain prescribed information (see below).
   
4. No commission may be paid before obtaining a credit approval.
   
5. 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.
   
6. 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.
   
7. 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).
   
8. 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.

1. The name and address of the finance broker and if the finance broker is a company, the ACN.
   
2. If the finance broker trades under a business name – the name and address of the principals.
   
3. The date by which finance is to be secured.
   
4. The details of the loan as required.
   
5. The broker’s panel of lenders.
   
6. A statement that the panel of lenders do not necessarily represent all lenders who offer credit of the type required.
   
7. 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.
   
8. If commission or other benefits are to be received from somebody other than the borrower:
   
9. a statement that the broker will receive that benefit;
   
10. 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:

1. the benefits payable by the lender;
   
2. 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;
   
3. 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);
   
4. any interest or relationships of the finance broker that can be reasonably expected to influence the finance broker’s recommendation.

Note: The benefit in (1) and (3) 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.
Any referral fees, Loan Details to be Included in the FBC:

1. Amount of credit, or if not ascertainable the maximum amount of credit.
   
2. If for a fixed term, the term.
   
3. If to be repaid at regular intervals, the maximum payment the borrower 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).
   
4. If the loan is not to be repaid at regular intervals – the repayment arrangements which are acceptable to the borrower, including any fees.
   
5. The maximum interest rate.
   
6. Any special loan features (such as redraw facilities) that are required by the borrower.