My Dad guaranteed my first car loan way back in 1972 and without that guarantee I would have never qualified for the $850 loan that paid for my two year old ex-police Mini.   While many things have changed – the most obvious being the number of zeros at the of any loan amount, young people today can still struggle to qualify for loans on their own.

We have arranged many loans for young people using parental guarantees – the legal and technical side has always been obvious however I recently became a guarantor for my own son and that gave me a new perspective on the process.

When we guarantee a child’s car loan, they are typically just starting out in the world and so probably in their late teens.  However when they require our help to buy a house they are more likely to be in the late twenties or early thirties and this is an important difference because it obviously means that we (the guarantor) are ten or more years older.

In my case I am in my late fifties and like so many people  my age trying to pump as much into superannuation as my lifestyle will permit.  I am also a self employed contractor and to complicate matters my home is in a remote rural area in a different state to where my son wanted to buy.

The criteria for my ideal loan, as the guarantor;

• I didn’t want to have to provide two years personal and company tax returns – which is normally required for self employed,
• I wanted a partial guarantee which means rather than guaranteeing the full loan amount, offering sufficient security only to cover the gap 20% between the purchase price and the amount where mortgage insurance applies.
• I didn’t want to be forced to refinance my existing mortgage and therefore I required that the lender accept a 2^nd mortgage for my guarantee

Why this criteria?  Well like so many people of my age I have substantial equity in my home – in fact I could pay it off tomorrow but I choose not to as I have access to a substantial redraw which I  consider a safety net.  If I was forced to refinance and maintain the redraw I then have to prove I can service this debt and because of my age I may be expected to do so over a much shorter term.  As a result I could struggle to show servicing and may not qualify to keep all of my safety net.

But this created its own issues as the lender likes to allow for ample padding, they start by requiring 25 percent rather than 20 percent guarantee amount and use a 75 percent maximum LVR overall.  Then not unexpectedly the valuation on my home came in low – the valuation on the new property for my son came in low – the lender counts my redraw as ‘fully ‘drawn’ and then add 20 percent padding on this amount.

So let’s say for example your child’s new house purchase price is $500,000 – they have some limited savings say borrowing required $490,000:

• your home is worth $450,000 but the valuer comes in at $405,000
• you have $150,000 in redraw but the lender adds 20% so it making it $180,000
• the bank requires 25% of $490,000 guarantee security = $122,500
• the guarantee plus the redraw = $302,000 which is 74.6 percent LVR

As you can see the 74.6% LVR only just squeezes in despite the fact that you may only have $10,000 in actual mortgage  left to pay.

Where the real crunch will come is if my second and/or third sons ask “Hey Dad will you be a guarantor for our home loan?”

KeyInSure running on iPad

KeyInSure is a simple FileMaker application that has been completely redesigned to run on iOS devices using a free version of FileMaker Go 12. The application stores two photographs plus another photo of your receipt and all the technical information such as serial numbers, purchase date etc.

The app can then prepare a detailed pdf document ready to print or email that will support your claim.

The application is currently available free to use and can be downloaded from http://www.keychange.com.au/keyinsure.html and a short video on installation and use is at http://www.keychange.com.au/insurehelp.html

The legislation as administered by ASIC places what is probably an unfair onus on the mortgage broker to “take reasonable steps” to ensure that a loan recommendation or application is within the borrowers capacity to repay without causing undue financial stress. I found that the Westpac calculator can be very easily misinterpreted resulting in an incorrect income figure placing the broker in breach simply for recommending the loan.

There is always a variation between lenders on borrowing capacity as their various policies may accommodate or discount an individual scenario and so it would be very easy to say ah well Westpac are generous on this one. After all it is not unusual for a range of $100,000 across different lenders on a $500,000 loan scenario.

I only became aware of the issue when comparing a larger deal $3 million and found all other lenders offered only $2 million. Only then did I realise that I had misinterpreted how to enter data in the calculator and that the calculator provided no error detection to capture the double entry – something Westpac should address.

My concern is that ASIC’s latest RG209 (2013) confirms that the legislation applies at the time that the broker suggests a credit contract or assists a consumer to apply. Therefore any broker who has made an application based on a flawed use of a servicing calculator may be deemed to not have ” taken reasonable steps”. As COSL ( credit ombusdman ) so often point out “Although an application for credit may satisfy a credit provider’s own policies for affordability, it does not necessarily mean that it meets the responsible lending standard in the legislation.” So even if the application is rejected, as it should be, the broker is potentially in breach for recommending or submitting the application.

This is probably an issue that aggregators should raise with lenders in order to keep the process simple and as standard as possible. After all the aggregators are often licence holders and a mistake by one of their credit representatives will reflect on them.

The system has developed significantly since then as new versions of FileMaker have come onto the market and with the release of FileMaker 12 I have released KeyRelations V 5.0  you can now host the application on your desktop and share with up to 9 other users including iPad or even iPhones using a free FileMaker Go app.

To the best of my knowledge this is the first fully mobile, full featured CRM for mortgage brokers in Australia.

There is no need to sync devices, all you need is access to wifi or 3G mobile and you are accessing the full client database live just as if you were in the office.  With the iPad version some of the reports don’t work, so you may need to get back to the office to use the automated email generator – this produces product information, credit guide, proposal and quotation and even a needs assessment if required. Of course it logs that these have all been provided and even logs when they are returned.

Imagine being able to walk into a clients office, update their scenario and portfolio, scan all of their documents including ID in excellent resolution and then using the optional KeyPanel app you can select products based on fitting the individuals criteria and compare actual cost of home loan over whatever period you like and make a recommendation – on the spot.

The CRM system is a full back office and customer contact system with retention of all email and phone contact summaries, commission tracking (subject to data availability from aggregator)  and NCCP compliance.   The best thing is that for a small office the costs are very low with FileMaker 12 available for $379 per desktop installation  and FileMaker Go 12 for iPad completely free. You can even share your CRM over the web with up to 5 users absolutely free (some limitations on reports etc) – we don’t recommend this unless you are running a secure web server environment .

For a small one or two man brokerage Installation and training ( 4 hours virtual) costs only $750 one off with no ongoing fees, updates will be made available to use at your discretion.

If you have a group the system can be hosted ( from $59 per month)  and each user can access the system from their office or home or laptop or iPad.  Call me  to discuss your needs and I will give you a firm price.

The normal procedure we follow in order to comply with AML is to confirm phone and or online existence eg: LinkedIn and then we request certified copies of identification documents.  Most lenders require that we either hold these certified copies or submit them with the application supporting documents.  We also require our clients to provide originals of bank statements and pay slips etc – as anyone can easily digitally edit a scanned copy, we consider this an appropriate additional check.

Imagine my surprise when viewing the uBank web site and seeing that they don’t even want the certified copies of the identification – they accept uploaded scanned copies ie: a copy of a certified copy and copies of all other documents.  Talk about inconsistency!  I haven’t checked the AML legislation for some time but I would not be at all surprised if this was not fully compliant.

But to me is shows a deliberate attempt to impose policy that makes it more difficult and therefore more expensive for mortgage brokers, for no other reason than, they can.  Or do they hope that by disadvantaging mortgage brokers they will gain more direct market share?

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The truth is that as a mortgage broker I don’t support a ban on break fees, that would make our system more like the USA and I can’t think for one moment why we would want to mirror any of their mistakes.  Since (IMO) we already operate in an overly  regulated environment where so many of the regulations are pointless or perform contrary to the regulators intentions I do believe that exit fees need to be regulated and could be easily and fairly for all involved.

What are exit fees – these are sometimes referred to “break costs” or the “economic cost”  and is the amount of money that the lender will not make on the loan amount, if they have to re-lend it in the current market.  Obviously if rates have increased then the lender makes a windfall profit – which they generally never share.  Whereas if rates have fallen the lender may make less money than they would have and so they are entitled to recover the ‘economic costs’.

For example if you break a $350,000 loan with 30 months fixed period still to run and lender earns 1.50% below what you fixed at then you will be up for $13,125 in break costs.

Where I think the regulation is required, is that there is no single basis for how the cost is calculated.  Some lenders may compare the 90 day bill rates or their actual retail rate on the day but many use their cost of funds and there is no requirement for lenders to divulge any of this in the mortgage contract.   They are required to explain how the break is calculated which involves mathematics beyond the average persons comprehension and when you request a break fee quote they are compelled to again provide the calculation however they are only compelled to disclose the actual cost of funds if a dispute arrives at the credit ombudsman.  All under the name of commercial in confidence.  This means there is no way for you to compare the potential break costs of one lender over another.

Given that lenders score a free windfall if rates increase I think there should be some room for manoeuvring on this.  Why not simply quote a standard using the 90 Day Bank Bill Swap Rate ( BBSW)  which should be quoted on the mortgage document, just as the current standard variable rate is quoted and then calculate the economic cost on that against the current BBSW on the date of the break.  All above board and no need for lenders to disclose cost of funds or margins – too easy and too sensible.

Introductory rate or honeymoon loans are loans that offer a ‘special’ low rate for an introductory period and then the rate escalates to a higher ongoing rate. Before the government’s ban on early exit fees these loans were a real trap, giving  an attractive rate for 6 or 12 months then locking you in on a uncompetitive rate for 3 to 5 years with big penalties if you tried to get out early.

In the new regulated market hangovers have improved however the competitiveness of the introductory offer is probably not as keen.

Things to be aware of:

• you may not be allowed to make additional or lump sum payments
• you may not have access to offset account or redraw during the introductory period
• any special or package discounts may not be fully honoured at the end of the honeymoon
• you may have to pay additional fees to switch to a better product after honeymoon is over.

In years past in my role as a mortgage broker I used to get regular calls from what I called ‘honeymoon junkies’ people who just went from one honeymoon to the next.  However there just aren’t that many good ones and the lenders quickly realise what they are dealing with and start looking for reasons to reject the applications.

In todays finance world of automated credit scoring you need to be careful about going in for a short term.  The magic number is around 6 credit inquiries over the last 2 years and these include credit cards, car loans, mortgage insurance and home loans.  One home loan application with mortgage insurance will probably generate 2 inquiries however if there is any re-work done on the loan eg: valuation is short so higher LVR required – this can result in another round of credit inquiries.  So if you hope to refinance in 12 months time to a better deal you better not apply for any store cards etc.

Would I buy property off the plan?  not in a million years!  That’s not to say that  lot’s of people are not happy with their off the plan purchase, but in my 12 years experience as a mortgage broker I have seen plenty of people get badly burnt and due to the very short notice to settle in most contracts the final process can be chaotic and therefore stressful.

People want a loan approval 6 to 12 months or even 3 years into the future and the truth is that approval is virtually worthless until the construction is fully completed and can be valued. A lot can happen in that time –

• the GFC saw massive changes in lender’s policy and pre-approvals were torn up with unhappy abandon.  Lenders can and do change their policy and a pre-approval does quarantine you from those changes,
• credit legislation has severely affected a range of borrowers ability to obtain finance – loans that used to be common are now unobtainable – so unforeseen changes can and do impact
• government incentives come and go – NSW recently hurt their off the plan investors to the tune of about $20,000,
• developers go broke or get into financial difficulty – your deposit will go with them,
• developers/builders change things, even critical things like floor space,
• you might change your job or start a new career – this can be crucial if it happens within 6 months of settlement,
• you might get married or take holiday, using savings earmarked for settlement,
• you might buy another property or a car or go guarantor – any of these can affect your loan chances.

1. Check current comparable unit prices in that area especially the trends, if there are no comparable then that is not necessarily a good thing you don’t want the  best unit in the worst suburb.  In ten years time it might be a fashionable suburb but can you wait – in the meantime your rents or sales will be moderated by the median for the rest of the area.
2. Check current rental prices on comparable property.
3. What else is being built in the area of similar style and price.  Consider can this create a glut eg: Sunshine Coast or Gold Coast 2010/12 – if your development is unique – is that a positive or could it be too tightly focused on a single market eg: holiday renters.
4. If this is a larger development then remember that when completed there will be competition to attract  renter and buyers.
5. How financially stable is the builder / developer – do they have a good track record and sound financial arrangements.  Developers go under and the guy that takes over may not be as reputable as the one you started with.
6. Get some contractual assurance that the property will value as predicted with either compensation or no-cost get out clause.
7. Make sure contract allows for no-cost recission (get out clause)  if the specifications change.  It is not unusual for what may appear small changes in layout to greatly impact your ability to finance eg: making the balcony or car park slightly bigger at the expense of internal floor space.  A developer may offer a second car park as a fob – but this won’t change lenders attitudes if the internal floor space is below policy.  If your loan is knocked back due to the valuer’s report highlighting this then you do not have sufficient time to seek alternative finance.  Do not skimp on the completion inspection make certain the floor space is acceptable under your loan approval. Fifty square metres is the magic measure although some (not all) approvals will go down to 40 square metres. Below 40 square metres you are in very serious trouble.

Finally talk to your mortgage broker at least 3 months before completion – you need as much time as you can get just in case that indicative loan approval you have in your pocket isn’t worth a stamp.  You don’t want to be scraping around for a new home loan approval with only 21 days before settlement is due – some developers can be very ruthless.

So the primary difference between a construction loan and a normal home loan is that the lender controls the outlay of funds rather than a single lump sum payment into an account.  When you think about it, with the number of builders and developers who go broke every year it is understandable that the lenders require this. The process is called ‘progress payments’ ie: the  builder puts in an invoice claim for payment when he achieves specific milestones in the construction work.  The lender will probably send someone out to have a quick (or thorough) check to ensure that everything is as it seems and the pay the builder.

Unlike a standard term loan which is fully drawn at settlement your construction loan starts with a zero balance and then gradually increases as the progress payments are made.  This means that you are only paying interest on the balance at any given time rather than on the full loan amount.  In addition most construction loans are ‘interest only’ during the construction phase and this means you don’t start paying any of the principal off until the construction is over.

As a result of the extra administration and inspections most construction loans come with a higher interest rate (often the full standard variable) and /or additional fees such as site inspection fees for progress payments.  Keep in mind that the higher interest is charged only on the current balance and only for the duration of the build – so you are not committing to 30 years of high interest rates.

Having said that there are some lenders who offer fully discounted interest rates on construction with minimal fees and even the option to fix the interest rate… well worth asking us for advice on these.

Another thing to be aware of is that if you are buying vacant land, you will be required to commit to commence (or complete) construction within 12 months.  This is due to APRA regulations to avoid lending to speculative land buyers – after all they are really commercial borrowers not residential.

Finally it is important that you understand how the lender values the property for the construction loan. It would be nice if they  could forecast the value based on current comparable properties – however remember they are taking the risk and so the property is not comparable until it is fully completed.  Therefore they will use the purchase price or valuers estimate of the unimproved value of the land – plus the construction costs and this it.  It is important that you take this into account when calculating your contribution as you have to have enough left over after your deposit to complete the items that were not included in the construction contract – although many lenders will make small adjustments, do not take it for granted – speak to your mortgage broker.

What are the most common issues for investors:

• Renting out the PPOR (primary place of residence) ie: family home  - there are very serious taxation implications in doing this.  The most important thing is to identify that this may be an option right from the start ie: when you first arrange the finance for your family home there is a very specific strategy that must be put in place there and then.  Failure to do so causes potential gearing issues that cannot be corrected and could result in costs of tens of thousands to rectify – get advice!
• Using equity in your PPOR to purchase an investment property – yes you can do than and people do it all the time and end up with deductible interest on their borrowing.  However do not use redraw!  The original home loan on your  PPOR was for personal use and therefore the interest is not tax deductible – the tax office consider the purpose of the original borrowing when allowing or disallowing deductions.The investment borrowing  secured by your PPOR should be a separate loan account created specifically for that purpose.Likewise think very carefully before using funds in your PPOR offset account as a deposit for an investment property. It just doesn’t make sense to use after-tax dollars to purchase something that should be deductible.  You will usually be better off to reduce your PPOR loan balance by the offset amount and then re-borrow the funds (in a new investment home loan account) which are then deductible.Most lenders will allow that with existing loans however if you are looking to expand a portfolio it can be a good time to consider package options that offer you more flexibility.  While many lenders offer investment loans and residential loans there are rarely any differences in rates or charges, although LVR limits can vary.
• You need to understand your investment strategy ie: are you looking for negative or positive gearing.  It is not my intention to go into the strategies as that is the realm of a financial advisor – and spruikers who promote their books or investment plans.  I urge you to be wary of the latter – do your homework but please do not be taken in by all of the claims that spruikers come out with.  For every over-night property multi-millionaire there are hundred of thousands of  investors who realise that it is unrealistic to expect things to happen quickly.If you have an aggressive accumulation strategy you need to take risks and lenders will quickly realise this and the easy approvals that you obtained early in your investment life, will vaporise.  Lenders do not like risk takers.  The recent commodity price downturn and possible end to the mining boom will result in many sleepless nights for borrowers who sought out high return property in mining towns.  Those $600,000 homes could be worth $200,000 almost overnight  - behind every boom there is a bust.
• Beware of property with very high returns – superficially they sound like a terrific investment, however high return usually reflects high risk, or restricted market and can make finance very difficult to find.  Keep in mind that if you have trouble finding suitable finance then when it comes your turn to sell the prospective purchasers will likewise have difficulty and your potential sales market can be diminished.Traditionally regional areas offer higher returns mainly due to the lower cost base although this has been completely upturned in any mining affected areas.  None the less the down side is that usually regional areas do not have the same potential for capital growth that cities enjoy.Other examples of high yield properties are – CBD high rise, studio apartments, hotel conversions, student accommodation, mining hot bed houses, serviced apartments, holiday rentals, over 50 developments, resort style units.   Don’t expect lenders to get enthusiastic about these – they very often come with restrictive management contracts or planning restrictions which limit the uses.  Lenders are only interested in funding property that can if necessary be sold to the general market, including investors and home buyers and sell in a quick time frame.  Property with restrictions reduces the potential market and that will be reflected in the valuers assessment.

So what do lenders like?   Simple, they like normal everyday houses, multi-bedroom apartments in medium density developments (less than 30 units), town houses etc … in other words places where people can live and that can be easily sold to the entire market.

Acreage can be ok but don’t expect a residential lender to accept 120 acres of olive grove … because that is a farm not a residence.  Try and stay below 10 acres and with 10 km of a reasonable size town.  Outside of these specifications you may be looking at LVR below 60% as a maximum.

If your strategy is to gradually accumulate a portfolio of standard residential property using the growing equity to leverage additional property with an overall equity position of <80% then most lenders will be very happy to deal with you.  Some lenders limit the number of properties eg: ING limit is 5 and all lenders prefer no LMI involvement.  Also keep in mind that there are only two insurers and they have master limits so if you are relying on them your ability to grow will eventually be capped by access to insurance.

Find a mortgage broker that you can trust – my advice is that if you find a mortgage broker who will bend the rules for you then they might bend the rules against you…  I have heard of mortgage brokers turning up at an auction and bidding against their own client.  We are not that type of mortgage broker, we will play it straight and fair.