CIVMB IK T1-3 v3

The Lending Process
Topic 3-1: Understanding the

client’s needs
© 2017 Kaplan Education Pty Ltd. All Rights Reserved.
The copyright of this material is owned by Kaplan Education Pty Limited and any reproduction, copying or other unauthorised use of this material without
the written consent of Kaplan Education Pty Limited is strictly prohibited. While all care is taken to ensure the material presented is accurate and up to date,
it should not be relied upon when providing advice or constructing financial plans.
External websites
Kaplan’s subject notes contain links to the websites of other organisations. Kaplan does not necessarily endorse or support the views, opinions, standards or
information contained within these linked websites. Kaplan does not accept any responsibility or liability for any loss, damage, cost or expense you might
incur as a result of the use of, or reliance upon, the materials that appear at any linked site. Kaplan respects the intellectual property rights of others.
Be aware that material found on linked sites is likely to be protected by copyright and may also contain trademarks and other protected information.
It is your responsibility to use the material on each linked site in accordance with the site’s specific terms and conditions of use.
Topic 3-1: Understanding the client’s needs
Certificate IV in Finance and Mortgage Broking
Contents
Overview .......................................................................................................... 3-1.3
Part 1: The fundamentals of lending ................................................................. 3-1.4
1 The five Cs of credit ............................................................................... 3-1.4
2 Character .............................................................................................. 3-1.5
3 Capacity ................................................................................................ 3-1.9
4 Capital................................................................................................. 3-1.10
5 Collateral ............................................................................................ 3-1.11
6 Conditions ........................................................................................... 3-1.15
7 The ‘common sense’ test ..................................................................... 3-1.15
Part 2: Engaging with customers ..................................................................... 3-1.16
8 Establish rapport ................................................................................. 3-1.16
9 Communication skills .......................................................................... 3-1.18
Part 3: The mortgage broker and organisation ................................................ 3-1.20
3-1
10 The role of the mortgage broker ......................................................... 3-1.20
11 The mortgage broker organisation ...................................................... 3-1.25
12 Products and services .......................................................................... 3-1.31
13 Responsible lending disclosure obligations.......................................... 3-1.32
14 Complaints handling and dispute resolution ....................................... 3-1.33
Part 4: Determining customer needs ............................................................... 3-1.36
15 Customer needs and priorities ............................................................ 3-1.36
16 Investment goals ................................................................................. 3-1.40
17 Customer concerns.............................................................................. 3-1.43
18 Customer risk profile and risk tolerance .............................................. 3-1.48
19 Specialist advice .................................................................................. 3-1.55
© Kaplan Education Pty Ltd 3-1.1

Part 5: The customer’s financial situation ....................................................... 3-1.60
20 Obtaining information from the customer........................................... 3-1.60
21 Types of information to be obtained from the customer ..................... 3-1.61
Part 6: Determining serviceability and borrowing capacity ............................. 3-1.67
22 Determining serviceability and calculating borrowing capacity ........... 3-1.67
23 Calculating borrowing capacity............................................................ 3-1.69
24 Determining associated costs .............................................................. 3-1.70
Part 7: Client records ...................................................................................... 3-1.77
25 Maintaining appropriate documentation ............................................ 3-1.77
References ...................................................................................................... 3-1.78
Suggested answers ......................................................................................... 3-1.79
3-1.2 CIVMB_LP_T3-1_v3
Overview
Understanding the loan applicant’s needs, their financial position, their investment style
and their appetite for risk is vital to recommending appropriate home loan products and
providing excellent customer service.
Topic learning outcomes

On completing this topic, students should be able to:
• establish rapport and a relationship with the customer
• determine customer requirements and objectives
• ascertain the customer’s financial situation and borrowing capacity
• collect required supporting documentation
• complete appropriate customer relationship management (CRM) records.
3-1

Part 1: The fundamentals of lending

Mortgage brokers need to have a good understanding of the principles of lending and
how to apply them to potential loan applicants.
This section is an introduction to the main criteria that a credit provider will assess when
considering a loan application.
1 The five Cs of credit

The five Cs of credit is a method used by lenders to determine the creditworthiness of
potential borrowers. The five Cs are shown in the diagram below.
2 Character
When a credit provider evaluates a loan applicant’s character, they may look at:
• stability and the period of time spent at a particular address — while there is often
no requirement by the credit provider for a certain period at the same address,
a credit provider may request a history of residential addresses covering a number
of years
• stability in full- or part-time employment, including:
– how long the applicant has been in their current job
– an employment history over several years
• the loan applicant’s credit history, that is, whether the applicant has a good record of
paying bills on time and in full
• past loan performance
• from whom the loan was referred
• any unresolved legal issues
• the applicant’s savings history when purchasing property for the first time
• the applicant’s credit rating.
For a business loan, the credit provider may consider the applicant’s experience and
track record in business.
The loan applicant’s willingness and past performance in meeting financial obligations is
an important indicator of character and creditworthiness. Understanding an applicant’s
past credit activities gives credit providers a better assessment of the potential level of
risk involved in approving an application for credit.
2.1 Credit reports and credit agencies

Credit providers are likely to rely on credit agencies (also called credit bureaus or credit
reference agencies) to provide information about the loan applicant. In Australia,
credit agencies include:
3-1
• Veda Advantage <www.veda.com.au>
• CreditorWatch <www.creditorwatch.com.au>
• Dun & Bradstreet <www.creditreports.dnb.com/m/home>
• Experian <www.experian.com>.
The largest Australian credit agency is Veda Advantage (or Veda). According to its
website (n.d.), Veda is the leading Australian data intelligence and insights company
using the largest, most comprehensive and current data source in Australia and
New Zealand, including information on more than 16 million individuals, 1.9 million
companies and 1.7 million business names.
Further resources: Veda Advantage

Articles and videos on Veda Advantage and what they do can be found at
<http://www.veda.com.au/yourcreditandidentity/about-us>.

2.2 Authority required

The loan applicant is required to sign an authority to enable the lender to conduct a
credit reference check with a credit agency to review the applicant’s record for defaults,
judgements, current accounts and recent enquiries.
Failure to provide this authority will lead to the loan application not being processed.
2.3 Information provided by credit agencies

Credit agencies provide a range of information about prospective borrowers, including:
• credit history details covering:
– credit applications and enquiries over the last five years, including banks and
utilities such as gas, electricity, telephones and finance companies
– the amount of credit being applied for and the type/purpose of credit sought such
as an overdraft, interest-free home loan and credit card
• records of current credit accounts
• overdue accounts that may have been listed against the borrower
• bankruptcy information
• judgements, including writs and/or summons from courts around Australia
• public record information such as directorships and proprietorships.
Apply your knowledge 1: Credit file contents

Review the article below and answer the following questions.
My Credit File 2011, Understanding your credit file, Veda, 27 May,
viewed 13 March 2017,
<http://www.mycreditfile.com.au/education/article.dot?inode=521186>.
1. What information does a credit file contain?
2. What is the meaning of the following terms?

(a) payment default
(b) serious credit infringement or clear out
(c) payment status current
3-1
(d) late payment
Note: You can access ‘Suggested answers’ for this activity at the end of this topic.

2.4 Overdue accounts

An overdue account, which may also be referred to as a ‘default’, is usually a debt of
more than $100 that has been owed for a minimum of 60 days. However,
telecommunications and utilities accounts such as electricity and gas bills may be
reported when they are $20 or more in arrears.
Overdue accounts may only be listed once steps have been taken to recover the whole
or any part of the amount. The credit provider must have requested the borrower,
either in person or in writing, to pay the outstanding amount.
2.5 Changes to credit reporting, March 2014

Comprehensive credit reporting commenced on 12 March 2014 under changes to the
Privacy Act 1988 (Cth). These changes include the following:
• Before March 2014, personal credit files could only hold negative information such
as credit enquiries and defaults. Since March 2014, a person’s credit history also
includes positive credit information such as on time credit card repayments.
• Additional information will be held in credit reports, including:
– credit account information, such as the type of credit account, for example a
credit card or personal loan, account open and close dates and credit limits
– monthly repayment history on credit accounts such as mortgages and
credit cards.
2.6 When completing a loan application

As a mortgage broker, when assisting a loan applicant to complete their application,
encourage the applicant to disclose any adverse credit history information as soon
as possible.
Where loan applicants require it, it is possible on payment of a fee to a credit agency for
individuals and businesses to obtain a copy of their credit file.
Note: Individuals may also choose to monitor their credit file to check for any
fraudulent behaviour.
2.7 Effect of a poor credit history

Credit providers may not look favourably on customers with a history of overdue
accounts and/or judgements. A history of credit defaults and refusals will prejudice
a loan application.
Further resources: Credit reporting

Mortgage Professional Australia (MPA) 2013, ‘Credit reporting: 10 things
every broker should know’, MPA, 24 April, viewed 13 March 2017,
<http://www.mpamagazine.com.au/sections/columns/credit-reporting-10-
things-every-broker-should-know-174673.aspx>.
3 Capacity
Capacity refers to the loan applicant’s ability to repay the loan while taking into account
other debts and expenses. Credit providers evaluate the applicant’s debt to income
ratio, that is, how much the applicant owes compared to how much he or she earns.
The lower the ratio, the more confident the credit provider will be in the applicant’s
capacity to repay the loan.
For this assessment the loan applicant needs to provide a full and complete disclosure of
assets and liabilities. This includes the minimum payment for all outstanding debts.
3.1 Serviceability
Serviceability refers to an applicant’s capacity to meet the repayments over the term
of the loan. When determining serviceability, credit providers consider:
• the applicant’s average earning capacity
• other sources of income earned on a regular basis, such as rent, interest and
dividends
• the loan applicant’s number of dependants
• liabilities, including:
– all loans
– minimum repayments on credit cards
– child maintenance payments.
3.2 Employment history

Loan applicants generally need to:
• be in their current employment for a minimum of three months
• be able to demonstrate stable employment for at least 12 months
3-1
• provide evidence of continuity of employment with:
– two years tax returns and/or
– assessments of annual payment summaries (previously known as
‘group certificates’) if income has drastically varied.
3.3 Self-employed applicants

Self-employed applicants may need to provide:
• a minimum trading period of one full financial year
• tax returns for their trading entities as well as financial statements to demonstrate
the viability and continuity of their income and business.

3.4 Income sources

All other sources of income need to be substantiated with documentary evidence.
Requirements about the type and amount of evidence differ between credit providers.
Further resources: Budget calculators and apps

The MoneySmart website provides a number of useful calculators and apps at
<https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps>,
including:
• Budget planner and budget planner wizard, viewed 13 March 2017,
<https://www.moneysmart.gov.au/tools-and-resources/calculators-and-
apps/budget-planner>.
• Mortgage calculator, viewed 13 March 2017,
apps/mortgage-calculator>.
• TrackMySPEND app, viewed 13 March 2017,
apps/mobile-apps/trackmyspend>.
• TrackMyGOALS app, viewed 13 March 2017,
apps/mobile-apps/trackmygoals>.
4 Capital
Credit providers consider the net worth of a loan applicant. A person’s net worth
includes the value of any assets minus any liabilities.
4.1 Ability to manage financial affairs

The capacity to accumulate net worth from earnings and savings demonstrates a strong
ability to manage financial affairs.
4.2 Saving for a deposit

Loan applicants must demonstrate that they have genuinely saved at least 3–5% of the
purchase price unless the application is for a refinance.
Alternative savings can be shares, managed funds or ownership of land, provided they
have been owned for at least six months. Items that do not qualify as alternative savings
include rental payments, extra loan repayments and hidden funds.
3-1.10 CIVMB_LP_T3-1_v3
5 Collateral
Collateral is any asset owned by the loan applicant, for example a property, of which the
credit provider can take ownership and sell to pay the debt if the borrower defaults and
cannot make the agreed loan repayments.
For a home loan, the security offered is typically the property being purchased, but may
also be another property owned by the applicant. The security offered by the loan
applicant is important because it provides the collateral on which the lender will
secure the loan. Generally, a credit provider will secure the property with a mortgage.
For more information, see ‘Mortgage’ in Part 1, section 5.2.
5.1 Valuations
The size of the loan offered is based on the value of the property. Each property offered
as security is valued.
Valuations are conducted by registered valuers who are independent of the credit
provider. Each credit provider has a panel of valuers who will carry out valuations in
accordance with the instructions from the credit provider.
Valuation purpose
A credit provider typically requires a valuation to:
• confirm the worth of the property offered as collateral security in the current market
• ensure that the property falls within the lending guidelines of the credit provider.
Loan to value ratio
A loan to value ratio (LVR) is the amount of money that a credit provider will lend in
relation to the property value. LVR is expressed as a percentage.
LVR is determined by the following formula:
3-1
Loan amount (L)
LVR = ×100
Property value
Example: Loan to value ratio

What is the LVR of a property worth $650,000 securing a loan of $450,000?
450 ,000
× 100 = 69%
650 ,000
Minimum amounts
All lenders have both minimum and maximum limits on the amounts they will lend to
loan applicants.
Minimum amounts are determined by the economic cost of assessing and administering
the loan, while maximum amounts are determined by the lender’s acceptable level of
risk. Some lenders will lend from $20,000, while others set a minimum of $50,000.

Maximum loan amounts

The maximum loan granted by the credit provider is subject to the purchase price or
valuation figure, whichever is lower. Often the credit provider will limit the maximum
loan amount, including other stipulations about the LVR.
Credit provider rules around LVR determine the maximum amount a credit provider will
lend to a loan applicant. For example, some lenders will not lend up to a LVR of 95% if
the loan amount exceeds $500,000.
For most credit providers, an applicant borrowing more than 80% LVR is required to pay
lenders’ mortgage insurance (LMI). For more information, see ‘Lenders’ mortgage
insurance’ in Part 6, section 24.11.
Location and LVR

The location of a property may also determine the LVR that a lender will accept. As a
rule, the further a property is from a major regional centre, the lower the acceptable
LVR will be.
Further resources: LVR

• Mortgage & Finance Help 2014, What is LVR?, Mortgage & Finance Help,
16 July, viewed 13 March 2017,
<http://www.mortgageandfinancehelp.com.au/what-is-lvr>.
• Sweeney, N n.d., Borrow 85% LVR and avoid LMI!, Your Mortgage,
<http://www.yourmortgage.com.au/article/borrow-85-lvr-and-avoid-
lmi-119391.aspx>.
Requirements for a valuation

The requirements for a property valuation vary from lender to lender.
Generally, the higher the LVR, the more likely a full valuation will be required.
Valuation requirements may range from:
• a full inspection of the property to determine size, condition and enhancements
• kerbside valuations where the property is visited to confirm location, outside
description and condition
• situations where no valuation is required because the loan is below a certain LVR,
usually in the 75–80% range, and the value can be confirmed by an on-market
transaction conducted by a real estate agent.
Full valuation methods

Where a full valuation is required, the valuer may use the direct comparison method
where the property to be valued is sufficiently similar to recent sales so that the
properties may be compared without much adjustment for points of difference.
Alternatively, valuers can establish a value using a summation of land and buildings.
This involves obtaining a land value from comparable sales and then valuing the
buildings and other improvements by their replacement value less depreciation.
While it is not favoured, it is a useful method as an independent check for valuers.
3-1.12 CIVMB_LP_T3-1_v3
Currency of valuations
The currency of the valuation and the accuracy of its data covering comparable sales
are very important. It is therefore imperative that comparable sales used in formulating
a valuation report are accurate and up to date.
5.2 Mortgage
A mortgage is a debt instrument by which a borrower (mortgagor) gives a lender
(mortgagee) a lien (claim) on property as security for the repayment of a loan.
The borrower has use of the property and the lien is removed when the obligation is
paid in full.
Registered and unregistered mortgage

In Australia, mortgages may be:
• registered, that is, recorded against the title of the property in the respective state
land title office
• unregistered.
The lender secures the property offered as security by registering a mortgage against
the title of the property. If the borrower is unable to repay the loan, the property is sold
to recover the debt.
First mortgage
Senior credit providers will normally have their interest registered as a first mortgage
with subordinate lenders registering their interests as a second or subsequent
mortgage. This hierarchy establishes the order in which mortgagees are to be paid out
when a property is sold.
The first mortgagee may not allow subordinate mortgages. However, for Australian
3-1
Defence Service personnel who have access to subsidised home loan schemes,
legislation ensures that a second mortgage can be established if necessary. The practice
of property owners borrowing funds on a second mortgage basis where the mortgage is
unregistered, is also becoming more frequent.

When assisting a loan applicant, a mortgage broker needs to:
• ensure that all existing mortgages on property are established as soon as possible
• establish any caveats placed on the property that may impact on the application.

5.4 Types of properties
Acceptable properties
In most cases, only residential property is acceptable as a security, regardless of
whether it is owner-occupied or a rental property.
This includes houses, townhouses, villas, duplexes, units and apartments in
multi-dwelling complexes.
Unacceptable properties
The majority of lenders will be reluctant to lend on non-standard housing and unusual
properties such as:
• warehouse conversions
• serviced apartments
• properties used for holiday lettings
• motel and hotel conversions
• small units where the floor space is less than 50 square metres
• rural property (over 2.5 hectares)
• properties in sparsely populated areas
• properties which are encumbered by unusual caveats
• properties where councils have not approved extensions.
5.5 Title
All properties have a record of ownership known as a ‘Certificate of Title’.
All encumbrances including mortgages are recorded in this document.
Types of titles
There are different types of titles that refer to the legal way interest is held in a
property. Real estate titles include:
• Torrens title
• strata title
• qualified Torrens title
• old systems title
• company title
• community title
• leasehold.
Unacceptable titles
Company titles, community titles and leaseholds are generally not acceptable collateral
security for lenders and may pose difficulty for borrowers trying to use such property
as security.
3-1.14 CIVMB_LP_T3-1_v3
5.6 Guarantee
Some credit providers may require a guarantee in addition to collateral. A guarantee
means that another person signs a document promising to repay the loan if the loan
applicant cannot make the payments. The person providing the guarantee is called
a guarantor.
6 Conditions
Credit providers may consider a number of external circumstances that may affect the
borrower’s financial situation and ability to repay, for example prevailing conditions in
the local, national or international economy.
If the loan applicant is a business, the credit provider may also want to evaluate the
financial health of the borrower’s industry, market and competition.
For more on national economic conditions, see ‘Topic 1-1: The industry and economy’.
7 The ‘common sense’ test

All applications will be checked by credit providers to ensure that they make sense.
These include:
• checking to ensure that the income stated matches the employment given in
the application
• ensuring that the applicant’s job positions are consistent with their age and income
• comparing current employment with past employment
• checking the authenticity of supporting documentation
• checking bank statements to confirm deposits are consistent with normal
savings patterns.
3-1
A mortgage broker, when assisting a loan applicant, needs to carry out the
common sense checks above before submitting the application to the credit provider.

Part 2: Engaging with customers

For the customer, the process of obtaining a mortgage can be overwhelming,
frustrating and stressful. A mortgage broker’s aim is to make the process less
intimidating and less stressful. To achieve this aim, a mortgage broker must build a
relationship of trust and confidence with the customer.
This section reviews some of the important communication and interpersonal skills
already covered in this course and looks at how they are used in meeting the
customer’s needs and building connected and successful relationships.
8 Establish rapport
Building rapport is the process of establishing a relationship of trust and acceptance
with a customer. Building rapport is an essential component of any
successful relationship.
Rapport with another person may be affected by:
• the personal presentation of the mortgage broker or the office
• the ability to communicate effectively, particularly the ability to listen to the
customer’s requirements and reflect them in the solutions offered
• attitude and willingness to help
• attentiveness
• inclination to respond to a complaint or problem.
It is important to know your customer to be able to offer appropriate support and
advice on mortgages. Successful brokers use their knowledge and experience to build
trust, a critical component in offering advice.
Review the section on establishing rapport with the customer (Step 1 of the sales cycle)
in ‘Topic 2-2: Customer service’.
The following activities build on the interpersonal skills required to establish rapport
with customers.
3-1.16 CIVMB_LP_T3-1_v3
Apply your knowledge 2: Building rapport

View the video below on building rapport.
Shakiba, E 2014, How to build rapport and trust by Eleanor Shakiba,
online video, 12 March, viewed 13 March 2017,
<https://www.youtube.com/watch?v=dU8VH6vurXg>.
1. What are the steps to building rapport suggested in the video?
2. Note some practical ways you can apply these techniques with your
own customers.

View the following video on establishing rapport with customers.
Traylor, T 2012, Sales education — how to establish rapport with customers,
online video, 12 March, viewed 8 February 2016,
<https://www.youtube.com/watch?v=lH595K9G3N0>.
1. What are the rules suggested in the video to building rapport
3-1
with customers?
2. Note some practical ways in which you can apply these techniques to
your own customers.

Further resources: Building rapport

• Keep, D 2013, ‘How to speak your clients’ language’, MPA, 1 October,
<http://www.mpamagazine.com.au/sections/columns/how-to-speak-
your-clients-language-179926.aspx>.
• Soker, O 2013, ‘Trust: the new competitive advantage’, MPA, 24 August,
<http://www.mpamagazine.com.au/sections/columns/trust-the-new-
competitive-advantage-178986.aspx>.
9 Communication skills
Communication skills are critical in establishing a customer relationship.
Review the following:
• relevant sections on effective business communications in
‘Topic 2-1: Organisations, teams and individuals’
• writing business documents in ‘Topic 2-3: Managing information’.
Apply your knowledge 4: Communication skills

Research the types of questions a customer is likely to ask during the initial
meetings with a mortgage broker as well as information the mortgage
broker might be required to provide to the customer. Use the articles below
as a starting point.
• Linz, A n.d., Top 10 questions to ask your mortgage lender,
Your Mortgage, viewed 13 March 2017,
<http://www.yourmortgage.com.au/article/top-10-questions-to-ask-
your-mortgage-lender-176682.aspx>.
• Cain, A 2014, What to expect from your first meeting with your finance
broker, Mortgage & Finance Help, 20 May, viewed 13 March 2017,
<http://www.mortgageandfinancehelp.com.au/what-to-expect-from-
your-first-meeting-with-your-credit-adviser>.
1. As a mortgage broker, what are the important pieces of information you
need to provide the customer with during initial meetings?
3-1.18 CIVMB_LP_T3-1_v3
2. What communication skills do you require in an initial meeting with

the customer?
3. What do you think are the most effective communication methods of

providing certain information to the customer? For example, when is it
best to provide written information rather than verbal information?
3-1

Part 3: The mortgage broker and organisation

In establishing a relationship with the customer, the mortgage broker must:
• be properly trained and accredited
• be a member of a professional organisation
• have appropriate knowledge of and experience and skills in mortgage products,
the industry and economic conditions
• properly meet all his or her responsibilities under the National Consumer Credit
Protection Act 2009 (Cth) (NCCP Act) and other relevant legislation and codes
of practice
• represent his or her organisation appropriately, providing relevant information to the
customer at the appropriate time.
This section covers these responsibilities.
Review the following:
• ‘Topic 1-3: Products and services’, in particular mortgage broker services and
property mortgage/home loan products
• ‘Topic 2-2: Customer service’, in particular complaints handling.
10 The role of the mortgage broker

A broker acts as the intermediary between the customer and the credit provider.
A broker negotiates the best home loan deals on the market for the customer and
assists in the preparation and lodgement of the loan application. The broker is in a
position of trust and requires education, accreditation, training, experience,
knowledge and skills to perform this role.
10.1 Accreditation
According to the Mortgage & Finance Association of Australia (MFAA 2014):
A finance broker or brokerage has to obtain accreditation with lenders in
order to sell their product/s. Most credit advisers will become accredited
with a number of lenders — called a ‘panel of lenders’. Credit advisers are
only able to sell products from lenders on their panel. The requirements for
accreditation vary from lender to lender, as too does the size of each credit
adviser’s panel. Some lenders have minimum volume loan requirements in
order to achieve and maintain accreditation.
3-1.20 CIVMB_LP_T3-1_v3
10.2 Professional associations and educational

qualifications
Membership of professional associations such as the MFAA requires that members:
• complete accredited training and have a minimum level of experience in the industry;
for more information on training and levels of membership, see the MFAA
membership categories at:
<www.mfaa.com.au/JointheMFAA/Membership-Options/Pages/default.aspx>
• adhere to a professional code of conduct ensuring ethical behaviour, professionalism,
transparency and full disclosure of information
• maintain professional indemnity insurance cover of no less than $2 million for any
one claim and $2 million in the aggregate
• be a member of the Credit Ombudsman — the MFAA requires its members to hold
membership of the Credit and Investments Ombudsman (CIO) (or another
Australian Securities and Investments Commission (ASIC)-approved external dispute
resolution (EDR) scheme).
Note: The latter is also a requirement for all brokers under ASIC regime.
For more information, see:
• the MFAA website at <www.mfaa.com.au>
• ‘Topic 1-2: Legislation and codes of practice’.
10.3 Broker responsibilities

When assisting loan applicants, inform them at the earliest possible stage about:
• the process of applying for a loan
• the role of the mortgage broker
• limits to the mortgage broker’s authority
• the range of services provided by the mortgage broker
• the services and the capacity of the organisation the mortgage broker represents
3-1
• any fees and charges, including commission, that will be charged for
services delivered
• any relationships that exist with other financial services providers,
including fees generated
• how to handle any complaints regarding the broker and the organisation
they represent
• methods of resolving complaints
• their rights.
A mortgage broker needs to ensure that the loan applicant’s needs are fulfilled
professionally, ethically and with integrity. To achieve these requirements, they need to:
• achieve full disclosure from the loan applicants about their financial situation
• provide advice and recommendations based on the loan applicant’s circumstances
• maintain high standards of documentation.

Apply your knowledge 5: Role of the mortgage broker

Use the internet or the material in earlier topics to research the role of a
mortgage broker, what they do and how they get paid. Answer the
questions below.
1. What is the main role of a mortgage broker?
2. How do mortgage brokers get paid?
3. What is the percentage of commission that a mortgage broker would

expect to make on a home loan?
4. Using the information in the above answers, develop, refine and practise
a short explanation for a customer, covering the role of a mortgage
broker and how a mortgage broker is paid.
3-1.22 CIVMB_LP_T3-1_v3
10.4 Why use a mortgage broker?
Apply your knowledge 6: Why use a mortgage broker?

Assume you are now a qualified mortgage broker. While at a barbeque at
a friend’s house you meet a young couple, Chung and Kim. In making
conversation, you explain that you are a mortgage broker. Kim says that she
and Chung are in the market for a home loan and asks you why a person
would use a mortgage broker instead of just going to their bank for a loan.
How would you reply?
3-1
Further resources: Why use a mortgage broker?

Smith, A 2012, ‘How to define your value proposition’, MPA, 18 July,
<http://www.mpamagazine.com.au/sections/columns/how-to-define-your-
value-proposition-141719.aspx>.

10.5 Mortgage broker credentials
Apply your knowledge 7: Mortgage broker credentials

Read the following articles on selecting and using a mortgage broker from
a customer’s point of view, then answer the questions below:
• Mihm, U 2014, Get the best out of your mortgage broker, CHOICE,
24 November, viewed 13 March 2017,
<http://www.choice.com.au/reviews-and-tests/money/borrowing/your-
mortgage/are-mortgage-brokers-working-in-your-interest.aspx>.
• MoneySmart n.d., Using a broker, Australian Securities and Investments
Commission, viewed 13 March 2017,
<https://www.moneysmart.gov.au/borrowing-and-credit/home-
loans/using-a-broker>.
1. What are the issues outlined in the articles to check before using a
broker?
2. When meeting with a customer, what are some ways that you might be
able to dispel customer fears or doubts about these issues?
3. How can you prove your credentials as a mortgage broker to a

customer?
Note: You can access ‘Suggested answers’ for Question 1 at the end of this topic.
3-1.24 CIVMB_LP_T3-1_v3
11 The mortgage broker organisation

There is a wide range of mortgage brokers in the market. Mortgage brokers may
be independent operators and work for themselves, or be employed by credit providers
or other organisations. They may operate flexibly, for example by spending a great deal
of time on the road and visiting the customer rather than the reverse. Others may have
a central office or a chain of offices. All brokers, however, have a website and probably
some social media presence, such as a Twitter account or Facebook page.
11.1 Services
Mortgage broker organisations may offer a range of services, including:
• mortgage brokerage services for particular markets such as:
– owner-occupiers
– investors
– self-employed persons
– persons who have a slightly impaired credit history or whose credit criteria
fall just outside the limits of major lenders
– businesses, including rural and agricultural businesses or other
commercial enterprises
– persons seeking to refinance existing home loans
– persons seeking to consolidate debt
• other associated services such as insurance brokerage services and
financial planning services.
The range of services offered to a customer can be affected by:
• the number of lenders on the organisation’s panel of lenders; therefore, the range of
loan products offered
• the quality of mortgage brokerage services offered
• the organisation’s commitment to customer service
3-1
• the way fees and charges are structured
• when and how the customer is informed of the types of fees and charges.

11.2 Values
The values of an organisation are demonstrated in how the corporation presents itself
to the world, including:
• the type and level of customer service provided by the organisation
• standards of corporate governance
• the conduct and behaviour demonstrated by employees of the organisation
• the treatment of employees who breach the law or do not demonstrate or uphold
the stated corporate values
• being a ‘good corporate citizen’ or being socially responsible, demonstrated in
activities such as:
– compliance with the spirit as well as the letter of the law, or the demonstration of
exemplary behaviour in spheres outside of legal compliance
– support of community organisations and charities or other philanthropic activities
– consideration of the effects of business ventures on the environment and the
local community.
These values may be expressed in:
• organisational documents such as:
– mission or vision statements; for more information,
see ‘Topic 2-1: Organisations, teams and individuals’
– a customer service charter; for more information,
see ‘Topic 2-2: Customer service’
– organisational policies; for more information,
see ‘Topic 2-1: Organisations, teams and individuals’.
• membership of professional associations such as the MFAA where members must
have completed accredited training, have a minimum level of experience in the
industry and must adhere to a professional code of conduct ensuring ethical
behaviour, professionalism, transparency and full disclosure of information; for more
information, see:
– the MFAA website at <www.mfaa.com.au>
– ‘Topic 1-2: Legislation and codes of practice’.
Organisational values may be demonstrated in the following areas:
• compliance with relevant legislation and codes of practice such as described in
‘Topic 1-2: Legislation and codes of practice’
• employment of staff
• the publication of, and compliance with, customer service standards, training and
policies; for more information, see ‘Topic 2-2: Customer service’
• probity in areas such as receiving gifts and giving gifts
• quality standards of products and services, in particular, the quality of service when
addressing customer complaints.
3-1.26 CIVMB_LP_T3-1_v3
11.3 Capacity
The capacity of the organisation may be determined by:
• the number of brokers in the organisation
• the number and amount of the business or mortgages written in the previous sales
period
• the number of customers served by the organisation
• the geographical region of Australia being serviced by the organisation
• the type of business in which the organisation specialises
• market and economic forces.
11.4 Fees and charges

A mortgage broker needs to make all home loan customers aware of the range of fees
and charges for which they will be responsible.
In relation to the cost of brokerage services, according to the MFAA (n.d.):
The normal practice for commercial, equipment and general finance brokers
is that they enter into a mandate or agreement with the commercial or
business borrower which provides for a fee to be paid by the borrower to
the broker for sourcing their required finance.
In relation to who pays the mortgage broker, according to MoneySmart (n.d.):
Different credit providers pay different commission levels. This can
potentially influence what loans the broker recommends to you.
Sometimes a broker will charge you a fee directly (instead of, or in addition
to, the credit provider’s commission). Find out the fee structure for the
broker’s service, and compare fees charged by different brokers to make
sure you get a good deal.
3-1
11.5 Differentiation with the credit provider
Mortgage brokers are professionals who are paid a commission to bring together credit
providers and loan applicants. Mortgage brokers often have access to many different
lenders and evaluate a customer’s financial situation to determine which credit provider
and which product is the best fit for the customer. Brokers specialise in selecting the
best mortgage for the customer’s unique needs.
A credit provider such as a bank or other financial institution provides the finance,
based on a set of credit rules or guidelines.
Further resources: Differentiation between broker and credit provider

View this video on the link between the credit provider (NAB) and the
broker channel:
• Waldron, A & Kane, S n.d., Brokers bring better clients,
Australian Broker Online, viewed 13 March 2017,
<http://www.brokernews.com.au/tv/brokers-bring-better-clients-
188554.aspx>.

11.6 Mortgage broker organisations
Apply your knowledge 8: Mortgage broker services,

values and capacity
Compare the service offering of at least three mortgage brokers. Choose at
least one smaller or independent mortgage broker and at least one larger
organisation offering brokerage services, such as Mortgage Choice or
Aussie. If possible, visit their offices, obtain promotional material and
explore their websites to compare the differences.
You may also like to use the following articles as a starting point:
• Christie, R 2014, ‘Top 10 independent brokerages of 2013’, MPA,
3 March, viewed 13 March 2017,
<http://www.mpamagazine.com.au/rankings/top-10-independent-
brokerages-of-2013-184845.aspx>
• Christie, R 2014, ‘Mortgage professional Australia top 100 brokers 2013’,
MPA, 27 February, viewed 13 March 2017,
http://www.mpamagazine.com.au/rankings/mortgage-professional-
australia-top-100-brokers-2013-184514.aspx>.
1. Note any differences in the number and types of services offered,
such as:
• the number of lenders on the organisation’s panel of lenders
• the mortgage products offered
• specialties
• the quality and type of mortgage brokerage services offered
• whether additional services are also offered, such as insurance or
financial planning.
3-1.28 CIVMB_LP_T3-1_v3
2. Note how each organisation structures mortgage brokerage fees and

charges, as well as other fees and charges and how this information is
made clear to the customer.
3. What is the capacity of each organisation? For example, are you able to
identify the number of:
• mortgage brokers employed by the organisation?
• customers served?
• mortgages written over the last year?
• years in the mortgage broking business?
3-1
4. Does the website explicitly state or otherwise imply the values of the
organisation? How is this information provided? Do you think it is
important for an organisation to have a stated set of values? Why/why
not?

5. What are some of the ways that you can present the services, values and
capacity of a mortgage broker organisation to a customer?
6. What are some of the ways that a mortgage broker organisation can
clearly distinguish between itself and the credit provider so that the
customer understands the distinction?
Note: This activity requires independent research, therefore, no suggested answers are provided.
3-1.30 CIVMB_LP_T3-1_v3
12 Products and services

Review the products and services provided by a mortgage broker covered in
‘Topic 1-3: Products and services’.
Apply your knowledge 9: Handling customer enquiries about

products and services
Based on your product knowledge, develop some responses to common
customer enquiries about mortgage broker products and services.
A starting point for research could be the FAQ pages on a credit
provider’s website.
1. ‘Which mortgage is most suitable for me?’
2. ‘Should I select a variable or fixed interest rate?’
3. ‘Will I need LMI?’
3-1
4. ‘What fees apply to my home loan? How much are the mortgage
broker fees?’

13 Responsible lending disclosure obligations

The NCCP Act requires that the following persons have a responsibility to provide
customers with information about credit activities. These persons are:
• credit providers and lessors, including assignees
• credit assistance providers such as mortgage and finance brokers, including:
– product designers
– mortgage managers
– franchisees
• credit representatives, including some franchisees
• debt collectors.
According to ASIC Information Sheet INFO 146 ‘Responsible lending disclosure
obligations – Overview for credit licensees and representatives’, mortgage brokers must
provide all of the following four documents to customers:
• Credit guide: This provides preliminary information about the mortgage broker to
a customer. Provide this information to the customer before discussing
credit activities with them.
• Quote: A quote shows the customer the estimated cost of using the mortgage
broking service. Before providing credit assistance, the mortgage broker must give
the customer a quote. The customer must accept the quote by signing and dating it.
Provide the customer with a copy of the accepted quote.
• Proposal document: This sets out the costs to the consumer of using the
mortgage broking service, including any commissions the broker may receive.
Provide the proposal document at the same time the credit assistance is provided to
the customer.
• Written assessment: A preliminary or final written assessment that a credit contract
or consumer lease is ‘not unsuitable’ for the consumer. The mortgage broker is
required to give a free copy of the written assessment to the customer if they
request one within seven years of the date of the quote.
Further resources: Information disclosure

Australian Securities and Investments Commission (ASIC) 2011,
Information Sheet INFO 146 ‘Responsible lending disclosure obligations —
Overview for credit licensees and representatives’, ASIC,
viewed 13 March 2017, <http://asic.gov.au/regulatory-
resources/credit/responsible-lending/responsible-lending-disclosure-
obligations-overview-for-credit-licensees-and-representatives>.
3-1.32 CIVMB_LP_T3-1_v3
14 Complaints handling and dispute resolution

Review the complaints handling procedures covered in ‘Topic 2-2: Customer service’.
14.1 What is a complaint?

ASIC Regulatory Guide RG 165 ‘Licensing: Internal and external dispute resolution’ uses
the Australian Standard definition (AS ISO 10002) of complaint, where it is defined as:
… an expression of dissatisfaction made to an organisation, related to its
products, or the complaints handling process itself, where a response or
resolution is explicitly or implicitly expected.
14.2 Complaint handling procedures

RG 165 (p. 4) states that:
Australian financial services (AFS) licensees, unlicensed product issuers,
unlicensed secondary sellers, Australian credit licensees (credit licensees)
and credit representatives are required to have in place a dispute resolution
system that consists of:
• internal dispute resolution (IDR) procedures that meet the standards
or requirements made or approved by ASIC; and
• membership of one or more ASIC-approved external dispute resolution
(EDR) schemes.
14.3 EDR schemes

Currently there are two ASIC-approved EDR schemes in the Australian financial services
industry:
3-1
• Financial Ombudsman Service Australia (FOS) <http://www.fos.org.au>
• Credit and Investments Ombudsman (CIO) <http://www.cio.org.au>.
14.4 Adviser responsibilities

The mortgage broker licensee/principal is responsible for the adviser’s conduct.
This includes:
• all persons who provide financial product advice to retail clients
• any representative of a licensee
• an employee or owner.

14.5 Providing customers with information about

complaints handling
Clause 11.3 of the MFAA Code of Practice (2014) states that:
Members must maintain a written IDR policy which is made available to any
person on request and posted on the Member’s website, if any.
Apply your knowledge 10: Customer complaints handling

Using the following resources and your own research, answer the
questions below.
• Mortgage & Finance Association of Australia (MFAA) 2014,
MFAA code of practice, MFAA, 12 March, viewed 13 March 2017,
<https://www.mfaa.com.au/AboutUs/Governance/Pages/Code-of-
Practice.aspx>.
• Australian Securities and Investments Commission (ASIC) 2015,
Regulatory Guide RG 165 ‘Licensing: Internal and external
dispute resolution’, ASIC, viewed 13 March 2017,
<http://www.asic.gov.au/regulatory-resources/find-a-
document/regulatory-guides/rg-165-licensing-internal-and-external-
dispute-resolution>.
• Financial Ombudsman Service Australia (FOS): <www.fos.org.au>.
• Credit and Investments Ombudsman (CIO): <http://www.cio.org.au/>.
1. Give some examples of customer complaints that a mortgage broker
might need to address.
2. When is the appropriate time to explain the internal dispute resolution

(IDR) and EDR schemes for complaint resolution to a customer?
3-1.34 CIVMB_LP_T3-1_v3
3. If you currently work for a credit organisation, describe the

organisation’s IDR scheme. If not, visit a mortgage broker website and
describe the components of their IDR scheme.
4. Investigate one of the EDR schemes you’ve found using the above
resources. What are the steps in the dispute resolution process?
3-1

Part 4: Determining customer needs

The following is a quote from Colin Lamb (MPA 2013), an award-winning mortgage
broker, in response to the question, ‘What qualities make a successful broker?’
A true focus on customer service. Taking the time to get to know people and
understand what their long-term plans are and then working with them,
educating them, to develop and realise these plans. We have clients that we
have worked with as first home buyers who have now built a portfolio of
investment properties. From my point of view, this makes my work very
rewarding, to see them succeed in realising their plans. These clients are our
biggest referral sources and our greatest success stories. Communication is
key with both clients and referrers; understanding the needs, presenting the
case and keeping all parties informed every step of the way.
This section focuses on specific customer needs when assessing the customer for a
home loan.
Review the section on exploring the customer’s needs (Step 2 of the sales cycle)
in ‘Topic 2-2: Customer service’.
15 Customer needs and priorities

A mortgage broker needs to determine the client’s top needs and priorities to assist
them in making the right choice of mortgage product.
15.1 Customer income

Each loan applicant has a requirement for a certain level of income when servicing the
debt of a home loan. This includes:
• paying the loan repayments, or servicing the debt
• living expenses, such as food and utility bills
• discretionary spending, such as entertainment and dining out.
When assessing a credit application, a credit provider will allow a minimum level of
income for living expenses (for more information, see ‘Living expenses’ in
Part 6, section 22.3). Lenders typically recommend that the mortgage repayments
should be no more than 35% of the applicant’s gross income.
However, depending on commitments and lifestyle requirements, each loan applicant
needs to be comfortable with the:
• amount of debt they are taking on
• level of their projected income to both service their mortgage and maintain a
reasonable lifestyle.
3-1.36 CIVMB_LP_T3-1_v3
15.2 Customer debt position

The debt to income ratio for Australian households has increased substantially over
time. In 1977, Australians on average had a debt roughly equal to one-third of their
yearly disposable income. In 2013, that debt is equivalent to almost 18 months
disposable income.
As with any investment, the loan applicant needs to be comfortable with the size of the
debt they are taking on. The debt needs to be seen in perspective of the type of debt as
well as the equity that the loan applicant has in the property.
Apply your knowledge 11: Good and bad debt

Read the following articles and answer the questions below.
• D&B checkyourcredit n.d., Good debt vs bad debt, Dun & Bradstreet,
<https://www.checkyourcredit.com.au/CreditEducation/Good-debt-vs-
bad-debt>.
• Kane, L 2014, ‘Here’s the difference between good and bad debt’,
Business Insider Australia, 19 July, viewed 13 March 2017,
<http://www.businessinsider.com.au/difference-between-good-and-
bad-debt-2014-7>.
1. What is good debt? Give some examples.
2. What is bad debt? Give some examples.
3-1
3. How can you use this information to help your customer make a
decision about a home loan?

Further resources: Debt

• Australian Bureau of Statistics (ABS) 2014, What types of debts do
households have?, ABS, viewed 13 March 2017,
<http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/4102.0main+featur
es402014>.
• Bird, J 2014, Interest rates won’t keep falling, CHOICE, 10 October,
viewed 13 March 2017, <https://www.choice.com.au/money/credit-
cards-and-loans/home-loans/articles/mortgage-tips#Debt>.
15.3 Security
The security for the mortgage needs to be carefully selected by the loan applicant.
For more information about:
• the assessment of valuation of a property by a credit provider, see ‘Valuations’ in
Part 1, section 5.1.
• the information to be gathered about the security property, see ‘Security property’ in
Further resources: Finding the right property

MoneySmart n.d., Buying a home, Australian Securities and Investments
Commission, viewed 13 March 2017,
<https://www.moneysmart.gov.au/life-events-and-you/life-events/buying-
a-home>.
15.4 Customer business needs

A loan applicant who has a business or is self-employed may require additional flexibility
in their home loan to fit in with their business requirements.
In addition, a customer may wish to invest in property using the equity in their home or
as a part of a self managed superannuation fund (SMSF).
Further resources: Property investment and SMSFs

• Christie, R 2014, ‘SMSF lending: your step-by-step guide’, MPA,
11 August, viewed 13 March 2017,
<http://www.mpamagazine.com.au/sections/features/smsf-lending--
your-stepbystep-guide-191891.aspx>.
• MoneySmart n.d., Property investment, Australian Securities and
Investments Commission, viewed 13 March 2017,
<https://www.moneysmart.gov.au/investing/property>.
3-1.38 CIVMB_LP_T3-1_v3
15.5 Mortgage term

Mortgages can be taken over different terms or lengths of time to repay. A mortgage
term in Australia is typically 30 years but it can be varied according to circumstance
and preference.
The main differences between a shorter term of, say, 20 years compared to a longer
term of 30 years is straightforward. Shorter loans have higher monthly payments but the
borrower pays less interest, while longer terms have lower monthly payments but the
borrower pays significantly more interest.
The mortgage broker should recommend a mortgage term that is appropriate to the
loan applicant’s requirement for flexibility and access to income as well as their ability to
service the loan. For example, some applicants will simply not be able to afford a
shorter-term loan. Other applicants will choose the lower payments of a longer-term
loan, but when money is available, make additional payments on the loan to pay it
off earlier.
Further resources: Mortgage terms

• Dykman, A 2009, Pros and cons: 30-year mortgage vs. 15-year
mortgage, Get Rich Slowly, viewed 13 March 2017,
<http://www.getrichslowly.org/blog/2009/09/30/pros-and-cons-30-
year-mortgage-vs-15-year-mortgage>.
• Sweeney, N n.d., Mortgage term: 25 vs 30 years, Your Mortgage,
<http://www.yourmortgage.com.au/article/mortgage-term-25-vs-30-
years-78108.aspx>.
3-1

16 Investment goals
For most people, the purchase of a property is the largest investment they will make in
their lifetime. In order to provide appropriate advice, a mortgage broker needs to
investigate the customer’s investment goals, investment approach and attitude to
returns.
16.1 Approach to investing

In order to provide appropriate advice and suggest appropriate products, a mortgage
broker needs to determine what type of investor the customer is.
• Speculative: Speculation is the act of trading in an asset or conducting a financial
transaction that has a significant risk of losing most or all of the initial outlay,
in expectation of a substantial gain.
Speculators buy something expecting a profitable change in price. These investors
will buy if they think something will rise in value and will sell if they think the price
will fall.
• Passive: Passive investing is an investment strategy involving limited ongoing buying
and selling actions. Passive investors will purchase investments with the intention of
long-term appreciation and limited maintenance.
Passive investing requires good initial research, patience and a diversified portfolio.
Passive investors rely on their belief that the investment will be profitable in the
long term.
• Active: Active investing is an investment strategy involving ongoing buying and
selling actions by the investor. Active investors purchase investments and
continuously monitor their activity in order to exploit profitable conditions.
Active investors:
– tend to rely on research and analysis
– typically seek short-term profits
– believe that gains can be had by buying on hearing or in anticipation of good news
and selling on hearing or in anticipation of bad news.
3-1.40 CIVMB_LP_T3-1_v3
Apply your knowledge 12: Investment style

Read the following article and answer the questions below.
Fontinelle, E 2010, 6 investment styles: which fits you?, Investopedia,
22 April, viewed 13 March 2017, <http://www.investopedia.com/financial-
edge/0410/6-investment-styles-which-fits-you.aspx>.
1. Define growth and value investing.
2. What is market capitalisation?
3-1
3. How can you determine the investment style of a customer?
Note: You can access ‘Suggested answers’ for Questions 1 and 2 at the end of this topic.

16.2 Short-, medium- and long-term goals

In terms of investments, short-term goals are goals to be achieved in the next few years.
Short-term goals include a:
• holiday
• car.
Long-term goals are goals that a person wants to achieve in five or more years.
Long-term goals may include:
• paying off a mortgage
• raising a family/educating children
• providing for a secure retirement.
It is important for mortgage brokers to ask their customers to articulate their
investment goals so that they can recommend appropriate products and strategies.
There are two broad categories of investments:
• capital growth, an investment that builds and protects the investment —
capital growth means that the investor wants the original investment amount
to grow by more than inflation
• income-generating investments that provide cash, for example a person nearing
retirement might want to live off their investments.
Customers who are focused on:
• short-term goals such as saving for a car or holiday may need easy access to their
money and a return that is reasonably certain
• medium- to longer-term goals may prefer investments more likely to grow in value
over the longer term. Growth assets such as shares carry more risk but may be useful
in achieving these goals.
A mortgage broker needs to be aware of the possibility that there may be a mismatch
between the customer’s investment style, appetite for risk and short- or long-term
goals. For example, a customer may have a short-term goal to double his or her money
to pay for a lavish holiday, but may also be a conservative investor. An investment
strategy designed to double one’s money in a short time is likely to be a high-risk one.
The customer’s goal may not be compatible with his or her risk profile.
3-1.42 CIVMB_LP_T3-1_v3
17 Customer concerns
Customer concerns and issues are normal. Customers face a life-changing decision when
purchasing a property as it is the biggest investment choice of most people’s lives. It is
natural that they will be anxious and have concerns.
Dealing with customer resistance is a normal part of the sales cycle. For more
information, see ‘Dealing with resistance’ in ‘Topic 2-2: Customer service’.
Look at some of the possible customer concerns that might be raised in home loan
discussions and consider:
• product or feature options that can be suggested to remove or mitigate the concern
• other ways to alleviate these concerns.
17.1 Concerns about price or interest rates

Customers may be concerned that:
• interest rates are currently very high
• interest rates are about to rise.
Apply your knowledge 13: Price or interest rate resistance

What are some of the ways you can alleviate a customer’s concerns about
interest rates or price?
3-1

17.2 Uncertainty about the product

The customer may raise concerns about the home loan product recommended.
These concerns may arise from:
• misunderstanding or not being clear about the product’s benefits and features
• placing too much emphasis on any product negatives or shortcomings
• a poor selection of product, that is, the product does not match the customer’s
investment goals, appetite for risk or investment style
• the customer’s investment goals are not compatible with his or her risk profile or
investment strategy.
Apply your knowledge 14: Product uncertainty

How would you deal with a customer who is unsure about a
home loan product?
3-1.44 CIVMB_LP_T3-1_v3
17.3 Customer resistance to the organisation or broker

Customers may demonstrate that they are concerned that the:
• broker organisation is untrustworthy, inexperienced or not providing the appropriate
level of advice or attention they require
• broker they are dealing with is untrustworthy, inexperienced or unskilled in providing
advice, not listening to their requirements or rushing them for a decision.
Apply your knowledge 15: Resistance to the organisation

or broker
1. How might a customer demonstrate resistance to a broker organisation
or a broker?
2. How would you deal with resistance to your broker organisation?
3. How would you deal with resistance to yourself (as the broker)? 3-1

17.4 Concerns about timing

A customer may express doubts about the timing of investing in a property.
This could be because the investment in a property:
• does not fit with what is currently happening in the customer’s life
• appears to be inopportune due to national or international events or changes in the
economic cycle
• volatility in the property market.
Apply your knowledge 16: Timing

1. How would you deal with a customer who is unsure about timing due to
personal life events?
2. How would you deal with a customer who is unsure about timing due to
national/world events or property market volatility?
3-1.46 CIVMB_LP_T3-1_v3
17.5 Concerns about debt

Customer concerns about debt may focus on:
• the size of the debt
• future uncertainties that may result in hardship when repaying the debt, such as
unemployment or illness.
Apply your knowledge 17: Concerns about debt

How would you deal with customer concerns about debt?
3-1
Further resources: Managing debt
• MoneySmart n.d., Keeping your mortgage on track, Australian Securities
and Investments Commission, viewed 13 March 2017,
<https://www.moneysmart.gov.au/managing-your-money/managing-
debts/problems-paying-your-mortgage/keeping-your-mortgage-on-
track>.
• MoneySmart n.d., Making repayments, Australian Securities and
debts/making-repayments>.
• MoneySmart n.d., Problems paying your mortgage, Australian Securities
and Investments Commission, viewed 13 March 2017,
debts/problems-paying-your-mortgage>.
• MoneySmart n.d., Trouble with debt, Australian Securities and
debts/trouble-with-debt>.

18 Customer risk profile and risk tolerance
18.1 What is risk?

Risk is the potential of losing something of value or the likelihood of loss, injury or
damage when undertaking an activity. The ISO Guide 73:2009 definition of risk is:
‘the effect of uncertainty on objectives’.
Risk can apply to many areas, including health, safety, project success, insurance and
actuarial analysis, and finance and investing. Financial risk is the probability that an
actual return on an investment will be lower than the expected return.
Risk includes the possibility of losing some or all of the original investment.
It is important for a broker to establish a customer’s tolerance to risk when discussing an
investment proposition such as a mortgage.
Apply your knowledge 18: Risk

Investopedia 2013, Determining risk and the risk pyramid, Investopedia,
<http://www.investopedia.com/articles/basics/03/050203.asp>.
1. What is the risk–reward concept?
2. What are the two (2) important things to consider when deciding how
much risk to take?
3-1.48 CIVMB_LP_T3-1_v3
3. What is the risk pyramid? Describe the levels of the pyramid.
4. How can you assist customers in assessing their risk tolerance level?
3-1
Note: You can access ‘Suggested answers’ to Questions 1, 2 and 3 at the end of this topic.

18.2 Risk profile

FinaMetrica (2015) defines a risk profile as:
Risk profiling is a process for finding the optimal level of investment risk
for your client considering the risk required, risk capacity and risk
tolerance, where,
• risk required is the risk associated with the return required to achieve
the client’s goals from the financial resources available,
• risk capacity is the level of financial risk the client can afford to take,
and
• risk tolerance is the level of risk the client is comfortable with.
Attitude to risk
Risk means different things to different people. How a customer feels about risk
depends on individual circumstances and personalities. Generally, the more risk a
person is prepared to take in investing, the greater returns or losses the person can
potentially make.
Broadly speaking, a classification of risk for investors includes at least three levels:
• Low tolerance of risk — these investors are conservative and take a cautious and
risk-averse approach to savings and investments. They are willing to accept a lesser
return for a more assured one and are extremely unwilling to accept any loss.
This may be because they do not have time to recoup any loss or have little to lose.
Their investment choices tend to be safe, such as keeping money in cash.
• Moderate tolerance of risk — this category is for middle-of-the-road investors who
have a tendency to hold a balanced or mixed portfolio of investments. They know
they will lose money if the markets go down, but also expect to benefit if they go up.
Typically, these investors expect to achieve returns greater than taxes and inflation
and have a relatively relaxed approach to risk.
• High tolerance of risk — these investors want to outperform the markets
substantially and are exposed to substantial risk. They tend to be younger and have
aggressive attitudes to risk and profit. They know (or should know) they can lose a
very high percentage of their money if the markets go down, but also expect to profit
greatly if they go up.
The investment goals and timescales suggested to the customer must match the level of
risk they are willing to take.
A person’s attitude to risk is subjective and likely to be influenced by recent events.
Levels of risk tolerance can be described on a scale or determined using a
risk attitude questionnaire.
3-1.50 CIVMB_LP_T3-1_v3
18.3 Gearing risks
Negative gearing definition

Gearing is the act of borrowing money at fixed interest, which is then used to produce
more money than the interest paid.
According to the Australian Taxation Office (ATO):
A rental property is negatively geared if it is purchased with the assistance
of borrowed funds and the net rental income, after deducting other
expenses, is less than the interest on the borrowings.
The overall tax result of a negatively geared property is a net rental loss.
In this case, you may be able to claim a deduction for the full amount of
rental expenses against your rental and other income — such as salary,
wages or business income — when you complete your tax return for the
relevant income year. Where the other income is not sufficient to absorb the
loss it is carried forward to the next tax year.
Gearing of property and investments carries both benefits and risks.
Further resources: Gearing

• MoneySmart n.d., Property investment, Australian Securities and
<https://www.moneysmart.gov.au/investing/property>.
• Your Mortgage n.d., Negative gearing calculator, Your Mortgage,
<http://www.yourmortgage.com.au/calculators/negative_gearing>.
18.4 Flexibility of product

It is important for a mortgage broker to recommend a mortgage product that is
3-1
appropriate to the customer’s risk profile.
Some mortgages are more flexible than others or have features that may be appropriate
for different types of customers, depending on their appetite for risk. Generally,
the more flexible the loan, the more expensive the loan, that is, the higher the interest
rate.
Some of the features that may be considered for a customer wishing for a more flexible
product include:
• flexible home loan products, or loans that allow a borrower to pay their income into
the home loan account and withdraw it as required, such as offset accounts
• loans with a redraw facility or the ability to pay additional funds into a mortgage over
the standard repayment
• loans allowing a payment holiday or payment break — some mortgages offer the
option to take a break in payments. These types of products may be suitable for
people facing important life events such as the birth of a child.
In addition, mortgage holders who find it hard to meet payments due to illness,
unemployment or other circumstances may apply for a hardship variation.

Further resources: Product flexibility

• MoneySmart n.d., Hardship threshold, Australian Securities and
debts/trouble-with-debt/hardship-threshold>.
18.5 Risky home loan products and strategies

Some strategies to assist a loan applicant in taking out a mortgage when they do not
meet credit provider lending guidelines are risky and can result in very adverse financial
outcomes.
Apply your knowledge 19: Risky home loans

Mihm, U 2015, ‘A calculated risk?’, CHOICE, viewed 13 March 2017,
<http://www.choice.com.au/reviews-and-tests/money/borrowing/your-
mortgage/risky-home-loans.aspx>.
1. What is risky about a no deposit home loan?
2. What is risky about a family guarantee?
3. What is risky about 40-year home loan terms?
3-1.52 CIVMB_LP_T3-1_v3
18.6 Access restrictions to mortgage products

A number of system-wide risks can develop during boom–bust financial cycles.
These risks can be driven by rapid credit growth, rising household debt or excessive
liquidity. Prudential agencies, credit providers, government departments or the
Reserve Bank of Australia (RBA) may act to mitigate these risks.
For more information, see ‘Topic 1-1: The industry and economy’.
Lending caps
Access restrictions on mortgage products such as mortgage lending caps may be
imposed by credit providers to cool housing market growth and reduce the number
of people with access to a mortgage. For example in 2014, Britain’s The Telegraph
reported that:
Britain’s biggest mortgage provider, Lloyds Banking Group, took an
unprecedented step this week by refusing to lend big mortgages,
those of £500,000 or more, when the loans were for more than four times
the borrower’s income.
It was the first move by a lender in response to growing concern that
property prices in London have become dangerously high. It caused a wave
of speculation whether such restrictions would be followed elsewhere,
and whether they would dent confidence in the housing market, which was
already showing signs of slowing.
LVR restrictions
LVR restrictions limit the amount of high-LVR lending a bank can do. These restrictions
reduce the risk of a sharp housing downturn and the loss of equity that would result,
particularly for highly indebted homeowners.
For more information on LVR, see ‘Loan to value ratio’ in Part 1, section 5.
3-1
18.7 Market and sector risks
Market risk is the risk of losses arising from market changes, such as interest rate
changes or movement through the economic cycle.

Interest rates and monetary policy

The RBA (2015) is responsible for monetary policy:
Monetary policy involves setting the interest rate on overnight loans in the
money market (‘the cash rate’). The cash rate influences other interest rates
in the economy, affecting the behaviour of borrowers and lenders,
economic activity and ultimately the rate of inflation.
In determining monetary policy, the Bank has a duty to maintain price
stability, full employment, and the economic prosperity and welfare of the
Australian people. To achieve these statutory objectives, the Bank has an
‘inflation target’ and seeks to keep consumer price inflation in the economy
to 2–3 per cent, on average, over the medium term. Controlling inflation
preserves the value of money and encourages strong and sustainable
growth in the economy over the longer term.
The table below summarises the impact of interest rate adjustments by the RBA.
Table 1 Interest rates and monetary policy

Substantial interest rate … Designed to … Traditionally result in …
rises restrain inflationary booms contractions in demand and a reduction
in inflation
reductions encourage growth periods of significantly faster growth
For mortgage holders with variable loans, changes in monetary policy have a direct
impact on their regular loan repayments. Loan applicants who want to be sure of the
amount they will be required to pay each month may consider opting for a fixed interest
rate loan.
Economic cycle
The economic cycle is the natural fluctuation of the economy between periods of
expansion (growth) and contraction (recession). Factors such as gross domestic product
(GDP), interest rates, levels of employment and consumer spending can help to
determine the current stage of the economic cycle.
The impact on mortgages and the housing of the economic cycle can be illustrated by
example of the global financial crisis (GFC) of 2007/08. The US housing market bubble
burst in 2006 primarily due to the overvaluation of bundled subprime mortgages.
The ensuing GFC resulted in the collapse of several major financial institutions and had
disastrous economic consequences across the world. Following the GFC, credit
availability in the US for mortgages was very limited. Limited credit availability means
fewer persons become homeowners, depriving these persons of an opportunity to build
wealth. This causes the housing sector to recover more slowly and impacts the wider
economy through less consumer spending.
For more information, see ‘Topic 1-1: The industry and economy’.
3-1.54 CIVMB_LP_T3-1_v3
18.8 Property risks
Location
The location of a property is one of the key factors affecting its value. As the whole of
the investment is tied up in a single location, the risk of the investment is concentrated.
Location is one of the most important criteria in determining a property’s value;
however, it is important to assess the location’s future prospects as well as current
attractiveness. Over the life of a property, the attractiveness of its location is likely to
change due to:
• development of the surrounding area
• the changing nature of local business activity.
Location is therefore crucial to managing risk, although it can be hard to evaluate
upfront the entire life of the property investment.
Expert knowledge of an area can help to mitigate this risk.
Property management
Property requires active management to maintain its value. Property value can also be
increased through good management. Conversely, poor management can destroy a
property’s value. Property management involves:
• the day-to-day management of repairs and maintenance, minor improvements and
the management of relationships with tenants, including the collection of rent and
service charges
• asset management or strategic decision making regarding:
– when to buy and sell
– how to make a significant improvement to the property’s value.
3-1
19 Specialist advice
Do not be afraid to recommend to customers to seek specialist advice. Some situations
where specialist advice may be required are:
• Taxation and tax law for property investors — seek advice from a
Certified Practising Accountant (CPA) on tax law and tax deductions arising from
investment properties. For more information, see ‘Taxation’ in Part 4, section 19.1.
• Insurance — seek advice from an insurance broker about specific products and
requirements.
• Customers with special needs — identify loan applicants with special needs
and either:
– take appropriate action to assist them, or
– refer them to a service provider who is more suited to fulfilling their needs.
For more information on customers with special needs, such as disabled customers or
customers with low literacy, see ‘Topic 2-2: Customer service’.

19.1 Taxation
Tax law is very complex. The information provided below is of a very general nature and
cannot be relied on for specific requirements or individual circumstances. It is important
for the customer to seek advice from their own accountant regarding their specific tax
situation and the tax implications of property ownership.
19.2 Tax implications of buying or selling owner-

occupied homes
Generally, there are no tax implications for buying or selling the home that a person
occupies, provided the homeowner does not use the home to produce income and the
home is on two hectares (or less) of land.
Further resources: Tax implications of buying or selling

your home
Australian Taxation Office (ATO) 2015 Your home, ATO,
<https://www.ato.gov.au/General/Property/Your-home>.
19.3 Tax considerations for investors
Negative gearing and deductible costs

When a property is negatively geared, the investor is able to claim the difference
between income and costs as a deduction, thus reducing their overall taxable income.
Meanwhile, the property also increases in value.
Investors can also claim a wide range of other deductible costs, including the running
costs of property investment, as tax deductions.
Further resources: Negative gearing

Australian Taxation Office (ATO) 2014, Rental properties 2014, ATO, May,
viewed 13 March 2017, <https://www.ato.gov.au/Individuals/Tax-
return/2014/In-detail/Publications/Rental-properties-2013-14>.
3-1.56 CIVMB_LP_T3-1_v3
Depreciation
An investor may be able to claim a tax deduction for the depreciation of assets in an
investment property. Depreciation of an investment property is based on its useful life,
or the number of years it is expected to be in use, commonly from 25 years to 40 years.
Investment properties can depreciate in two ways:
• depreciation of assets, including items such as carpets, fittings, heaters or hot
water systems
• depreciation of the building itself, based on the cost of construction of the building
rather than the acquisition cost. This is called ‘capital allowance’ or
‘building allowance’ depreciation.
Capital gains tax

The ATO (2015) defines a capital gain or loss as ‘… the difference between what it cost
you to get an asset and what you received when you disposed of it’.
Capital gains tax (CGT) is paid on an investment property when it is sold or otherwise
disposed of. Generally, a principal place of residence is usually exempt from any CGT
liability on its disposal. However, if a property has been used as both a principal place of
residence and an investment property, the seller may be liable for CGT on a pro rata
basis for the period that the property was rented out.
Case study: Home loan customer case studies
Apply your knowledge 20: Home loan customer case studies

In each of the case studies below, determine the stated customer needs
from the scenario. Make notes and consider what other questions you
would ask the customer to understand their needs, investment goals
and aims.
3-1
1. Raghav is a South Australian government employee based in Adelaide.
He is single, 29 years old and lives with his parents. He is interested in
buying a property.

2. Tim, 50, and Sarah, 34, have a mortgage on their Brisbane home.
They have twin daughters, Megan and Gabrielle, who are age two.
Tim owns a plumbing business and Sarah is currently staying home to
look after their young children but wishes to resume her career as a
hairdresser in a year’s time. Nearly three years ago they fixed their
mortgage for three years at 6.39% when variable rates were around
7.1%. Since then interest rates have fallen to around 5.5%. They are
considering their options as the end of the fixed rate period of their
mortgage approaches.
3. Ray, 37, and John, 34, are a couple renting a property in Paddington,
Sydney. Ray is a project manager in information technology
implementation and John is a medical specialist at a large public
hospital. They are both career oriented, ambitious and earn large
salaries. Between them they can liquidate other investments to produce
a substantial deposit. They are keen to purchase a Paddington terraced
house for proximity to the city and to be close to favoured restaurants
and entertainment venues.
3-1.58 CIVMB_LP_T3-1_v3
4. Suji is a 45-year-old graphic designer for a large Melbourne-based

communications firm. She recently inherited some money after an aunt
passed away and wants to use this money as a deposit for a newly
renovated two-bedroom flat in Richmond. This will be her first property.
5. Angelica and Carmine are homeowners. They have a mortgage, car loan,
personal loans, credit cards and a store account. Their monthly cost of
living is approximately $1,900 and with interest rates on the rise,
they are experiencing more of a squeeze. What are their options?
3-1

Part 5: The customer’s financial situation

The mortgage broker needs to obtain information from the customer to assess their
financial situation and to provide recommendations about home loan products.
This section covers the types of information that mortgage brokers need to obtain
and why.
20 Obtaining information from the customer

Home loan customers are required to disclose relevant facts to a mortgage broker in
order to determine their:
• personal details and situation
• financial situation, including current income, assets and liabilities.
20.1 Mortgage broker’s responsibilities

When obtaining information from the customer the mortgage broker needs to:
• inform the customer of their privacy rights
• obtain all relevant facts and information to determine the customer’s situation prior
to defining customer expectations, requirements and objectives
• conduct a preliminary analysis of the customer’s financial position based on the
information disclosed by the customer concerning their current income,
expenditure and liabilities, plus relevant information about investments and assets
held by them
• remain alert to any:
– indications of risk and fraud from the customer
– inconsistencies in the information provided by loan applicants.
20.2 Fact finder

A mortgage broker may use a tool called a ‘fact finder’ to assist in the collection of
financial information from a customer.
Using a well-designed fact finder ensures that the mortgage broker will be able to gather
all of the appropriate information to assist prospective borrowers in finding the most
appropriate loans.
3-1.60 CIVMB_LP_T3-1_v3
21 Types of information to be obtained from

the customer
The following details are provided as a generic guide only. Each credit provider will have
their own credit guidelines and detailed requirements when it comes to the information
to be collected and the substantiation of that information.
21.1 Customer information

The table below indicates the types of information that need to be obtained from
the customer.
Table 2 Customer information

Information Description
Name Obtain full names of all applicants. See also ‘Identification of applicants’,
in Part 5, section 21.2.
Residential address Obtain the current addresses of applicants. It may be necessary to obtain an
address history for some lenders.
Marital status Obtain the current marital status of all applicants.
Age Obtain the birthdates of all applicants.
Contact details Obtain all relevant contact details, including landline and mobile phone numbers,
email addresses and preferred methods of contact.
Dependants Obtain the number and date of birth of any dependants.
21.2 Identification of applicants

Under anti-money laundering (AML) legislation, it is necessary for credit providers
to verify the identity of applicants before providing a designated service.
3-1
For more information on this process and acceptable forms of documentation,
see AUSTRAC at <http://www.austrac.gov.au/index.html>.

21.3 Occupation and employment history

the customer.
Table 3 Occupation and employment history

Occupation and Obtain the occupations of the applicants and their current job status, for example:
job status • currently employed full-time
• currently employed part-time
• temporary employment
• self-employed
• unemployed.
Employer details Obtain the details of any employers, such as address and contact phone number.
Length of time in Obtain the commencement date and length of time with the current employer.
employment It may be necessary to obtain an employment history, including details of other
employers, length of employment and commencement date along with
documentary evidence of the employment.
21.4 Loan amount and purpose

the customer.
Note: The customer’s savings history may need to be substantiated by bank statements
or other documentary evidence.
Table 4 Loan amount and purpose

Loan purpose Determine the purpose of the loan, for example:
• purchase of an owner-occupied property
• purchase of an investment property
• purchase of an investment other than property
• refinance
• debt consolidation
• renovations or home improvements.
Loan amount Determine the loan amount required.
Deposit Determine the amount of the deposit and how the deposit was accumulated,
for example:
• genuine savings
• sale of assets
• gifts
• First Home Owner Grant (FHOG).
3-1.62 CIVMB_LP_T3-1_v3
21.5 Self-employed persons

Self-employed applicants may be sole proprietors, members of partnerships, or directors
or owners of a company.
the customer.
Note: The information will need to be substantiated by documentary evidence such as
tax returns, profit and loss statements and business registration documents.
Table 5 Self-employed persons

Business details Including the:
• business name
• address
• contact details
• registered Australian Business Number (ABN), where applicable.
Business type The type of business.
Size of business The size of the business in terms of annual turnover, profit and number
of employees.
Length of time in business The length of time that the business has been trading.
21.6 Credit history

It will be necessary for all applicants to consent by signature to the credit provider
completing the credit report. For more information, see ‘Credit reports and
credit agencies’ in Part 1, section 2.1.
3-1

21.7 Security property

Obtain information from the customer about the property to be purchased or used
as security for the loan. Most often, the value of the security property will need to
be confirmed by a property valuation. For more information, see ‘Valuations’ in
Table 6 Security property

Property Address details, including the postcode. Many lenders use the postcode to
determine whether the property is acceptable as a security. Some postcodes,
such as those in rural areas, may be deemed unacceptable.
Property type The property type offered for security, such as:
• house or townhouse
• residential vacant land
• villa, flat or home unit
• residential unit block
• rural residential
• rural
• commercial.
Owner-occupied or not Whether or not the loan applicant intends to occupy the property.
Property size • the size of the block of land

• the size of the dwelling in square metres.
Property facilities Most properties offered as security need to fulfil minimum requirements,
such as:
• fully serviced by power, water, utilities and road access
• be a minimum size
• have a separate bathroom and kitchen
• be in an acceptable location.
Other important facilities include:
• number of bedrooms and bathrooms
• car space or parking facilities.
Title The type of property title such as:

• Torrens title
• strata title
• common law title
• community title.
3-1.64 CIVMB_LP_T3-1_v3
21.8 Income
Obtain information from the customer about the amount and type of income.
All sources of income as well as the amount will need to be substantiated by
documentary evidence such as pay slips and employment contracts.
Note: Some forms of income may not be acceptable to credit providers.
Table 7 Income
Salary • PAYG salary for full- or part-time permanent employees
• penalties, regular overtime or permanent shift allowance
• commissions
• car allowance
• travel allowance.
The above need to be substantiated by documentary evidence such as pay slips
and employment contracts.
Centrelink or Centrelink payments such as family allowance or pensions, and Veterans’

government payments Affairs payments or pensions.
Interest Interest from savings or term deposits.
Other sources of • rental income from investment properties

income • dividends from investments
• annuities
• directors’ fees
• dividends from companies
• trust distributions.
21.9 Expenses/liabilities
When deciding whether a loan applicant can afford the repayments for the proposed
loan, the applicant’s total commitments need to be assessed. The table below indicates
3-1
the types of information that need to be obtained from the customer.
Table 8 Expenses/liabilities
Existing mortgages Minimum repayments for any existing mortgages need to be considered.
Personal or other loans Minimum repayments for any personal loans or other credit arrangements
such as overdrafts, need to be considered.
lines of credit or leases
Credit or store cards Minimum repayments for any credit or store card arrangements need to be
considered based on the credit limit for each card.
Rent If the applicant is not going to occupy the property and needs to pay rent or
board elsewhere, this needs to be considered as an expense.
Maintenance or If an applicant is required to pay maintenance or child support for one or more
child support children, this needs to be considered as an expense.
Living expenses The living expenses for each applicant and any dependants need to
be considered.

21.10 Assets
the customer.
Table 9 Assets
Home Insured value of home, date of purchase, value at purchase and current value.
Investment properties Insured value of properties, date of purchase, value at purchase and
current value.
Motor vehicle(s) Insured value of all motor vehicles, date of purchase, value at purchase and
current value.
Boat/caravan Insured value of all boats or leisure vehicles, date of purchase, value at purchase
and current value.
Other assets, Details of any assets, including their insured value, date of purchase, value at
e.g. furniture, purchase and current value.
artworks and jewellery
Bank accounts Current balance of bank accounts and interest p.a.
Term deposits Date acquired, current balance of account, interest p.a. and date of maturity.
Managed investments Date acquired, purchase price, current value and interest or income p.a.
Shares Date acquired, purchase price, current value and interest or income p.a.
Other investments Date acquired, purchase price, current value and interest or income p.a.
21.11 First Home Owner Grant

The FHOG scheme was introduced on 1 July 2000 to offset the effect of GST on home
ownership.
Under the scheme, a one-off grant is payable to first home owners that satisfy all the
eligibility criteria. It is a national scheme funded by the states and territories and
administered under their own legislation. Hence, a loan applicant needs to investigate
the FHOG scheme in the state or territory in which they intend to purchase the property.
Further resources: First Home Owner Grant

• First Home Owners Grant, viewed 13 March 2017,
<http://www.firsthome.gov.au>.
Apply your knowledge 21: Develop your own fact finder

Use the information provided in this section to develop your own fact finder
to assist when interviewing customers about mortgage requirements.
3-1.66 CIVMB_LP_T3-1_v3
Part 6: Determining serviceability and

borrowing capacity
A mortgage broker needs to assess the serviceability and borrowing capacity of the
borrower in order to provide advice on product selection as well as to guide the
borrower towards the best deal.
For more information, see ‘The fundamentals of lending’ in Part 1.
22 Determining serviceability and calculating

borrowing capacity
Borrowing capacity is the prospective borrower’s capacity to meet the repayments
over the term of the loan. Not only do mortgage brokers need to be capable of
calculating borrowing capacity, they must also understand what other factors will affect
loan serviceability.
22.1 Factors affecting serviceability

When determining borrowing capacity, credit providers will take into account
the applicant’s:
• monthly gross or net income derived from:
– salary and/or wages
– other sources of income earned on a regular basis, such as income from interest,
rental property income and share and managed fund dividends
– family payments received from Centrelink for children under the age of 11 years.
• basic living expenses:
3-1
– commonly 30–35% of net salary or wages
– the number of applicant dependants.
• current levels of financial commitment, including:
– minimum monthly payments on all loans
– minimum repayments on credit or store charge cards, depending on the
credit limit for each card
– interest-free accounts and maintenance payments.
The remaining funds represent the monthly payment which can be used to service a
home loan at a given interest rate.

22.2 Income
The treatment of income for calculating borrowing capacity varies between credit
providers. In most cases, credit providers require borrowers to demonstrate that they
have had a steady income flow for more than three months; therefore, prospective
borrowers who are applying for housing loans during a probationary period are more
than likely to be declined.
Rules about the treatment of income vary greatly between credit providers. It is
important that mortgage brokers familiarise themselves thoroughly with each
credit provider’s policy, as this could be crucial in whether the customer’s application
is successful.
General rules that brokers need to be aware of are as follows:
• salary and wages are assessed in full, but overtime, allowances and commissions may
be reduced or even discounted altogether
• pensions are generally treated in the same way as income
• the treatment of family payments and child maintenance varies between
credit providers
• rental income from investment properties is usually reduced by 20–25%
• investment income from other sources, such as interest, share dividends or managed
funds may be reduced further or even discounted altogether
• some prospective borrowers, such as property developers, may find that their
derived income is treated as capital gains and therefore does not count as income
at all.
22.3 Living expenses

Much like the treatment of income, the treatment of expenses varies between credit
providers. This results in differences that can be quite significant with variations ranging
from tens of thousands to even hundreds of thousands that can be borrowed.
Generally, lending institutions will apply one of the following methods to determine
what figures to use when considering living expenses:
• a formula based on a percentage of income, or
• a table based on the Australian Bureau of Statistics’ (ABS) average living costs or the
Henderson Poverty Index, which identifies the amount of money that individuals and
families of different sizes need to cover essential living costs.
The method chosen will be dependent on the individual lending institution’s treatment
of risk and its business strategy.
3-1.68 CIVMB_LP_T3-1_v3
22.4 Financial commitments

Financial commitments, such as existing loans or credit cards, reduce the amount of
income available to service a new housing loan. These financial commitments fall into
two categories:
• Non-contingent liabilities — liabilities that already exist, where the borrower is
making regular payments. These include:
– all other loans, including personal loans, car loans etc. that the prospective
borrower is currently paying off
– other regular commitments such as maintenance payments, tax liabilities
and HECS.
• Contingent liabilities — these do not necessarily require regular repayments,
but could in the future. All credit cards, store accounts, interest-free loans and loans
with deferred payment plans are contingent liabilities.
Lending institutions will deem that the borrower will be required to make regular
payments, normally in the range of 3–5% of the limit regardless of the level of the
outstanding balance. Some lenders, however, may disregard these liabilities if the
prospective borrower can demonstrate that the cards or accounts are paid in
full regularly.
Debit cards or charge cards, such as Diners or American Express, are usually not
considered as liabilities.
23 Calculating borrowing capacity
23.1 Sensitised interest rate

Rather than establishing a loan repayment based on prevailing interest rates, a credit
provider will adopt a higher interest rate called a ‘sensitised interest rate’, also known as
3-1
a ‘factored’, ‘benchmark’ or ‘assessment rate’.
The sensitised interest rate is based on a P&I rate that may be up to 2% above the
lender’s current standard variable interest rate. It is a proven affordability factor that
takes into account potential interest rate increases in the future. By adopting this rate,
a credit provider reduces the potential for loan delinquency and exposure to bad debts.
It also means that when interest rates are low, borrowers will have access to larger loan
amounts, and lower loan amounts when interest rates are high.
Borrowing capacity can be determined without a financial calculator if the broker has
access to loan repayment tables. The procedure is as follows:
1. Determine the funds available for potential loan repayments, considering the factors
that affect serviceability.
2. Determine the lender’s sensitivity rate and the loan term that the lender uses to
assess serviceability.
3. Using a loan repayment table, determine the appropriate factor to be applied.
4. Divide the funds available figure by the appropriate factor.
5. Multiply the figure established in Step 4 by 1,000 to determine the maximum loan
that can be borrowed.

23.2 Debt serviceability ratios

Lending institutions may also employ other ways of measuring borrowing capacity,
such as debt serviceability ratios (DSRs) and determining minimum annual
surplus income.
A DSR may be used if the borrower has more than three dependant children. It is
calculated by dividing the borrower’s financial commitments (including loan
repayments) by the gross verifiable income. The lower the DSR, the stronger the
prospective borrower’s application.
Generally, the DSR should not exceed 35%. However, if the applicant has a high level of
income, a higher DSR may be acceptable. This may bring the applicant’s surplus income
into account. If it remains high, the lender may be inclined to approve the loan,
particularly if other factors such as the level of collateral security offered is high and the
applicant has a good credit history.
23.3 Calculating borrowers’ comfort levels

Borrowing capacity calculations and other methods for determining an applicant’s
borrowing capacity should be used as a guide only. While a calculator may determine
that the potential applicant has a high borrowing capacity, it may be much higher than
the applicant’s comfort level.
To determine the applicant’s level of comfort, work backwards:
1. Find out how much the borrower is comfortable paying on a weekly basis to
service a loan.
2. Convert the weekly figure to a monthly figure.
3. Using either a financial calculator or loan repayment tables, calculate the loan
amount based on the prevailing interest rate and loan term.
24 Determining associated costs

A variety of costs have to be calculated when preparing loan submissions. These costs
will be dependent on whether the application is for a loan to purchase a property or to
refinance a property already owned by the applicant.
Mortgage brokers need to be aware of all potential costs associated with taking out a
housing loan and need to be able to inform prospective borrowers accordingly.
3-1.70 CIVMB_LP_T3-1_v3
24.1 Stamp duty

Stamp duty is a state-imposed tax based on the purchase price of the property. It is also
payable on transfer of ownership in most cases. The higher the purchase price,
the higher the stamp duty to be paid.
Stamp duty rates vary from state to state and they can add a very significant cost to the
property being bought. First home owners may be eligible for a reduced rate of stamp
duty in some states.
Apply your knowledge 22: Stamp duty costs

Investigate the stamp duty costs in each Australian state and territory,
bookmark the links and determine which states and territories provide a
reduced rate of stamp duty for first home buyers.
• ACT Revenue Office, viewed 13 March 2017,
<http://www.revenue.act.gov.au/duties-and-taxes/calculators>.
• NSW Office of State Revenue, viewed 13 March 2017,
<https://www.apps08.osr.nsw.gov.au/erevenue/calculators/landsalesim
ple.php>.
• NT Department of Treasury and Finance, viewed 13 March 2017,
<http://www.treasury.nt.gov.au/TaxesRoyaltiesAndGrants/StampDuty/S
tampDutyCalculators/Pages/default.aspx>.
• Queensland Government Office of State Revenue,
viewed 13 March 2017, <https://www.treasury.qld.gov.au/taxes-
royalties-grants/index.php>.
• RevenueSA, viewed 13 March 2017,
<http://www.revenuesa.sa.gov.au/taxes-and-duties/stamp-
duties/calculators/stamp-duty-on-conveyances-calculator-new>.
• Tasmania Department of Treasury and Finance, viewed 13 March 2017,
<http://www.sro.tas.gov.au/domino/dtf/SROWebsite.nsf/v-
all/4829E8B44ABC1076CA25793300034073?OpenDocument&menuitem
=Property%20Transfer%20Duties>.
3-1
• Victoria State Revenue Office, viewed 13 March 2017,
<http://www.sro.vic.gov.au/SRO/sronav.nsf/alltitle/Calculators?open>.
• Western Australia Department of Finance, viewed 13 March 2017,
<http://www.finance.wa.gov.au/cms/index.aspx>.

24.2 Legal costs
Conveyancing fees
Conveyancing is the legal process of transferring ownership of a property from one party
to another. A conveyancer is a licensed and qualified professional whose job it is to
provide advice and information about the sale of a property, prepare the
documentation and conduct the settlement process.
A professional to legally transfer ownership of the property is required when a person is
either buying or selling a property.
The process can be both time-consuming and quite complicated and it is therefore
common for the services of a solicitor or conveyancer to be used. Their role is to act as
an intermediary who can also prepare all of the information required for the financial
institution for settlement if a loan is being provided.
When purchasing a property, a conveyancer will:
• prepare, clarify and lodge legal documents, for example a contract of sale and
memorandum of transfer
• research the property and its certificate of title; they will check for easements,
type of title and any other information that needs addressing
• put the deposit money in a trust account
• calculate the adjustment of rates and taxes
• settle the property; they will act on the client’s behalf, advise them when the
property is settled and contact their bank or financial institution when final payments
are being made
• represent the client’s interest with a vendor or their agent.
When selling a property, a conveyancer will:
• complete and ensure the legal documents are all sorted
• represent the client and respond to requests from the buyer, for example a request
to extend dates and title questions.
Costs incurred usually cover the professional fee for the solicitor or conveyancer services
and the cost of disbursements. These will vary depending on the service provider’s
standard fee and the type of searches required.
Searches
A legal representative needs to perform property and title searches to ensure that the
seller is legally entitled to sell the property. For a strata property, a strata inspection and
a check of the strata body corporate records is usually arranged.
24.3 Pest inspections

Pest inspections are relatively cheap and are necessary to ensure that there are no
underlying problems with the building structure or infestations such as termites.
3-1.72 CIVMB_LP_T3-1_v3
24.4 Real estate agent fees

When a customer is selling their current home and buying another they will probably
sell through a real estate agent. These agents typically charge commission to the vendor
of the property, usually as a percentage of the sale price.
24.5 Rates and land tax

Generally, these items have already been paid for by the existing owner of the property.
However, the new owner or purchaser will generally be responsible for the payment of
pro rata land and water rates. They will generally be paid at settlement. While land tax is
normally the existing owner’s responsibility, there may be times when a new owner may
also take on this responsibility.
24.6 Credit provider fees and charges

A range of fees may be imposed by the credit provider, including:
• loan application or establishment fees — many credit providers charge a loan
application or establishment fee to set up the loan. This is paid either:
– upfront at the time the loan application is submitted, or
– at settlement and is taken from the loan amount.
Where there are multiple loans involved in the application, the credit provider may
charge a fee for each loan.
To attract prospective customers, some lenders may not charge this fee upfront but
at the conclusion of the loan, particularly if the borrower discharges the loan within
set time limits.
• valuation fees — most credit providers charge a fee for a property valuation.
The cost of these valuations may be incorporated in the lender’s application fee or
it may be an additional cost, particularly if there is more than one property being
offered as collateral security.
3-1
• settlement fees — the credit provider may charge a fee to attend the settlement of
the loan.
• servicing and other fees — some credit providers charge fees to service the
loan, including:
– monthly ongoing fees
– access fees
– administrative fees
– ATM fees
– late payment fees
– early exit fees
– break fees
– deferred establishment fees
– default fees (if failed to meet repayments)
– discharge fees.
Most credit providers provide a list of any applicable home loan fees and charges so that
customers can take account of these fees and compare them.

24.7 Mortgage stamp duty

Similar to stamp duty paid on transfer of a property, a prospective borrower will also be
required to pay stamp duty on the loan amount. This duty is around 0.4% of the loan
amount. In some cases the stamp duty may be waived if the new loan is to refinance an
existing loan.
24.8 Mortgage registration fees

Lenders confirm the use of a property as collateral by registering the mortgage, which is
an official document lodged with the respective state or territory titles office. A fee of
normally $100 to $110 is charged to register the mortgage.
24.9 Title and other search costs

Mortgages are lodged against certificates of title. A title search will be conducted to
confirm the correct title particulars and correct property identification of the property
being offered as collateral security. The types of searches and number required will
vary between lenders and a cost to issue the relevant certificate will be charged. Up to
37 searches can potentially be carried out but generally lenders will require only four
or five.
24.10 Insurance
A borrower may need to consider several types of insurance. Some are mandatory and
others are at the borrower’s discretion.
• LMI — see ‘Lenders’ mortgage insurance’ in Part 6, section 24.11.
• Building insurance — if the borrower is not buying a strata property, a condition
of borrowing money to purchase a property is the requirement to obtain building
insurance for the property being offered as collateral security. The credit provider
will normally stipulate the amount of cover and may provide a list of approved
insurers. This is designed to cover their interests in the event that the property
is damaged or destroyed. Building insurance needs to be dated from the time
of exchange.
• Contents insurance — an optional decision for a borrower, contents insurance
protects the homeowner’s fixtures and fittings included with the sale, as well as
furniture and possessions.
• Mortgage protection insurance — an optional decision for a borrower,
mortgage protection covers mortgage repayments if the borrower is affected by
illness or injury.
For more on home insurance, see ‘Topic 1-3: Products and services’.
3-1.74 CIVMB_LP_T3-1_v3
24.11 Lenders’ mortgage insurance

LMI is a one-off premium that allows purchasers who have only a minimum deposit to
apply for and potentially be granted a home loan. It is included in the cost of borrowing
and is paid to an insurance company that provides this type of insurance.
With LMI, a credit provider may allow a loan applicant to borrow a higher proportion of
the purchase price, that is, to purchase with a smaller deposit than would otherwise
be required.
Before LMI was available, borrowers required a minimum deposit of 20% of the value of
the property as well as sufficient funds to cover their costs to secure a housing loan.
LMI was introduced to make it much easier to obtain a housing loan.
How does LMI work?

LMI protects the credit provider against a loss should the borrower default on their
home loan. If the security property must be sold because of the default, the net
proceeds of the sale may not always cover the full balance outstanding on the loan.
Should this be the case, the credit provider will make an insurance claim to the LMI
provider for the reimbursement of any shortfall. Where a claim for loss is paid to a
lender, the LMI provider may seek recovery from the borrower or any guarantor for
any shortfall amount.
LMI covers the lender’s shortfall should there be a mortgagee sale or foreclosure.
It offers no protection to the borrower. If a property is foreclosed, additional expenses
will be added to the loan, including:
• interest arrears and accrued interest
• any additional valuation expenses
• legal fees associated with the sale and/or obtaining court orders
• real estate marketing and selling costs, including commissions
• any outstanding rates and/or land taxes.
3-1
LMI premiums
The cost of an LMI premium depends on the size of the loan and the size of the deposit.
Generally, the higher the loan amount, the higher the premium paid.
LMI premiums may also include the following additional costs:
• GST is payable on all LMI premiums
• subject to various state government regulations, stamp duty may be payable on
LMI premiums.
How LMI is paid

Most credit providers allow the LMI premium to be:
• capitalised into the loan, or
• paid upfront.

When LMI is required

LMI is required for a variety of loans, including:
• loans where the LVR exceeds 80%
• low-doc loans
• loans supplied through mortgage managers and originators, or any loan provided by
securitised funds.
3-1.76 CIVMB_LP_T3-1_v3
Part 7: Client records

A central and critical aspect of a mortgage broker’s practice is the maintenance of
up-to-date and accurate records. This is vital given the level of regulatory requirements.
25 Maintaining appropriate documentation

The following are suggested guidelines:
• records of relevant customer facts, information, and personal and financial histories
must be documented, cleared by the customer and managed confidentially in
accordance with relevant legislation and industry codes of practice
• client records, including diary notes, must be updated where necessary and placed in
the customer’s file
• all customer documentation must be filed in a format and held in a secure location
that is only accessible to authorised personnel.
Client history sheets or diary sheets are the standard method used by mortgage brokers
to maintain records about their customers.
25.1 Regulatory compliance for documentation
Apply your knowledge 23: Documentation and regulatory

compliance
Read the following guide and answer the questions below.
Australian Securities and Investments Commission (ASIC) 2010,
Regulatory Guide RG 205 ‘Credit licensing: General conduct obligations’,
ASIC, viewed 13 March 2017,
3-1
<http://www.asic.gov.au/asic/asic.nsf/byheadline/Regulatory+guides?open
Document#rg205>.
What are the requirements under the NCCP Act for credit licensees
regarding documentation?

References
Australian Taxation Office (ATO) 2015, Negative gearing, ATO, viewed 13 March 2017,
<https://www.ato.gov.au/Individuals/Tax-return/2014/In-detail/Publications/Rental-
properties-2013-14/?page=16>.
Blackmore, N 2014, ‘Will restrictions on mortgages cool the housing market?’
The Telegraph, 24 May, viewed 13 March 2017,
<http://www.telegraph.co.uk/finance/personalfinance/houseprices/10851130/Will-
restrictions-on-mortgages-cool-the-housing-market.html>.
FinaMetrica n.d., ‘What is Risk Profiling’ FinaMetrica, viewed 13 March 2017,
<https://riskprofiling.com/riskprofiling/what-is-risk-profiling>
ISO 2009, 15 November, ISO/Guide 73:2009(en) Risk Management — Vocabulary,
viewed 13 March 2017, <https://www.iso.org/obp/ui/#iso:std:iso:guide:73:ed-1:v1:en>
MoneySmart n.d., Using a broker, Australian Securities and Investments Commission,
viewed 13 March 2017, <https://www.moneysmart.gov.au/borrowing-and-credit/home-
loans/using-a-broker>.
Mortgage & Finance Association of Australia (MFAA) 2014, MFAA code of practice,
MFAA, 12 March, viewed 13 March 2017,
<https://www.mfaa.com.au/AboutUs/Governance/Pages/Code-of-Practice.aspx>.
Mortgage & Finance Association of Australia (MFAA) 2015, viewed 13 March 2017,
<https://www.mfaa.com.au/Pages/homepage.aspx>.
Mortgage Professional Australia (MPA) 2013, ‘MPA top 100 broker 2013: Colin Lamb’,
MPA, viewed 13 March 2017, <http://www.mpamagazine.com.au/leading-mortgage-
professionals/mortgage-professional-australia-top-100-brokers-2013/mpa-top-100-
broker-2013-colin-lamb-195240.aspx>.
Reserve Bank of Australia (RBAA) 2015, Monetary policy, RBA, viewed 13 March 2017,
<http://www.rba.gov.au/monetary-policy/index.html>.
Veda n.d., About us, Veda, viewed 13 March 2017,
<http://www.veda.com.au/yourcreditandidentity/about-us>.
3-1.78 CIVMB_LP_T3-1_v3
Suggested answers
Apply your knowledge 1: Credit file contents

1. Information about the borrower, such as:
• full name
• date of birth and driver’s licence
• gender
• residential address and employer information.
Consumer credit information, which may include:
• credit applications made in the past five years relating to loans for household,
personal or family purposes as well as loans to purchase, renovate or refinance a
residential investment property
• details of overdue consumer credit accounts.
From 12 March 2014, additional positive information can be included in credit
reports, including:
• type of credit account, such as a credit card or personal loan
• account open date and close date
• credit limit — the maximum amount of credit available to you for an account.
If you accept a credit limit increase, the new credit limit could be included on your
credit history.
• monthly repayment history on credit accounts such as mortgages and credit
cards. This will reflect whether you paid the minimum amount required on your
financial commitments on time each month or not.
In addition, for the purposes of consumer credit reporting only, the following publicly
available information is consumer credit information:
• court judgements and court writs
• directorship details
• proprietorship details
3-1
• bankruptcy, debt agreement and personal insolvency information.
Commercial credit information may include:
• credit enquiries pertaining to applications for credit for commercial purposes
• details of overdue commercial credit accounts.
2. (a) Payment default — a consumer payment default is debt of $150 or more that
is 60 days or more overdue.
(b) Serious credit infringement or clear-out — a serious credit infringement is
where a person owes a credit provider money but has left or appears to have
left their last known address without paying that debt and without providing
the credit provider with a new address.
(c) Payment status current — at the time the account was updated, the person’s
payments were up to date and the account was still open.
(d) Late payment — if a person pays their credit card or loan repayments more
than 14 days past the due date, it can be recorded on their credit report as a
late payment and forms part of the person’s repayment history kept on file for
two years.


• Watch for gestures and posture, then match gestures and posture.
• Listen for key words. Use the same words and phrases when it is your time to speak.
• Track key needs and concerns. Feed these needs and concerns back to the customer.
• Matching needs to be subtle. Create a similar pattern of words and gestures.

• Understand the customer’s point of view.
• Establish common ground or consensus.
• Ask the right questions.
Apply your knowledge 4: Communication skills

1. You may need to inform the customer about the following:
• the range and limitations of the services of a mortgage broker
• the customer’s role and rights
• the borrowing and lending process
• lending products available
• how customer loan serviceability is calculated
• any limitations on borrowing
• the services and capacity of the credit provider
• any fees and charges, including commission, that will be charged for
services delivered
• any relationships that exist with other financial services providers,
including fees generated
• the IDR and EDR processes.
2. Important communication skills in all customer interactions, and particularly initial
customer meetings, include:
• active listening skills
• verbal communication, particularly questioning techniques
• non-verbal communication, such as eye contact or mirroring gestures to
build rapport.
Apply your knowledge 5: Role of the mortgage broker

1. A mortgage broker helps to source the most suitable home loan for his or her
customers. This means the broker:
• reviews and provides information about the mortgage products currently
available in the market
• looks at the customer’s future plans
• considers what the customer wants to do with that property
• discusses various loan options with the customer
• understands the features the customer requires in the loan.
2. Mortgage brokers are paid commission by the credit provider. They do not charge
fees for residential finance. Most banks pay an upfront commission and a trail
commission for the life of the loan.
3-1.80 CIVMB_LP_T3-1_v3
Apply your knowledge 6: Why use a mortgage broker?

You might suggest some or all of the following reasons:
• Many people underestimate just how complex the loan market is. There is a wide
range of products, differing mortgage conditions and various fees and charges.
A mortgage broker can explain what all these things are and help to negotiate a
successful property loan.
• Sometimes mortgage brokers can negotiate a better deal than you would get by
going direct or online.
• Mortgage brokers offer a better experience and potential savings for
their customers.
• Commissions on mortgage broking services are normally paid by the credit provider
rather than the lenders.
• Mortgage brokers check all loan paperwork and assist lenders to prepare an
application. Mortgage brokers lodge the application and follow up through the
process, saving the customer time, effort and frustration.
• Mortgage brokers can select from a wider array of products than a single bank or
financial institution.
• Mortgage broking staff are more experienced and better qualified to provide you
with advice because mortgages are their specialty.
• Many mortgage brokers work flexible hours so they can meet customers at a
convenient time and location.
• Mortgage brokers do not necessarily have a preference for particular banks and
lenders, so their goal is to find the most suitable home loan for their customer’s
needs.
You might also give Kim and Chung your business card or your phone number so that
they can contact you when they are ready to go ahead with a home loan.
3-1

Apply your knowledge 7: Mortgage broker credentials

1. Check that the broker is licensed
• Search ASIC Connect’s professional registers to check that your credit provider has
been licensed or phone ASIC’s Infoline on 1300 300 630.
• Inform yourself about the law and consumer credit regulation.
Find out who you are dealing with
• Some people think they are dealing with the lender or credit provider directly,
when in fact they are dealing with a broker.
• Check who the credit provider or lender is.
• Check to see if there are any conflicts of interest in the advice you are given.
• Find out from your broker exactly what loans they offer, who pays their
commissions and if they will charge you a fee.
Make a wish list
• Make a list of what you want and ask your broker to find a loan that meets as
many of these requirements as possible. Find out the cost of these features.
• Ask your broker about other home loans or credit packages if you are not
satisfied.
Shop around
• Look at other loans online or phone other brokers to check what they charge and
what they offer to do.
• Get a written agreement from the broker, covering:
– the type of loan being arranged for you
– the amount of the loan
– the term of the loan
– the current interest rate
– any fees you have to pay, including broker’s fees or commissions, fees to the credit
provider or lender for setting up the loan, and/or any early termination fees.
• Never sign blank forms or leave details for the broker to complete later.
• If you feel like you are being pressured into signing something, ask for more time.
Warning about business purpose declarations
Do not sign a business purpose declaration unless you are using the loan for business
and are eligible to claim your repayments as a business expense for taxation
purposes.
Complain if something goes wrong
To complain about a broker or a related dispute, phone ASIC’s Infoline on 1300 300 630.
Apply your knowledge 8: Mortgage broker services, values and

capacity
This activity requires independent research, therefore, no suggested answers are provided.
Apply your knowledge 9: Handling customer enquiries about

products and services
3-1.82 CIVMB_LP_T3-1_v3
Apply your knowledge 10: Customer complaints handling

1. Customer complaints might include:
• poor customer service such as not returning phone calls, lack of organisation and
lack of adviser training or knowledge
• non-disclosure of important product information or non-disclosure of fees
and charges
• misrepresenting interest rates, product terms or fees
• serious breaches such as fraud or deception resulting in financial loss and/or
identity theft.
2. The IDR and EDR process must be made available to the customer if they request it.
However, it is advisable to have these policies and procedures generally available,
for example on a website. A broker might easily draw the customer’s attention to
these policies and procedures during initial discussions.
3. Components might include:
• how to lodge a complaint, including relevant phone numbers or email addresses
of a complaints handling officer
• details to include in the complaint
• the likely responses to a complaint and the time frame in which a complaint
response will be received by the complainant
• policy on how complaints are handled within the organisation
• links to the relevant EDR scheme.
4. Step 1: Contact the financial services provider.
Step 2: Lodge a dispute with the Ombudsman or dispute resolution provider.
Step 3: The dispute details are reviewed.
Step 4: A resolution is negotiated.
Step 5: The dispute is resolved through negotiation, conciliation or reaching
a decision.
3-1

Apply your knowledge 11: Good and bad debt

1. Good debt is when you borrow to invest and your investment is income producing,
making the interest you pay on the loan tax deductible. This usually involves an asset
that increases in value over time, such as a property or shares. Property, for example,
cannot usually be paid off in one go and involves paying off the mortgage in several
instalments that may take years to settle. While this means that you are living with
debt, this is an investment that appreciates in value and generates further income,
either through rental or the sale of the house for a higher price in the future.
A student loan taken out to pay for a university education is also a beneficial
investment because generally a higher salary can be commanded with a degree.
2. Bad consumer debt occurs when you borrow to invest but the value of the
investment drops over time. The asset is non-income producing and interest on the
loan is not tax deductible, for instance credit card debt. Incurring a debt on your
credit card is dangerous as it usually has high interest rates that can snowball over
time — it also makes it easy for you to spend more than you can afford, especially if
your limit is higher than your monthly salary. Other forms of bad debt include car
loans and holiday debt.
3. Good debt, like its name suggests, is good for you in the long term and should not
be avoided at all costs. In fact, if you are investing in something as major as a home,
it is better to incur this debt rather than paying upfront as this may place a strain on
your cash flow or even wipe out your emergency funding. However, remaining in
control of your debt and having the capacity to pay it off is still crucial to gaining
good financial health.
Apply your knowledge 12: Investment style

1. The growth style of investing looks for firms that have high-earnings growth rates,
high return on equity, high profit margins and low dividend yields. The idea is that if a
firm has all of these characteristics, it is often an innovator in its field and making a
great deal of money. It is thus growing very quickly and reinvesting most or all of its
earnings to fuel continued growth in the future.
The value style of investing is focused on buying a strong firm at a good price.
Thus, analysts look for a low price-to-earnings ratio, low price-to-sales ratio,
and generally a higher dividend yield. The main ratios for the value style show
how this style is very concerned about the price at which investors buy in.
2. The measurement of a company’s size is called ‘market capitalisation’ or ‘cap’
for short. Market capitalisation is the number of shares of stock a company has
outstanding, multiplied by the share price.
3-1.84 CIVMB_LP_T3-1_v3
Apply your knowledge 13: Price or interest rate resistance

A low interest rate home loan may be able to help you save money, but do not consider
this alone when selecting a home loan. For example, a loan with a low advertised
interest rate could possibly come with other extras such as higher fees or less features.
To get a more realistic view of how much you will be paying, look at the comparison rate
because this includes all other fees.
It is best to choose a home loan that suits your financial needs and long-term
investment goals. For example, if your goal is to repay your home loan as soon as
possible, you might opt for a loan product with an extra repayment feature. Even if this
loan has a higher interest rate, you may end up saving more in the long run.
If the prospect of future interest rate rises is a concern, suggest a fixed interest period to
have the security of knowing what the repayments will be.
Apply your knowledge 14: Product uncertainty

• First ensure that the home loan product you are recommending suits the customer’s
investment style, risk appetite, investment goals, budget and circumstances.
• State clearly why you think it is the best option for the customer and provide your
reasoning process.
• Listen to the customer’s objections. Respond specifically to the customer’s points.
• Provide information about the product. If possible, provide customer testimonials for
the product.
• Turn product features into benefits. For more information,
see ‘Topic 1-3: Products and services’. Draw attention to any product downsides and
try to address them.
3-1

Apply your knowledge 15: Resistance to the organisation

or broker
1. The customer may:
• be reluctant to meet your eye when you are speaking to them
• say things like ‘I don’t think this product is right for us’ or ‘The fees and charges
seem very high’
• display expressions of puzzlement or dismay
• look distracted, glancing at his or her watch, or look disinterested or bored
• display defensive postures such as crossed arms.
2. • Demonstrate the proper attitude.
• Uncover the objection and listen carefully.
• Clarify the objection.
• Acknowledge the objection, using neutral or positive statements.
• Handle the objection, for example, provide information about:
– the bona fides of the organisation, such as professional memberships
– testimonials from other satisfied customers, evidence of service,
experience and successes, numbers of loans written etc.
– dispute resolution schemes or other ways to make the customer feel more secure
about the broker organisation’s services and credentials.
3. All of the options for Question 2 can also work for objections to you personally.
Gaps in your experience, skills or knowledge require longer-term answers such as
training, professional development or mentoring. However, if you do not know the
answer to a question, write the question down and ensure that you ask a colleague
or do research to obtain the answer for the customer later.
If all else fails, and you feel there is a fundamental breakdown of communication
between you and the customer that cannot easily be repaired, consider referring him
or her to a colleague.
Apply your knowledge 16: Timing

1. Depending on what their life events are, property investment may be a wise choice.
For example, a person who has just got a promotion or achieved a career ambition
may like to capitalise on their success by investing in property.
On the other hand, people who are starting a family might find the accumulative
stress of a new baby, a new house and a large debt too much to manage at one time.
It is important not to push a customer into a decision they might regret.
2. Discuss how the economic cycle affects investment decisions, and that prudent
investments can be made at all stages of the cycle. Property investment is generally
consistent with a long-term approach to investment; thus, there is time to recoup
any short-term losses.
3-1.86 CIVMB_LP_T3-1_v3
Apply your knowledge 17: Concerns about debt

Assure the customer that the credit provider assesses the loan application and only
provides a loan to a customer when they are sure that the customer can service the
debt adequately.
Where a customer is concerned about future uncertainties, such as unemployment or
illness, you could suggest that they consider an insurance product such as income
protection insurance. This type of insurance provides an income when the insured is
unable to work and may alleviate these concerns.
Apply your knowledge 18: Risk

1. Any time you invest money into something, there is a risk, whether large or small,
that you might not get your money back. In turn, you expect a return that
compensates you for bearing this risk. In theory, the higher the risk, the more you
should receive — the lower the risk, the lower the compensation.
2. • The time horizon — determine the length of time that the money is to be
invested; riskier investments have greater volatility, the longer the time horizon,
the more chance to recoup any loss, therefore the higher the tolerance of risks.
• The amount of money that you stand to lose.
3. The pyramid is a way of viewing or grouping investments based on risk.
• Base of the pyramid: The foundation of the pyramid represents the strongest
portion and the bulk of assets, which supports everything above it. This area
should consist of investments that are low in risk and have foreseeable returns.
• Middle portion: This area should be made up of medium-risk investments that
offer a stable return while still allowing for capital appreciation. Although more
risky than the assets creating the base, these investments should still be
relatively safe.
• Summit: Reserved specifically for high-risk investments; this is the smallest area
of the pyramid (portfolio) and should consist of money you can lose without any
serious repercussions. Money in the summit should be fairly disposable.
3-1
Apply your knowledge 19: Risky home loans
1. With a deposit of less than 20% of the loan, a borrower is required to take out LMI.
Adding the insurance premium to the loan leaves the borrower with little equity in
the home. As the LMI only protects the credit provider and not the borrower, if the
borrower gets into trouble with repayments, they could be forced into bankruptcy.
2. A guarantee allows the borrower to lend up to 100% of the value of the home
without paying mortgage insurance. For elderly clients who are no longer in the
workforce, a guarantee is a high-risk strategy that might result in the loss of their
family home.
3. Taking out a 40-year home loan because you cannot afford the monthly repayments
on a 30-year loan may backfire if interest rates rise and can cost more than $100K in
additional interest on an average loan.

Apply your knowledge 20: Home loan customer case studies

1. Raghav wants to buy a property, but it is unclear from the scenario whether he wants
to occupy the property or continue to live with his parents and use the property as
an investment. To determine the best possible loan for his circumstances,
the mortgage broker should try to ascertain what Raghav’s future plans are.
Some possible questions include:
• Does he intend to live in the property immediately after purchase or at some time
in the near future?
• Does he envisage marriage or starting a family in the near future?
• If the property is intended as an investment, does he want to negatively gear
the property?
• Does the property he has in mind require any renovations for tenancy?
2. Tim and Sarah may want to refix their current loan for another period or change to a
different arrangement, perhaps a combination of a fixed and variable rate loan or
just a variable interest rate. Another option may be to refinance their current home
loan with another credit provider. As they have a young family and a business,
they may appreciate the additional funds made available following refinancing to a
cheaper rate loan. Sarah plans to return to work in a year’s time, so they may have
more disposable income at that point, and may appreciate the ability to make
additional payments on the mortgage. Some questions you may want to put to this
couple are:
• Are their long-term goals to become debt free sooner or to have additional cash
available while their child is growing up?
• Is a low-doc loan an attractive option because Tim is self-employed?
• Do they require additional features to the loan, such as redraw facilities?
3. Both Ray and John are clearly experienced investors and high-income earners.
Ray and John may be eligible for a professional package. Both may be interested in
further property investments.
4. Suji is looking for her first property and may require additional assistance with
making choices.
• Is she concerned about the possibility of interest rate rises? Therefore, is a fixed
interest rate for some of or the entire loan a good choice?
• Does Suji want to make the paying off of the loan a priority? Is the flexibility of
being able to make additional payments important to her?
Investigate whether Suji is eligible for the FHOG.
5. Angelica and Carmine could:
• consolidate their debts into one and choose a lender with a lower home loan rate,
reducing their monthly payments, and freeing more cash
• decide to try to pay off their home loan debt sooner, maintaining the outgoing
costs of $1,900 per month, but refinance their loan and reduce their remaining
loan term, becoming debt free sooner.
Apply your knowledge 21: Develop your own fact finder

3-1.88 CIVMB_LP_T3-1_v3
Apply your knowledge 22: Stamp duty costs

Apply your knowledge 23: Documentation and regulatory

compliance
The NCCP Act requires credit licensees to have:
• adequate arrangements and systems to ensure compliance with their obligations
under section 47(1)
• a written plan that documents these arrangements and systems.
Under the National Consumer Credit Protection Regulations 2010 (Cth), unlicensed COI
lenders must also comply with the requirement to have adequate arrangements and
systems, including having a written plan.
Documentation helps a mortgage broker demonstrate that he or she is complying with
the general conduct obligations. This includes details of who is responsible for
compliance, the time frames involved and associated record keeping and reporting.
Documented measures need to be implemented and monitored.
3-1

CIVMB IK T1-3 v3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CIVMB IK T1-3 v3

Uploaded by

Copyright:

Available Formats

The Lending Process

Topic 3-1: Understanding the

Certificate IV in Finance and Mortgage Broking

Part 1: The fundamentals of lending ................................................................. 3-1.4

1 The five Cs of credit ............................................................................... 3-1.4

2 Character .............................................................................................. 3-1.5

3 Capacity ................................................................................................ 3-1.9

5 Collateral ............................................................................................ 3-1.11

6 Conditions ........................................................................................... 3-1.15

7 The ‘common sense’ test ..................................................................... 3-1.15

Part 2: Engaging with customers ..................................................................... 3-1.16

8 Establish rapport ................................................................................. 3-1.16

9 Communication skills .......................................................................... 3-1.18

Part 3: The mortgage broker and organisation ................................................ 3-1.20

11 The mortgage broker organisation ...................................................... 3-1.25

12 Products and services .......................................................................... 3-1.31

13 Responsible lending disclosure obligations.......................................... 3-1.32

14 Complaints handling and dispute resolution ....................................... 3-1.33

Part 4: Determining customer needs ............................................................... 3-1.36

15 Customer needs and priorities ............................................................ 3-1.36

16 Investment goals ................................................................................. 3-1.40

17 Customer concerns.............................................................................. 3-1.43

18 Customer risk profile and risk tolerance .............................................. 3-1.48

19 Specialist advice .................................................................................. 3-1.55

© Kaplan Education Pty Ltd 3-1.1

Part 5: The customer’s financial situation ....................................................... 3-1.60

20 Obtaining information from the customer........................................... 3-1.60

21 Types of information to be obtained from the customer ..................... 3-1.61

Part 6: Determining serviceability and borrowing capacity ............................. 3-1.67

22 Determining serviceability and calculating borrowing capacity ........... 3-1.67

23 Calculating borrowing capacity............................................................ 3-1.69

24 Determining associated costs .............................................................. 3-1.70

Part 7: Client records ...................................................................................... 3-1.77

25 Maintaining appropriate documentation ............................................ 3-1.77

References ...................................................................................................... 3-1.78

Suggested answers ......................................................................................... 3-1.79

Topic learning outcomes

© Kaplan Education Pty Ltd 3-1.3

Part 1: The fundamentals of lending

1 The five Cs of credit

2.1 Credit reports and credit agencies

Further resources: Veda Advantage

© Kaplan Education Pty Ltd 3-1.5

2.2 Authority required

2.3 Information provided by credit agencies

Apply your knowledge 1: Credit file contents

2. What is the meaning of the following terms?

(b) serious credit infringement or clear out

(c) payment status current

© Kaplan Education Pty Ltd 3-1.7

2.4 Overdue accounts

2.5 Changes to credit reporting, March 2014

2.6 When completing a loan application

2.7 Effect of a poor credit history

Further resources: Credit reporting

3.2 Employment history

3.3 Self-employed applicants

© Kaplan Education Pty Ltd 3-1.9

3.4 Income sources

Further resources: Budget calculators and apps

4.1 Ability to manage financial affairs

4.2 Saving for a deposit

Example: Loan to value ratio