FNS40815 Certificate IV in FINANCE & MORTGAGE BROKING

FNSFMB402 Identify client needs for broking services

Assessment 1 - Knowledge

FNS40815_ FNSFMB402 Assessment 1 Knowledge REAA: Released January 2019

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Activity 1

Explain the concept of ‘honeymoon rates’ offered by lenders periodically.

(Explain basic financial and accounting terms and concepts relating directly to mortgage or finance
broking including: variable and fixed rate interest rates; types of mortgage accounts; procedures and
principles of deposit bonds; financial records relating to different ownership models).

Activity 1 Answer
Honeymoon rates are known as basic rates where an Interest rate is less for a brief period
of time - around 1 or 2 years and after that after the loan will move to the increased rate.
Honeymoon rates are accessible for both variable as well as fixed are ordinarily advertised
to clients who are trying to find a less rate, no-frill product in any case, the risky product
must be declared i.e. as the honeymoon period is completed the rate and repayment will go
up.

Concept of home loans: For anybody who doesn't have the complete buy cost upfront, home
loans are necessary. As a result, there are different type of home loans are accessible for
burrowers and may have a difficult time deciding which one is good for them.

Variable vs fixed interest rate: Variable rate increased with bank interest rate and fixed rate
will be constant for a certain period of time. If the customer locked the fixed rate for five
years that will be the same interest rate that period.

Types of mortgage accounts:

- Basic Home Loan - for clients looking for a `no frills' mortgage with low interest rates.
What it lacks in features it makes up for in lower interest rates.

- Fixed Rate Home Loan - for clients who consider being able to budget around their
regular mortgage repayments a priority. This way their interest rates will be locked in place
for a set period and repayments will remain consistent during this time. Clients will have the
option to fix rate from one to five years, depending on the lender and the client's
preferences.

- Variable Rate Home Loan - offers borrowers more flexibility and generally lower rates
than fixed home loans. However, borrowers must be warned of possibility of rate increase
which will translate to higher repayments.

- Low-Doc Home Loan - a low documentation home loan is a great option for
self-employed or small business owners who don't have the suitable paperwork required to
prove their income.

- Interest Only Home Loan - this home loan is particularly attractive for both investment
property buyers and home buyers who only want to pay the interest on the balance. Clients
who don't seem to plan their finances carefully are not to be recommended this product, as
they might fail to make the principal payments when the time comes.

- No Deposit Home Loan - if the client doesn't have the funds saved for the initial 10 to
20% home loan deposit, then they could consider a no deposit home loan. This means the
client will be borrowing the full purchase price of the property and as such their
loan-to-value-ratio would be 100%, which will
V1.0 most likely incur extra charges in
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lenders mortgage insurance, which can cost thousands. In this case the client may require a9
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guarantor, i.e. someone else putting up equity to guarantee the client pay on time.
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Activity 2

What sort of information could a mortgage broker require to verify the credit status of a home loan
applicant?

(Explain credit and credit reporting services).

Activity 2 Answer
A mortgage broker requires client's personal information including full name shows on the
passport, date of birth, home address, driver's license, employment details to verify the
status of a home loan application.
Credit shows the borrowing ability of an individual or entity and it represents a person's
reputation as a borrower. Credit score is a number calculated based on the information
uploaded on Equifax to reflects past financial situation, this number helps the lenders
determine client's risk level.

A broker can determine current investment and assets position of their client by asking for
the following documents:

- Current balances and recent statements for any bank accounts, including checking and
savings.
- Council rates notice for any owned properties, such as investment properties.
- Most recent account statement showing current market value of any investments such as
stocks, bonds or certificates of deposit.
- Documentation showing interest in retirement funds.
- Face amount and cash value of life insurance policies. Face amount is the basic amount
the beneficiary would receive when the insured dies, whereas cash value is the money the
life policy earns through investments by the insurer.

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Activity 3

What part, if any, do general economic conditions play when assessing applicants for loans?

(Describe key features of the economic environment and business cycle, financial markets and the
roles of industry participants, interest rates, exchange rates and inflation).

Activity 3 Answer
The lender may consider what industry the client is in or local economic environment when
lending funds, the economic environment could influence the mortgage service ability of the
borrower through changing unemployment rate, inflation, or interest rates.

Features of Business Cycles:

1. Expansion (Boom, Upswing or Prosperity)
2. Peak (upper turning point)
3. Contraction (Downswing, Recession or Depression)
4. Trough (lower turning point)

A financial market is as vital to the economy as blood is to the body. To know more about it,
let us understand its following features:
1. Acts as a Link: Financial markets connect the investors to the borrowers and bridge the
gap between the two for mutual benefits.
2. Easy Accessibility: These markets are readily available anytime for both the investors and
the borrowers.
3. Trades in Marketable and Non-Marketable Securities.

General economic situations play a vital role to assess and consider the loan applicants by
the broker. Sometimes financial conditions are out of control like during the pandemic of
COVID, even job market is not good but the interest rate is very low and property price is
increasing. During the recession, it is also very hard to get a job but recovery, prosperity,
and boom are the good conditions of the economy. Mainly, MB needs to check the job
market to make sure the borrower can pay the mortgage installment regularly from his
employment. Analysis of international financial market, US federal reserve interest rate,
financial policy of RBA and exchange rate, and inflation can be the major player to
determine the economic condition in the context of the Australian economy. It would be
helpful if MB has the sought knowledge and concept of the modern financial and market
economy.

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Activity 4

Most standard home loans are regulated under the National Consumer Credit Protection Act
(NCCP), legislation that is designed to protect consumers & ensure ethical & professional standards
in the finance industry, through the National Credit Code (NCC).

Identify and describe the key features of the Act that impact on mortgage brokers.

(Identify and describe key features of the legal environment and relevant legislation affecting
finance and mortgage broking services in regards to: disclosure: privacy: industry codes of practice:
National Credit Code).

Activity 4 Answer
Most standard home loans are regulated under the National Consumer Credit Protection Act
(NCCP) and main features of the NCCP, legislation that is designed to protect consumers &
ensure ethical & professional standards in the finance industry, through the National Credit
Code (NCC).
The main features of the NCCP are:
1. Disclosure: Make appropriate investigation regarding customer financial situation,
requirements, aim.
2. Privacy: Take appropriate process to certify the customer's personal and financial
documents to protect and maintain privacy.
3. Industry code of practice: Assess the initial situations of the burrower after collecting all
the information. Follow the step-wise process of what customers need to do exactly to get
the best loan from the lender and recommend the suitable loan for the costumers according
to his financial ability.
4. National code of practice: Follow the procedure of the National Credit Code (NCC2010)
which focuses on lenders have to be aware of the security provided to customers and the
responsibility they have in giving to the costumers(debtors). Customers also need to be
careful before they signed the contract loan, credit card, etc.

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Activity 5

Describe the circumstances where a lender would require an applicant to take out lender’s mortgage
insurance.

(Describe the key features of lender’s mortgage insurance).

Activity 5 Answer
In general, If the client funds saved for the initial deposit less than 20% of purchase price, a
lender will require mortgage insurance of a premium and monthly premium to secure the
loan. LMI is a type of insurance that credit providers to decrease the risk level from
borrowers not being able to repay the loan.

Loan value fees - an example of loan value related fees is lenders' mortgage insurance
(LMI), a type of insurance that credit providers take out to protect themselves from borrowers
not being able to repay the loan. The fee the lender charges a client for LMI can be many
thousands of dollars and is usually added to the home loan amount. Credit providers
normally charge the client this one-off fee to cover this insurance if the client borrows more
than 80% of the value of the property. Whether a client is charged LMI will also depend on
loan to value ratio (LVR), a percentage that is calculated by dividing the amount of home
loan by the purchase price (or appraised value) of the property. Generally, the higher the
equity the client has in the property (or the lower the LVR), the less chance the lender will
charge a fee for LMI, and where they do, the less the fee will be.

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Activity 6

Explain the term “lender’s pre-approval loan” and list the benefits and conditions of pre-approval.

(Explain loan transaction terminology and definitions of the parties involved including: lender and
borrower; lessor and lessee; mortgagee and mortgagor).

Activity 6 Answer
Pre-approval (or approval in principle) is an obligation-free way to estimate what you are
able to borrow from a lender before you make an offer on a property.

The benefits of obtaining a pre-approval loan from your lender:

> Know how much you could borrow. > Plan your budget.
> Be confident to make an offer.
> Be seen by real estate agents as a serious buyer.

Lender: A lender is an individual, a public or private group, or a financial institution that

makes funds available to a person or business with the expectation that the funds will be
repaid.
Borrower: A person or company that has received money from another party with the
agreement that the money will be repaid. Most borrowers borrow at interest, meaning they
pay a certain percentage of the principal amount to the lender as compensation for
borrowing.
Lessor: The lessor is the legal owner of the asset or property, and he gives the lessee the
right to use or occupy the asset or property for a specific period. Lessee: The lessee is the
party who gets the right to use an asset for a specific period and makes periodic payments to
the lessor based on their initial agreement.
Mortgagee: A mortgagee is an entity that lends money to a borrower.
Mortgagor: A mortgagor is that who borrows money from a lender in order to purchase a
property.

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Activity 7

Explain what a second mortgage is, and how it works.

(Explain real estate terms and concepts including: land titles and searches; strata title versus
company title; multiple securities; securing second mortgages; subdivisions of title; partial discharge
of mortgage where multiple securities are held by lender).

Activity 7 Answer
A second mortgage is a type of subordinate mortgage made while an original mortgage is
still in effect. In the event of default, the original mortgage would receive all proceeds from
the property's liquidation until it is all paid off. When most people purchase a home or
property, they take out a home loan from a lending institution that uses the property as
collateral. This home loan is called a mortgage, or more specifically, a first mortgage. The
borrower must repay the loan in monthly installments made up of a portion of the principal
amount and interest payments. Over time, as the homeowner makes good on their monthly
payments, the home's value also appreciates economically.

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Activity 8

Identify and explain some common fees associated with taking out a home loan.

(Categorise and explain types of fees and charges).

Activity 8 Answer
Types of fees and charges:

1) Application fee: The cost of establishing new mortgage documents, this is an one-off
payment. 2) Valuation fee: The cost to require a certified valuer to get the property valued.
This needs to be done so that the lender knows that the loan they pay out is equal to the
value of the property.
3) Conveyancing fee: cost of legal transferring ownership from the seller to the buyer.
4) Transfer duty: As known as the stamp duty, it is a tax collected by state governments. It is
a tax on the purchase of your property. But stamp duty can be exempted or concessional
depend on property value.
5) Lenders mortgage insurance: In general, the LMI is applied when LVR is more than 80%,
however the LVR can be more in some special circumstances.

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