FNS50315 Assessment Task on Diploma of Finance and Mortgage Broking Management

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Task 2 Short answer questions

 

1. As part of your client’s retirement plan, they are interested in buying a camping ground that allows 40 camping sites for tents only and has ten environmentally friendly cabins. The client is keen to add ten caravan/motor home sites to increase his revenue. It appears the land has native title rights, which your client is unfamiliar with, and what this entails.  Explain what restrictions, requirements, and issues might be evident around native title rights.

Native title rights mean natives are allowed to use the land also. Natives can use this land hunt, fish and camp. This could cause issues with potential clients who may want to use the camps as they may not want to use it with natives around. Banks also have stricter policies when it comes to lending to properties of this type.

 

2. A client has come to see you regarding the purchase of a heritage-listed terrace with two bedrooms and one living area with an open concept kitchen. The client intends to live in this property with their partner; however, they would like to build a second story main bedroom with an ensuite and study. What issues might you come across with a heritage-listed property? Include in your answer how you can overcome some of these issues.

Heritage properties have some restrictions with renovations as the council needs to maintain the look of the building. In some cases, renovations are possible with heritage titles. I would advise the client to first talk to the council and get the approval of the second story plans before purchasing the property.

 

3. How do you communicate verbally and non-verbally when dealing with clients who have the following special needs:

 

a. Visual or hearing impaired

For someone who is hearing impaired I would talk verbally at a slower pace to ensure the client can hear me. I would also talk with a loud and clear voice. I would also use non-verbal gestures and body language so the client can get an idea of what I’m saying. I may also use the Relay Service app to ensure the client fully understands what is being discussed.

 

b. English as a second language

In this situation I would communicate verbally by using the language the clients would understand and talking at a slower pace to ensure they have understood what I have said. I would also communicate non-verbally by ensuring my posture and gestures are conveyed appropriately and the clients build trust. I would also use an interpreter if deemed necessary.

 

c. Cultural differences.

I would keep an open mind when talking to culturally diverse clients. I would communicate in a clear and open tone to allow the clients to feel heard and also build the trust. I would also use open body language to ensure the clients are satisfied.

 

4. Explain the complex issues that can arise when using the following as security:

 

a. Implications of borrowing against leased premises

Risks that can arise from leased premises is that some properties can go unleased for extended periods. If a property is unleased, it means the owners won’t be able to make mortgage payments. This can be risky for the both the lender and the borrower as they may default if the property goes unleased for a long time.

 

b. Multiple securities of differing kinds

Securing multiple properties on the same loan can present complex issues. i.e If there is a investment and owner occupied property under the same loan the investment property can present more risk to the owner occupied property – potentially losing both. If the investment property is dependant on rent and there are no tenants for extended periods it may need to be sold to pay the loan down otherwise a client may default on their mortgage.

 

c. Rural/residential, crown, and rural land.

Rural/ Residential land can also be grouped together in certain sections of Australia – this can include rural land that is on the fringe of residential areas and therefore may be grouped that way. The client must have a direct intended purpose for this land before purchasing as different councils have different uses/ policies.

Crownland has a different set of legislation when it comes to ownership. It cannot be used for all purposes and requires a lot of government intervention before changes and approvals can be made. If this is being used as a security clients must first understand what the are using as a security and must also have an intended use for the property that has been approved by the State Government.

Rural land must also have a direct intended use by the client before using as security or purchasing. i.e Rural land can be used as farmland. If a client intends on opening a farm this must be communicated with the bank. Rural land can also be used for multiple other reasons. Rural land also does not increase as greatly as residential land presenting another coplex issue for both the lender and client.

 

d. Specialised securities such as hotels.

Lending against hotels also present risks, while the hotel building may increase in value the revenue may not. Many hotels may and will struggle overtime meaning the owner/ landlord won’t be able to make their mortgagee repayemtns which may be in the millions. This can be risky for all. In recent times such as covid these types of loans have been very risky.

 

5. Identify how the following forms of security can be utilised in complex loan structures:

 

a. Assignment of rental income to the lender

Rental income can used to increase the borrowing power of a client and therefore take out a higher loan. i.e A client may access up to $150k extra in vorrowing power if purchasing an investment property with roughly $20k p.a in rental returns. These funds can be used directly to pay off the loan and can also be used for tax benefits such as negative gearing.

 

b. Joint and several personal guarantees or related company guarantees,

A personal guarantee is a structure of home loan where if a company takes out a home loan and fails to meet its repayements the individual will take a personal guarantee to make the payments. This can be useful to get the home loan where otherwise not possible.

 

c. Multiple mortgages

Multiple mortgages can be taken out against an existing property and can be utilised to purchase potential investment properties. i.e Clients who have purchased an owner-occupied home and have built up Value in their home can use that value as a deposit and security against a potential investment property purchase. Clients can refinance and restructure their existing mortgage to take out a new mortgage on the same property with an investment split. This investment split can be used to purchase the new property.

 

d. Registered company charges

A company charge can be used to allow for companies to borrow more funds. The lender will not be a direct mortgagor of the property but will have a relevant interest in the property come a time of insolvency or default. This is a good solution for both the company borrowing the money and the lender that is lending as it gives security to the lender and flexibility to the company.i.e This method would suit companies who would like to borrow more funds but do no want to allow lenders to have direct control over the company’s property.

 

e. Second mortgages

A client purchasing their first home or even investment property will be able to use a security from a family member, usually the parent, as collaterall against the purchase. E.g A first home buyer may use their parents’ current property as security against their new purchase if their LVR is higher than 80%. This will lead them to avoid paying LMI. The new lender however will need to request a Second mortgage from the parents existing lender.

 

f. The involvement of a unit or family trusts as either borrowers or guarantors.

Family trusts can be appointed as borrowers while the Trust beneficiaries or directors can be nominated as the guarantor of the trust. This can be beneficial for the trust owners as there is many tax benefits to structuring the a loan like this. The trust may also be receiving income that the guarantors aren’t and this income can be used to service the loan putting the guarantors in a position to purchase the property when they otherwise couldn’t.

 

Please refer to your chosen case study in Task 1 and answer question 6 based on the scenario.

 

6. After you analysed and prioritised options for the client and compared the features, fees, charges, and risks, you would have rejected inappropriate options. Please list two options that would have been inappropriate for the client and explain why.

 

CASE STUDY DETAILS

The below information will be used for both Case Study A (Investment property and construction loan) and Case Study B (Plant and equipment loan).

Choose one of the case studies to present for assessment purposes. Please remember to follow the structured process we have set out in the learner guide. You should note that the loan must suit the clients’ best interest.

 

Personal details

 

Mr Jason White and Mrs Rebecca White
Date:		1st	December 20XX
Applicant 1:		Mr			Applicant 2:		Mrs
Surname:		White			Surname:		White
First Names		Jason			First Names		Rebecca
Date of Birth:		21/10/1973			Date of Birth:		26/01/1975
Drivers Licence		1234AB			Drivers Licence		4567CD
Address:		7 Park Lane, Suburb, State Postcode			Address:		7 Park Lane, Suburb, State Postcode
Time at address		6 years			Time at address		6 years
Phone:	Home:	00	9385	0000	Phone:	Home:	00	9385	0000
Mobile:		0417000000			Mobile:		0418000000
Business:		00	9835	0001	Business:		00	9835	0001
Fax		00	9835	0002	Fax		00	9835	0002
Email		jason@painting.com.au			Email		bec@interiordesign.com.au
Occupation:		Painting Contractor			Occupation:		Interior Decorator
Time self employed		11 years			Time self employed		11 years
Dependents (ages)		2 (Sara 10 and Mark 8)					2 ½ Years Interior Design Australia
Gross Income Y/E 06/XX		$95,000			Gross Income Y/E 06/XX		$95,000

 

	Asset values $	Liabilities amount owing $	Monthly payments $	Lender
Owner occupied residence	1,000,000	360,000	2,249	St George
Cash resources	125,000
Credit cards:
Limit $5,000 (swiped monthly) Jason		1,000	Nil	ANZ
Limit $10,000 (swiped monthly) Rebecca		3,000	Nil	St George
Furniture & personal effects	130,000
2009 Holden Commodore Jason	25,000
2010 Ford Focus Rebecca	15,000	10,000	300	ANZ
Vintage Motorbike Collection	80,000
White Superannuation Fund	514,000
Shares in All Painting Australia Pty Ltd	20,000
TOTALS	1,909,000	374,000	2,549

 

Commercial entities

 

All Painting Australia Pty Ltd Trading Company for Painting

Owns Registered Business Name “All Painting Australia”

Directors:                               Jason and Rebecca White

Shareholders:     Jason and Rebecca White (equal)

Employees:          Jason and Rebecca White, Martin Kelly

(apprentice)

 

Interior Design Australia Pty Ltd as trustee form White Unit Trust

Trading entity for Interior Design

Owns Registered Business Name “Interior Design Australia”

Unit holders:       Jason White           50%

Rebecca White       50%

White Pty Ltd           Non-trading “Special Purpose” company as trustee for White Superannuation Fund (SMSF)

White Superannuation Fund            SMSF

Beneficiaries       Jason and Rebecca White

 

WHAT THEY TOLD YOU

 

Jason and Rebecca have been clients of yours since 2005. At that time, you assisted them with a home loan from St George Bank to purchase their current owner occupied home. Home loan balance is $360,000 and a recent real estate agent appraisal of their home, located at 7 Park Lane in a good suburb in your State/Territory, estimates the market value to be $1m.

They are open to a refinance or restructure of this loan with their own bank or with any other lender if required.

 

Jason and Rebecca also have $257K each in their Self Managed Super Fund in cash.

 

All Painting Australia has been operating since 2000. A couple of years ago Rebecca completed her interior design qualifications and Jason is a qualified painter.

 

The unit trust was set up by their accountant, who also provides a book-keeping service for them so that all the BAS and other accounting needs are met professionally.

 

They do not consult currently with a financial planner, but they did say to you that their accountant has also been on to them about using the funds more effectively in their self managed superannuation fund. Their accountant is tied in with a Dealer Group and is also authorised to give advice in this area, hence his insistence on them discussing the $514K cash sitting in their SMSF. Rebecca mentions that referral for this type of service provided by a financial planner would be a good idea as a second opinion as well, plus they also need to sort out their insurances. She has asked for your recommendation of a suitable professional. Jason looks a little uncomfortable with this request. Your experience here tells you that you had better address his issues without delay, to avoid losing the referral to another Broker.

You also know, from your experience in your role, that many Australians are under insured, and many do not have wills in place. The clients are typical and express the opinion “Oh it

 

won’t happen to us”. They do not want to admit their shortcomings in these two vitally important areas. Nor do they wish to admit the possibility of not earning an income, become ill or even worse die.

 

Please note: Courts in Australia deem Finance Brokers to be professional and as such under the Duty of Care have a legal obligation to advise clients of the ramifications of financial hardship caused through illness, accident, or death.

 

Rebecca is concerned about how they will meet interest costs until homes are completed and rented. She has asked you for options in this area.

 

Case study A – Can be structured as an Investment property and construction loan

 

Jason advises that they have located a derelict home on a large block of land in a nearby suburb that they would like to purchase with the aim of constructing three freestanding dwellings. These homes will be rented out upon completion. They hope to retain them for at least 20 years and then sell to help fund retirement or perhaps for the older kids to live in down the track. Their solicitor has advised that given block size it may be advisable to subdivide and for each home to have separate title. Property is a corner block.

 

A local real estate agent has stated that the rental returns would be slightly higher than suburb average, as the area is made up of much older homes. Capital growth could also be above average as the suburb is ideally placed for medium density development. Schools and shops are nearby. Transport infrastructure is a little lacking.

 

Property contract purchase price is $500,000.

 

The Builder’s tender is for a total of $600,000 and does not include demolition, site clearance or subdivision costs. Builder is licensed and reputable and project will be funded via progress payments. Separate quote provided for demolition and clearance of $50,000. Solicitor advises subdivision costs of approximately $25,000. Clients wish to borrow all the project costs including lender, legal, government and any other charges and fees. Estimated completion date is in 6 months. Estimation is based on the completion valuation of $400,000 per property and rentals should be around $450 PW per unit.

 

Case study B – Can be structured as a plant and equipment loan

 

All Painting Australia Pty Ltd recently won a contract to paint a large supermarket chain (inside and outside). The contract covers 30 stores throughout Victoria, NSW and Queensland. Internal work will need to be done of an evening when the stores are closed, and it is expected to take two weeks per store using four painters and two hydraulic scissor lifts.

 

The contract is for $25,000 (excluding GST) per store and all work must be completed within 24 months. Half of the income will be paid on commencement of the work for each store and the balance on completion.

 

Jason has estimated he will need to employ a further three painters at a salary of $65,000 each and will also need to purchase two hydraulic scissor lifts with cage and trailer at a cost of $21,000 (including GST) each.

 

Clients have not yet spoken to Accountant however feel they would like to purchase the equipment in the Trust (White Unit Trust) and rent the machines out when not in use at the end of the contract.

 

You are required to prepare a complex application, loan documents, provide all supporting documents (including invoices) and a cash flow showing repayments and all costs that can be covered from contract income.

 

All Painting Australia Pty Ltd Trading as All Painting Australia

ACN 12345678 / ABN 91 12345678

Profit and Loss Statement for the year ended 30 June 20XX

 

	20XX $	20XW $
Income
Painting Income	522,665	616,508
Less Cost of Goods Sold
Purchases	51,187	83,075
Sub-Contractors	175,292	329,694
Plant Hire	598	614
Sub Total	227,077	413,383
Trading Profit	295,588	203,125
Interest Received	1,139	627
Gross Profit	296,727	203,752
Expenses
Accountancy	4,380	2,180
Advertising	1,958	5,108
Apprentice Wages	15,000
Bank fees and charges	222	201
Computer expenses	692	275
Depreciation – Plant and Equipment	1,245	937
Motor vehicles	8,031	9,894
Directors Salaries	190,000	150,000
Entertainment expenses		509
Filing fees	212	212
General expenses		369
Home office costs	1,473	1506
Insurance (business)	1,482	911
Insurance (workers comp)	8,726
Licence and permits	200	76
Motor Vehicle expenses	3,801	6039
Postages	93	45
Printing & stationery	1	137
Repairs & maintenance	881
Staff amenities	390
Staff training	572
Subscriptions		192
Superannuation – Directors	19,000	15,000
Superannuation – Other	1350
Telephone	3494
Travelling expenses	70
Uniform Expenses	30	818
Total expenses	263,303	194,409
Net profit from ordinary activities before income tax	33,424	9,343

 

All Painting Australia Pty Ltd Trading as All Painting Australia

ACN 12345678 / ABN 91 12345678

Balance Sheet as at 30 June 20XX

 

	20XX $	20XW $	20XV $
CURRENT ASSETS
Cash assets
Cash at bank	8,258	6,524	11,965
ABC Bank Business Online Account	20,000	15,000	10,000
Cash on hand	20	20	20
Sub-total	28,278	21,544	21,985
Debtors	6,195	10,123	8,956
Stock	4,324	5,874	7,546
Sub-total	38,797	37,541	38,487
Fixed Assets
Plant and Equipment	50,109	58,434	63,191
2009 Toyota Hilux Van	30,000	35,000	40,000
2009 Toyota Hilux Ute	22,873	31,477	40,000
Sub-total	102,982	124,911	143,191
TOTAL ASSETS	141,779	162,452	181,678
CURRENT LIABILITIES
Hire Purchase liability	13,603	13,603	13,603
ATO liability	5,013	5,583	3,254
GST payable	7,643	3,315	4,164
Sub-total	26,259	22,501	21,021
NON CURRENT LIABILITIES
Hire purchase liability	39,270	52,874	66,477
Sub-total	39,720	52,874	66,477
TOTAL LIABILITIES	65,979	75,375	87,498
Share Capital	20,000	20,000	20,000
Retained Earnings	55,800	67,077	74,180
EQUITY	75,800	87,077	94,180

 

Financial statement explanations (1% Variance Rule)
Total Income (-93K)	Took family to Egypt for holidays in 20XX
Sub-contractors (-154K)	Reduced contractor work and replaced some with apprentice
Workers Comp Ins (+$8K)	Agreement made with subcontractors to cover premiums
Telephone (+$3.49K)	Treated as personal expense for some reason in 20XW
Fixed assets P & E (-$8.3K)	Progressive depreciation
Non-current liabilities HP (-$13.6K)	Natural reduction by way of monthly payments.

 

Interior Design Australia Pty Ltd as Trustee for White Unit Trust Trading as Interior Design Australia

ACN 12345678 / ABN 91 87654321

Profit and Loss Statement for the year ended 30 June 20XX

 

	20XX $	20XW $
Income
Interior Decorating Income	52,165	37,889
Interest Received	105	56
Gross Profit	52,270	37,945
Expenses
Accountancy	500	500
Advertising	750	600
Bank fees and charges	60	60
Computer expenses	330	330
Filing fees	212	212
General expenses		369
Home office costs	625	573
Insurance (business)	782	658
Licence and permits	200	200
Motor Vehicle expenses	3750	3265
Postages	26	45
Printing & stationery	125	138
Subscriptions	800	192
Telephone	1200	937
Total expenses	9,360	8,079
Net profit from ordinary activities before income tax	42,910	29,866
Less Distributions to Unit Holders
Jason White	21,455	14,933
Rebecca White	21,455	14,933
Sub-total	42,910	29,866
Undistributed Income	0.00	0.00

 

Interior Design Australia Pty Ltd as Trustee for White Unit Trust Trading as Interior Design Australia

ACN 12345678 / ABN 91 87654321

Balance Sheet for the year ended 30 June 20XX

 

	20XX $	20XW $
CURRENT ASSETS
Cash assets
Cash at bank	2,121	1,458
Sub-total	2,121	1,458
Fixed Assets
Sample Books	3,500	2,800
TOTAL ASSETS	5,621	4,258
CURRENT LIABILITIES
AMEX Charge Card	1,000	0.00
Sub-total	1,000	0.00
NON CURRENT LIABILITIES
Unit Holder Distributions	4,621	4,258
Sub-total	4,621	4,258
TOTAL LIABILITIES	5,621	4,258
Retained Earnings
EQUITY	0.00	0.00

 

Complex loan application preparation

 

You will notice there are two options of Case Study within this assessment – the first (A) is more specifically for Mortgage Brokers, the second (B) for brokers in the Plant & Equipment field. Please complete only the stream relevant to you, indicating this on the assessment cover sheet.

 

Choosing only ONE of the case studies presented, prepare a loan file from your initial contact (file notes) with the clients to preparing the loan application for lodgement with the client’s lender of choice. Please refer to the document checklists in the assessment for the appropriate steps required.

 

To achieve competence, you will need to demonstrate a clear understanding of complex loan scenario, proving you are competent at the Diploma level. This case study will determine your understanding of the complexities of various loan scenarios and the outcome for your client.

 

Incorporate in your file notes your thoughts and processes on different aspects of the application. These may include, but are not limited to:

• The loan structure and why the client chose that structure
• The securities used, the costings and loan amount
• The choice of loan product for your client and the information about the loan product you presented to them
• Where you located the product information
• Address every area of the Notes in Detail on the second

 

Because this course is taken nationally, we ask that you localise addresses and places of employment to have familiarity with the assessment.

 

You will have to consider any necessary adjustment of stamp duty concessions when discussing and setting out the fees and costs with your clients.

Visit www.mfaa.com.au/calculators and scroll to the bottom of the page to select the Stamp Duty Calculator. This will give you all the government costs in one calculator. Alternatively, access your Office of State Revenue to determine the correct amount of benefits to which your clients are entitled.

 

A suggestion would be to split the loan into two products as this will assist you in showing the conversation you have had with your client around risk and tolerance. For example, if the clients are refinancing their owner occupied property the loan will require a split, splitting off the owner occupied debt as this is not a taxable debt and wish to separate taxable and non taxable debts. Once selected, you need to address the attributes of the product that suit your client’s needs. For example, the fixed rate may be an option as it offers the client set repayments and rate certainty (discuss rate-lock). Ensure you also consider the repayment options. Example: principal and interest, interest-only and interest in advance.

 

Remember, there is no right or wrong answer. Each client you see presents a new challenge, and if you can provide solutions for those challenges, you may be regarded as successful in this industry.

 

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