Case study on two brotheres

Case study on two brotheres

Page 1 FNS50311 Diploma of Finance and Mortgage Broking Management Bridging Program MFAA Provided Case Study (1) Tom & Steve Broad IMPORTANT NOTE: This case study has been written and produced by the MFAA. Intellitrain, as a preferred supplier of qualifications for MFAA members is required to use this case study as part of it’s assessment process. Page 2 Case Study:……………………………………………………………………………………………………………………………. 1 Investment Property Finance ……………………………………………………………Error! Bookmark not defined. Investment Property Finance …………………………………………………………………………………………………. 3 Overview …………………………………………………………………………………………………………………………….. 3 Evidence requirements………………………………………………………………………………………………………….. 3 Knowledge requirements ………………………………………………………………………………………………………. 4 Assessment…………………………………………………………………………………………………………………………. 4 Tom and Steve Broad …………………………………………………………………………………………………………… 5 Details of the property …………………………………………………………………………………………………………… 5 Summary of client analysis ……………………………………………………………………………………………………. 5 Tom’s personal information……………………………………………………………………………………………………. 5 Steve’s personal information………………………………………………………………………………………………….. 5 Submission One – The Client ………………………………………………………………………………………………… 7 What your report should include: ……………………………………………………………………………………………. 7 Submission Two – The Lender ………………………………………………………………………………………………. 8 Page 3 Investment Property Finance Overview In order to achieve competence, you will need to demonstrate a clear understanding of complex loan scenario’s by completing the following steps:  analyse the client situation, review the fact find and prepare a full report for your client  prepare a list of questions that you would need to ask the clients about the proposed transaction i.e. prepare your needs analysis  prepare two submissions – one for the client and one as a loan submission to the lender for preapproval  present the information in the appropriate format for the client to set up a loan  outline the process that is required for the client to obtain appropriate finance and the risks (potential and real) that your client should be aware of  include a selection of lenders that will consider this style of borrowing in your report to the customer  calculate the required servicing for the new debt and calculate the lender comfort surplus. Evidence requirements In order to be deemed competent, you will need to evidence the ability to:  develop detailed broking options designed to maximise the client’s outcomes and reach client objectives which incorporate elements from research and which address complex needs and issues  identify and describe key assumptions upon which the plan is based  provide a detailed analysis of research strategies and findings  test and make appropriate checks on a proposed plan for its integrity and compliance  assess the impacts of taxation, social security, economic and other government policies on client investment and financial requirements  interpret and comply with industry regulations and codes of practice  identify the roles of associated financial advisers and work effectively with them  assess broking options, financial markets and investment characteristics  use appropriate sales and marketing methodologies and provide justification and research evidence  gain client feedback on and/or agreement to the plan  prepare materials and personnel to effectively implement complex loan structures  establish appropriate audit trails and effectively document records and data. Page 4 Knowledge requirements To be deemed competent you must be able to demonstrate a comprehensive knowledge of where applicable:  Acts and regulations affecting the financial industry  borrowing risk factors  legislation impacting on financial services, including environmental, corporations and consumer legislation and State and Territory legislation, charges and taxes  heritage property issues and requirements  native title rights  products available in the financial services industry  relevant codes of practice  requirements related to the disclosure of capacity  the role of finance brokers  valuation practices and methodology  forecasting techniques  government financial policies  methods of presenting financial data  sources of information on financing such as: banks, financial advisers. Assessment The assessment for this module is to prepare two submissions:  Submission One – for the client so that they have the facts on all their obligations and fees and the structure of the loan.  Submission Two – as a loan submission to the lender for pre-approval. These submissions will demonstrate to the assessor whether you are competent at Diploma level and demonstrate an understanding of the complexities of various loan scenarios and the outcome for your clients. Page 5 The scenario Tom and Steve Broad Two brothers approach you with their desire to purchase two established units in the same building. These are to be rental investment properties. The building has 12 units in total. The units have 80% permanent tenants in place and the remaining 20% are used for holiday rentals. The location is a highly sought after area and all holiday periods are fully booked. The brothers are considering a mix of permanent tenants and holiday rental for their purchase Details of the property Proposed purchase prices are:  One ground floor unit at $350,000  One third floor unit at $385,000. Income and expenses are:  Body corporate fees at $2500 per unit per annum  Proposed income at $450 per week per unit as a permanent rental  As a holiday rental they would expect a total gross of $45,000 per unit. Summary of client analysis Initial Fact Find: The brothers have invested together before and have experience in buying and selling property. They have sold all their other investment properties and the units will be their only investment until they can identify another opportunity. The cash at bank is mostly from the sales of other investments. One brother, Tom Broad is single, has no children, and is in a PAYG position as a team leader of a call centre. The other brother, Steve Broad is married, has no children and is self-employed as a landscaper. Tom’s personal information Name: Thomas (Tom) Albert Broad DOB 4/12/76 Address: 20 Thomas Street Windsor (your state postcode)  Annual salary $85,000  Single, no dependants  Cash in bank $250,000 (not in offset)  Owner occupied property $650,000, debt $300,000, assume 7.2% P&I  Credit card limit $5,000, cleared monthly, assume 3%  Contents $100,000  Superannuation $150,000  Motor vehicle $60,000, nil debt. Steve’s personal information Name: Steven Joseph Broad DOB 16/5/74 Address: 17 James Avenue Newmarket (your state postcode)  Annual salary $65,000 Page 6  Married, no dependants  Marie Louise Broad annual salary $30,000 DOB 16/12/75 Teacher  Cash in bank $150,000 (not in offset)  Owner occupied property $450,000, debt $100,000, assume 7.2% P&I  Credit card limit $15,000, debt $5,000, assume 3%  Contents $130,000  Superannuation Steven $150,000  Superannuation Marie $20,000  Motor vehicle Steven $30,000, nil debt  Motor vehicle Marie $15,000, nil debt. Page 7 Submission One – The Client Prepare a full report for Tom and Steve by:  In a fact find format prepare a list of questions that you would need to ask Tom and Steve about their history and experience and the unit purchase  In a suitable format, documenting the process that is required for them purchase the two units as their investment properties; setting up a joint loan in the brother’s names.  Summary of your understanding of the loan proposal and how it suits the client’s needs  Including a selection of lenders that will consider this style of borrowing.  Outlining the process and the risks (potential and real) of which Tom and Steve should be aware. What your report should include: 1. the parties to the loan (Borrowers) 2. the best physical set up with the lender – are they using their own property as cross security or the cash at bank as deposit? (Structure) 3. an outline of the title requirements (Type of Security) 4. a list of the lenders that are able to lend (possible lenders that would consider submission, no more than 4) 5. the procedure to commence a loan for a property like this, an outline of the process and what the client needs to arrange 6. the client responsibilities, so Tom and Steve fully understand the loan (List what they are responsible for eg insurance etc) 7. the documentation needed to commence the borrowing (Can use checklist format) 8. the name in which the client will sign the contract/purchase/offer and acceptance (if different to the borrower) 9. the state revenue title requirements (Your state) 10. which lenders may also require a personal guarantee from the brother’s spouses (if applicable) 11. the maximum LVR that they can borrow 12. a summary of all fees and charges – including those for setup and those of the lender. Page 8 Submission Two – The Lender Prepare a loan submission to the lender for pre-approval. A guide has been provided to assist with this submission. This must include:  serviceability calculations –  the proposed structure of the loan given there are two brothers and there is a variance in income  the loan amount  the property style, size, use  the postcode  any other information that is relevant to the lenders requirements. Other areas to include and/or consider:  your obligations under the NCCP (if any)  maximum loan amount  maximum loan terms  any ATO consideration to be made  your state legislation and OSR requirements  your general advice restrictions  property purchase requirements.

1 Submission One – The Client Prepare a full report (Try and submit in a report or letter/proposal format eg Dear Tom and Steve and then outline the items discussed below) for Tom and Steve by:  In a fact find format prepare a list of questions that you would need to ask Tom and Steve about their history and experience and the unit purchase (Look at the Information memorandum, you might choose to complete it or something similar and then add additional questions you might think of to ask Tom and Steve. Some examples are as follows: – Is the property furnished? If not, will you require funds to furnish it – What agreement is in place in the event of the death of either brother or if one wishes to leave the arrangement? – Who is your solicitor and contact details? You will need a list of additional questions that you might ask the brothers, think of what you will need to know about them, the property, the structure, their relationship, their past)  In a suitable format, documenting the process that is required for them purchase the two units as their investment properties; setting up a joint loan in the brother’s names. (List out the process, you need to list out what the steps are, need to list out what they are responsible for eg insurance, legals, stamp duty)  Summary of your understanding of the loan proposal and how it suits the client’s needs (List out what you think the loan should be amount, term ,facility and how it would suit their needs, what security they will need, fees and costs, level of deposit)  Including a selection of lenders that will consider this style of borrowing. (Provide a comparison of lenders, just use a simple comparison format  Outlining the process and the risks (potential and real) of which Tom and Steve should be aware. (List out the risks that the brothers need to be aware of, eg interest rates, insurance, using a table format is good, for example risk in one column, mitigant in another. (MAKE SURE YOUR REPORT INCLUDES THE ITEMS BELOW, THESE SHOULD BE INCLUDED IN THE REPORT ABOVE ) What your report should include: 1. the parties to the loan (Borrowers) Who are the borrowers (names)? 2. the best physical set up with the lender – are they using their own property as cross security or the cash at bank as deposit? (Structure) What type of structure, joint loan, partnership etc 3. an outline of the title requirements (Type of Security) Are they buying as joint tenants or tenants in common, freehold security etc 4. a list of the lenders that are able to lend (possible lenders that would consider submission, no more than 4) See comparison notes above. 5. the procedure to commence a loan for a property like this, an outline of the process and what the client needs to arrange See loan process above 6. the client responsibilities, so Tom and Steve fully understand the loan (List what they are responsible for eg insurance etc) See loan process and what they need to do 7. the documentation needed to commence the borrowing (Can use checklist format) Include a checklist of what they need to provide eg ID, Contract, etc 8. the name in which the client will sign the contract/purchase/offer and acceptance (if different to the borrower) Confirm what names they will buy in 9. the state revenue title requirements (Your state) – any stamp duty considerations 2 10. which lenders may also require a personal guarantee from the brother’s spouses (if applicable) any guarantees required (if any) – outline this under the loan proposal 11. the maximum LVR that they can borrow (for example up to what LVR eg 80% and no mortgage insurance or higher with mortgage insurance) 12. a summary of all fees and charges – including those for setup and those of the lender. 3 General Example of Process to Obtain Finance – Complex Broking Transaction  Client Sign Contracts (may do this initially, subject to finance or after loan servicing established)  Client Solicitor may commence searches etc  Client Interview Arranged  Broker conducts Needs Analysis and establishes borrowing requirement and purpose  Broker Completes Servicing Analysis  Broker to Conduct Research of Loan Options and Borrowing Amounts and costs  Broker Presents Options to the Client and advises information required  Client Considers Options and Determines which Loan to proceed with  Broker obtains written agreement to proceed and collects information  Broker prepares Loan Application and submits to Lender  Valuation Completed – if commercial/business related may take 2-3 weeks – increased cost  Approval obtained from Lender and Client advised  Finance approval confirmed with Solicitor  Letter of Offer issued and explained to client and signature obtained to terms and conditions  Security Documentation prepared and either sent to Client or their solicitor for execution  Loan Established and accounts set up, funds to complete confirmed  Settlement effected, periodical payments and direct debits established  Stamp duty Charges Effected 4 Lender Comparison Lender BankWest Westpac BOQ BankSA Loan Type Security Type Repayment Type Interest Rate and margin Fixed Rate: 1 year Fixed Rate: 2 years Fixed Rate: 3 years Fixed Rate: 4 years Fixed Rate: 5 years Min Loan Term Max Loan Term Max LVR Establishment Fee 5 Submission Two – The Lender Prepare a loan submission to the lender for pre-approval. A guide has been provided to assist with this submission (see guide to loan submission). This must include:  serviceability calculations – need to run through a servicing calculator or complete manually  the proposed structure of the loan given there are two brothers and there is a variance in income how will loan be set up joint loan, property share, company, trust.  the loan amount – how much will loan be and facility, term and repayment (interest only, Principal and interest)  the property style, size, use – type of property, how large, what will it be used for  the postcode – where, can use your postcode or another  any other information that is relevant to the lenders requirements. Other areas to include and/or consider:  your obligations under the NCCP (if any) – detail what would you give the client under the NCCP and what you would fill out, eg Credit Guide, Proposal etc  maximum loan amount – include under facility  maximum loan terms – include under facility  any ATO considerations to be made – any considerations that need to be made, no tax advice requied  your state legislation and OSR requirements – any considerations for stamp duty  your general advice restrictions – what you are able to provide eg only credit advice  property purchase requirements – what attachments you need eg contract, payslips etc. 6 Assessment Case Study (1) and (2) Guide to Loan Submission to Lender for Pre-Approval (Memo format) Borrower: – Full Name – Address – DOB – Contact method – Employment Background: – History (based on information provided) Loan Amount and Facility Proposed: – Use of funds or purpose – Loan Type and Legal Structure (if applicable) – Term – Repayment – Justification if appropriate Funds Position – Amount of Equity/Deposit – Source of Equity – Additional Costs Security Proposed: – Type of security – Property details, style, size and use Serviceability: – Serviceability based on cash flow (including buffer)for all entities – Calculate any ratios applicable DSCR/Interest Cover – Source of income – Identify any shortfall or surplus and where funds are coming from Risk assessment: – Risks/Mitigants – Management – Exit Strategy Recommendation: List of Attachments/Enclosures: – Documentation which would be attached to the Loan Submission

Is this the question you were looking for? If so, place your order here to get started!