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D

Mortgage Secrets
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E XP O S E
An informed decision, is a good decision!
Never before have Australian borrowers had so much choice when it comes to the
selection of a home loan and with that range of choices can come confusion and
misinformation. In this report we expose many Australian mortgage secrets and myths
as well as giving some practical tips on the best way to secure your next mortgage.
Through this report
we hope to stimulate CONTENTS
thought and to detail
All I want is the lowest rate: 1
points that home loan
borrowers should Are non bank lenders safe: 2
consider as part of Secret Commissions: 2
their lender/broker
Insurance rip off: 2
and loan selection
criteria. Know the process: 3
Which loan type: 3
It's reported that in
Australia there are What are the real costs: 3
currently in excess of Property valuations: 4
300 lenders and or
mortgage managers Why do banks say no: 4
and over 12,000 Broker v Bank: 5
mortgage brokers. each other and the plethora of
Choosing a broker: 5
non-bank lenders and mortgage
In Australia today, in excess of brokers to get their share of loans How do brokers get paid: 6
40% of all home loans are placed, accurate information can Accountability and Fraud: 6
arranged by mortgage brokers sometimes be the victim.
with that figure following overseas Bait and Switch: 7
trends and growing each year. It is essential that every person Doubtful withdrawals: 7
considering a mortgage should
Based on the trends in other make an informed decision not Dealing with a broker: 7
countries, Australia could just about the loan product that's Know your credit history: 8
reasonably expect to see in right for them but also who they Repayment penalty: 8
excess of 60% of home loans will approach to arrange that home
arranged through mortgage loan. Recommendations: 8
brokers.
To add to the confusion there are
several hundred different loan All I want is the lowest rate!
products for borrowers to choose Does that seem like a logical way to determine which loan product you'd
from. chose? Unfortunately, it's not that simple. After all you wouldn't buy a car based
on the lowest price. Just like cars, mortgages come in many models with lots of
With this great diversity in both features.
lenders and loan products came
the rise of the largely unregulated For example, on paper a lender offering a one year low rate (Honeymoon rate)
would have the lowest rate. However, when you look at some of the restrictions
and often maligned mortgage that may apply to that loan it may in fact be a more expensive loan.
broking industry.
The loan may for example only allow monthly payments. It may prevent you
After years of branch closures and from making lump sum payments and it may not have things like re-draw or line
reductions in face to face service of credit facilities. It may also have higher account keeping charges and a non
many banks realized that their competitive rate in the second year.
traditional clients were leaving In this report we try to explain that "there is no such thing as a free lunch" just
them. Now as they compete with as the loan with the lowest rate may in fact be the most expensive loan for you.

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Are non-bank Insurance
lenders safe?
Traditionally Australian's have
rip off?
approached the "family bank" when When you take out car insurance
they needed a home loan. Things you get a 1 year policy not a "life of
started changing about 15 years ago as the car" policy. Yet when you get a
a number of non-bank lenders started home loan it will most likely have
appearing. Lenders Mortgage Insurance or LMI
and LMI is for the "life of the loan".
Some argued that this new style of
lender would neither last or offer LMI provides protection for the
comparable loan products. Well, not lender should they lose money on
only have they lasted but many also your home loan.
offer loan products more competitive
Given the average home loan is
than the big five banks.
about 3 to 5 years and 99.99% of
These new lenders are often funded by borrowers fully discharge their
organisations such as Permanent mortgage how can insurers get
Trustees or Perpetual Trustees who are away with this.
as "safe as houses" so don't be put off Consider this example. You borrow
a lender just because they aren't one of say $350,000 and you'll pay about
the big five because there are some $5,000 in LMI. 3 years later you
great loan products out there. refinance with another lender or
TIP: If you're considering a loan perhaps sell that property and buy
through a bank, talk to your mortgage broker and see if they can get another and again you'll pay
you a better deal through a non-bank lender. another $5,000 in LMI.
LMI should be a normal part of the
day to day operation of the lender's
Secret business and paid for by them as
they do other insurances. Those
costs are then amortized across

commissions?
their product range just like all
costs. Having the borrower pay
these costs simply encourages
loose lending practices with high
In NSW, Victoria and Western Australia, Mortgage Brokers are required to LVR loans being given to borrowers
who simply shouldn't have them.
disclose all commissions and benefits they will receive as a result of doing
your home loan application. Some lenders don't pass on LMI if
you borrow less than 80% of your
The same laws do not apply to bank staff who may receive a commission properties value but may have other
as a result of doing your home loan application! "early discharge" fees instead.
Many bank staff also receive commissions for insurance products they sell These lenders advertise that they
you. don't charge for LMI and then
charge you and exit fee of anything
It was argued by consumer groups that the recommendations of brokers up to 5% if you payout your loan too
could be influenced by commissions being paid. Surely the same rules soon.
should apply to bank staff.
Early discharge fees are normally
TIP: If you're considering a bank loan ask the bank staff "how much on a sliding scale with the full
commission are your making as a result of the loan you're amount payable in the first year.
recommending?" TIP: Double check your exit
costs for any loan you're
Improve your house value considering.

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Know the process!
They say information is power and that certainly applies to the process of obtaining a mortgage
settlement. The borrower’s broker should explain the approval and settlement process as well as
keeping the borrower informed along the way. In simple terms consider these time lines:
Conditional approval:
Anywhere from 1 to 2 days
depending on the lender. Which loan type?
Valuation: Allow 4 days from The Australian mortgage market may be small but there are more loan
the date they were instructed. products than there are days of the year.
Where the valuation is for a
purchase, consent has to be For example: Standard variable, honeymoon, fixed interest, interest only,
obtained from the vendor and the Line of Credit, lo doc, no doc, Reverse Mortgage,
tenant, if there is one, to get professional pack and private loans to name just a
access to the property. few.
When considering what loan type best suits,
Unconditional approval: Allow borrowers should avoid simply adopting the approach
5 days from the date the of “we want the lowest interest” loan. Borrowers
valuation is provided and all should compare features not just rate.
supporting documents have
been received by the lender. For example, a low rate honeymoon loan may not
Lenders cannot provide an allow extra repayments and may have higher monthly
unconditional approval unless all on-going fees.
supporting documents have
Whereas a competitive variable rate may allow all of that plus have re-draw
been provided and found to be
facility with internet and ATM support. There are substantial benefits in
satisfactory.
being able to make weekly payments.
Settlement: This can vary Your mortgage broker can explain which loan type best suits your personal
dramatically. It the loan is simply or financial circumstance and has the loan features you require.
for a refinance with the same
lender then settlement can occur You should be very cautious when considering any loan with a honeymoon
more quickly. rate. Where such a rate is being considered borrowers should assess costs
and payments for at least 24 months after the end of the honeymoon period
If however you're buying a .......... remember there’s no such thing as a free lunch. The lender isn't
property the settlement date is giving you a low rate just so they feel good about it.
usually set by the vendor.
TIP: Don't just consider the costs of getting the loan, look closely at
As a rough guide, assuming all the costs you're required to pay when you pay back the loan.
things go as planned a mortgage
for a property purchase should
settle within 8 weeks and a FREE Mortgage Magazine
refinance with the same lender Get a free subscription to Australia's only on-line mortgage magazine.
within 4 weeks.
www.mortgageinsider.com.au
If you have a need for an urgent
settlement you should discuss it
with your broker. What are the real costs?
TIP: Your loan application will As with any major purchase there are many costs associated with
be processed far quicker if obtaining a home loan. All borrowers should ensure that their mortgage
you supply all required broker provide a detailed list of costs. While some of these costs may
supporting documents as they be estimates, they should be sufficient to allow the borrower to gain an
are requested. understanding.
If your loan is to consolidate Some of the costs associated with a mortgage include:
debts such as credit cards or Application fee, valuation fee, lenders legal fees, Lenders Mortgage
personal loans, contact those Insurance (LMI), redraw fees, on-going fees, stamp duty and early
companies and confirm discharge or exit fees. These are just some of the fees a borrower may
payout figures. Don't guess face.
as some lenders may have TIP: Ask your broker to get you a list of all known entry and exist
discharge fees that may leave costs for any loan you're considering. Watch out for high exit
you short. costs if you don't intend having a loan for more than 5 years.

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Property valuations
The property valuation is the key to any loan proceeding to settlement. In all cases a lender will instruct
their own "panel" valuer to value the security property in accordance with their own criteria. Because of
this most lenders will not accept a valuation commissioned by another lender.
The valuers who act for a particular When the valuer values a property valuation has been done you'll be
lender are called “panel valuers”. they take into account a wide range required to pay for another
Lenders will traditionally lend at of factors including: condition of valuation or if the same valuer is
either valuation or purchase price, the property, land size, comparable used the costs of assigning that
whichever is the valuation to the new lender.
lessor.
Valuation disputes: We all think
A good idea for that what we own is worth more
borrowers is to than it really is so be mindful of
buy a property this when the valuation report
report from a comes in. Valuers value
company like properties at arms length from any
Australian influence and base their valuation
Property on sales history and trends. If a
Monitors. Their borrower feels the need to dispute
Premium Home the content of a valuation report
Price Guide will they should take it up with their
cost $59.95 and mortgage broker who will then
shows represent their concerns to the
comparison per lender.
street rather than
just by postcode TIP: Before you start the
as some reports application process check
do. NB: These what's been sold recently in
reports are not valuations and your area and compare it to
should not be relied upon. properties locally, comparable your home. Then buy one of
recent sales and the market trend the reports mentioned above.
An opinion from your local Real This way you can make an
in the area ie are property prices
Estate agent is not a valuation and informed decision.
going up or down.
is nothing more than a price they
would like to sell the property for if As a matter of policy most lenders
you were to appoint them as your won't supply you a copy of it and if
agent. you change lenders after a

Why do banks say NO!


There are many reasons why a bank could say no to your
loan application. Here are some of them:-
1. Your income isn't high enough to comfortably make the
loan repayments. Each lender has their own way of
calculating that and for most loans the lender is required
by law to be satisfied that you can repay the loan.
2. You haven't been in your current job long enough or
you've been changing jobs too frequently.
3. You don't have a good savings record.
4. Your credit history isn't good. While some lenders are
getting more flexible with isolated problems most still
take a hard line.
5. You have too many enquiries from lenders on your credit history.
6. You are the director or a company which cannot provide tax returns.
7. The mortgage insurer declines your loan even though the lender recommends it. There are only 2 mortgage
insurers in Australia and they have the final say on all loans that have LMI, not your lender.
TIP: If any of the things mentioned above even slightly fit you, talk to your broker and explain your
position. You are better off lodging your application with a lender who will approve it.

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Broker v Bank
The very first thing to understand is whether you do a loan through a broker or a bank, both are
businesses and both are doing your loan to make money. The essence of any decision making is having
enough information to make the right decision. The very first decision a borrower needs to make is
whether to go direct to a bank or use a mortgage broker?
BANKS: The Australian borrower has had a long so long as borrowers do their homework before
history of supporting their “family” bank however over commissioning a broker it should be a positive
recent years that has changed for a wide range of experience.
reasons. Conclusion: There is no doubting that by using a
Pros: mortgage broker you will have far greater loan
• Standard well publised loan products. product opportunities particularly if you don't fit
• Long lending history the standard bank mold.
See the selection of your broker as a long term
Cons: relationship whereby they can assist you with all
• Limited product range. your finance requirements both now and in the
• Frequent staff changes future.
• No requirement to disclose secret commissions
MORTGAGE BROKERS: Over recent years it
seems that there is a mortgage broker around every
corner and that the high level of competition has been
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a windfall for borrowers. However at times it has also
brought out the bad elements in the industry.
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It's often difficult to know if you'd qualify for a home
Pros:
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• Regulated in NSW, Qld and WA. lenders listed and by completing a simple assessment
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Cons:
instantly profile matched against those products. This
• Un-regulated in a Tas, NT, SA and Act.
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• No restriction on entry into the industry.
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There are many quality brokerage firms out there and

Choosing a mortgage broker


There are a number of basic but key things a borrower can do to shortlist a good
broker. Brokers should answer yes to each point:-
a. Are they a member of a professional industry body such as Australian Institute
of Mortgage Brokers - AIMB or Mortgage and Finance Association of Australia -
MFAA or Finance Brokers Association of Australia - FBAA.
b. Do they use an approved “Finance Broker Contract” which discloses fees and
costs?
c. Has their company been in business for more than 12 months and check out
their website for information and testimonials.
d. Do they conduct a thorough “needs analysis” before submitting a loan
application. This is perhaps the most important point. Realistically it is impossible
for any broker to assess which loan product is right for a borrower if they don’t
take the time to complete a “needs analysis” with the borrower BEFORE an
application is prepared. It is far to simplistic to say that every borrower wants the
best interest rate.
Clearly if that were the case there would only be one lender. The diversity of
product features and the complexity of the borrower’s needs dictate that a “needs analysis” should be essential.
e. Does the broker hold Professional Indemnity insurance?
TIP: Talk to family and friends and get their recommendation.

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How do mortgage brokers get paid?
The mortgage broking industry attracts many thousands of new brokers every year and unfortunately many find it
too difficult to continue. One of the greatest issues is payment to brokers. In the majority of cases a broker is paid
a "settlement commission" which is also referred to as an "upfront commission" because it's paid to the broker in
the weeks following the settlement of your loan.
Settlement commission: The settlement commission is traditionally
around the .7% of the loan amount settled. For example that would
represent $2,100 on a $300,000 loan. This is not paid by you, it's a
commission that's inbuilt into the interest rate. Claw-back: Unlike
any other business in Australia the broker can have the "Settlement
commission" taken back from them or "clawed back" if you were to
refinance within a certain period. Some lenders have a claw-back
period of 18 months. This effectively means that even though the
broker arranged your home loan for you to your total satisfaction and
to the lenders full requirements they could have done all of that for
nothing if you refinance away from the lender or pay-out your
mortgage.
Trail commission: On some loan products lenders will also pay the
broker a "trail commission" each month provided you've paid your
mortgage on time. The "trail commission" is around .25% per annum.
That would be a monthly commission of $62.50 for a $300,000 loan.
If you pay your mortgage one day late, the broker doesn't get the trail
commission. Not all lenders pay trail commissions.
Brokerage fee: Some lenders don't pay either settlement or trail
commissions and therefore the broker will charge a "brokerage fee".
This fee should be agreed to by you and fully disclosed in your initial
agreement with the broker.
TIP: For a mortgage broker to be successful in todays
competitive market place they need to maintain a quality
professional relationship with their clients and that's great for
you as a borrower. You have every right to expect a very high
level of ongoing service and support from your mortgage broker.

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Accountability and fraud


Mortgage fraud and identity theft are growing at a rapid rate in Australia. What we as borrowers must do
is question lenders about their "due diligence" procedures when they process mortgage applications.
Those lenders who aren't thorough enough don't deserve your business. As borrowers we should not
use any lender who doesn't take the preservation of our identity and assets seriously.
No valuation: As unbelievable as purchased one month and then If you become a victim of identity
it may seem, there are some sold for almost double within theft it will have a huge negative
lenders out there who don't do a months under "flipping scams" that impact on your life for many many
full property valuation if the LVR is involve stolen identities. years to come.
below a given level. In an interview on A Current Affair a Two faced: On one hand you have
No employment verification: spokesperson for a major bank said lenders taking shortcuts with
There are also lenders who don't that it simply wasn't possible to verifying the authenticity of
contact employers to confirm verify everything in a standard documents whilst on the other hand
employment. mortgage those same lenders will argue that
application ... time we need to be more careful in
Sales history: and costs didn't protecting our identity.
Most lenders don't permit it.
check the sales TIP: Ask your broker to explain
history of the That position is any proposed lender's due
property being unconscionable as it diligence process. You want a
financed. There only serves to allow lender to be strict with
have been many mortgage fraud and verification.
examples of identity theft to grow.
properties being
Bait & Switch
This trick is so old as the hills that you don't qualify for that
yet we all keep falling for it. particular loan or that the features
are ridiculously restrictive but you
This is how it works. You see an
will qualify for a loan with a higher
advert offering a great interest interest rate.
rate or perhaps with some great
features or perhaps even By now with a bit of pushing from
guaranteed approval. the broker/lender you feel so
committed to the process you'll
Often these adverts are placed by most likely go ahead with what's
brokers and targeted at people now being offered.
who can't normally get credit
through conventional sources. The truth of the situation was that
They also are aimed at borrowers the offer you responded to was
looking for the lowest rate in town. most likely never available to you.
That is Bait and Switch.
Having called the broker or lender
to take up what appears to be a TIP: If it sounds too good, it
great offer you are seduced into most likely is. Before you
believing that everything looks respond to any offer that stands
good so you lodge your out from the rest do your
application and supply the homework before you respond. Be clear in yourself that what's
supporting material. offered is genuine and that the
company offering it is
Then, surprise surprise you're told reputable.

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Doubtful withdrawals
When a lender is assessing your mortgage application they'll examine how you conduct your financial affairs. They
do this by looking at your bank, loan and credit card statements. Where they see constant withdrawals from a
hotel, club or casino bells will ring as they will have natural concerns that you may have a gambling problem.
Seeing these withdrawls may be enough to have your loan application rejected or at least more closely examined..
TIP: If you have a number of these withdrawals in your statements be upfront and honest with your broker
so that they can best represent your position to the lender.

Tips for dealing with a mortgage broker


In other parts of this report we discussed how to select a mortgage broker. In this section we look at some tips
to follow when dealing with them and building your relationship.
As we said in the Broker v Bank section you should treat your relationship with your broker as an on-going one
just as you would with your local butcher, mechanic or hairdresser.
1. Always ensure that you have an agreement in place with the broker before you lodge a formal
loan application. That agreement should disclose fees and your loan requirements. This can be
amended as needed. In NSW, WA and Victoria this is a legal requirement.
2. Always be totally honest about your personal and financial position.
3. Don't set your goals at unrealistic levels. Your broker can explain just what can and cannot be
done. For example if you have a credit problem don't expect an A grade bank style loan.
4. Never accept just one loan product recommendation from a broker without a very good
explanation. These days a good mortgage broker should have over 100 lenders in their resource.
5. Always supply any requested supporting documents quickly. This is the greatest factor in slowing
down loan settlements. You'll be amazed how fast your home loan approval can go when you act
quickly and supply all documents promptly.
6. If your broker does a great job for you, tell your family and friends. If you have a bad experience,
talk to the broker and if there's no satisfactory resolution tell your family and friends.
7. Don't shoot the messenger. Your broker is the conduit between you and many lenders. If a lender
declines you work with your broker to get an approval elsewhere, don't blame the broker.
Know your Credit History! Recommendations:
One of the key factors faced by Australian borrowers is the We would recommend that all
condition of their credit history as maintained by Veda borrowers use these simple
Advantage. recommendations as their guide
for a triuble free loan settlement.
Borrowers should treat their If a borrower has unpaid defaults
credit history with great respect, those defaults will remain on 1. Get a copy of your credit report
as every lender the borrower their report for 5 years after they and dispute any inaccurate
applies to for a loan will do a are paid. On the other hand, entries.
credit check with Baycorp. bankruptcy records are
maintained for up to 8 years after 2. Get a property report as
Whenever a credit enquiry is explained in "Property
discharge.
done by a lender that enquiry Valuations".
leaves what is called a “foot Once borrowers are clear about
print” showing who has made what’s on their credit file they 3. Realistically assess what type
the enquiry and the reason for should then examine their of loan suits your credit,
the enquiry. In many cases budgets and see just how having employment and property
lenders may decline a loan a mortgage or a revised circumstance.
application because of the mortgage would impact on that. 4. Ask family and friends for broker
number of enquiries on the recommendations. If they can't
borrower’s credit report. TIP: Obtain a copy of your
own credit report by calling recommend any, let your fingers
In Australia we have "negative" Veda Advantage on: 1300 762 do the walking and speak to a
reporting. This means that only 207. few.
non payments, defaults and 5. Interview your broker and only
enquiries are listed. A borrower proceed if you're comfortable
could have paid their credit card with their professionalism.
payments on time for 20 years
and then have a minor problem 6. Get your agreement with your
that wiull be listed. broker in writing BEFORE you
lodge a formal loan application.
The difficulty in Australia is that
all that is recorded is a loan 7. Lodge your application and
amount, who enquired and the supply all requested supporting
nature of the enquiry. information quickly.
There is no record to show 8. Double check all amounts that
whether the loan was actually are to be paid out with your loan
taken up. ie credit cards and personal
loans so you are left short.

Early repayment penality


Yes, as hard to beleive as it may seem some lenders on some loan products
will carge you a fee to make extra payments on your mortgage.
One key feature borrowers should confirm is their ability to make additional
repayments above and beyond their regular payments.
This might be by way of cash payments off the mortgage or by making weekly
payments instead of monthly. Some loan products don’t allow extra payments
without a fee being paid while others set a minimum amount that will be
accepted as an extra.
The borrower's broker should explain these options. As a general rule for every
extra $1 paid early on a mortgage saves around $2 in interest over the full term
of the loan.

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Note: The information contained in this report may vary from lender to lender so it is essential that all borrowers do their own
research and do not solely rely upon the information in this report. © 2007

Information sources: The Age Newspaper, Choice Magazine, Mortgage & Finance Association of Australia, Australian
Securities and Investment Commission, Australian Institute of Mortgage Brokers, Australian Prudential Regulation Authority,
Info-Choice, PMI, Mortgage Insurance Aust, Home Price Guide, Fox News.com.