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Today the major lending institutions acknowledge that new loans, in particular residential and commercial property introduced loans, introduced through the finance broking network, approaches 50% of the total overall new loans written in Australia in any one financial year.

As a result major lenders are in regular contact with the major finance broker organisations. Here lenders seek advices from the finance broking industry on how they can remain competitive by improving existing loan products, developing new products and regular reviews of overall service.

The finance broking industry has played an ever increasing role ever since the finance broker first gained recognition in the early 1970’s .Initially the role of the finance broker was to match available private individuals funds with a request from a borrower for a mortgage loan.

In the late 1980’s the role of the finance broker developed .At this time major finance broking firms approached a number of the leading lending institutions (specialising in residential and commercial property) to introduce business to lenders and be remunerated for these introductions.
Previously the broker invoiced the client direct for payment for services rendered. The only exception was equipment finance applications, whereas is today, the broker is rewarded by lender.

THIS WAS THE BEGINNING OF THE FINANCE BROKING INDUSTRY AS IT IS TODAY.

Gradually all the major lenders came on board, accepting residential and commercial property finance applications and being remunerated by that lender. Today the broker also receives a trailing commission for the life of the loan arranged.

This received trailing commission in effect becomes a highly valued asset enabling the broker to employ staff, develop better technologies and have an asset to sell, “Goodwill”, on retiring from the industry. In the meantime the broker is personally providing a “fee free service” unless otherwise advised. This broker “fee free service” is not to be confused with any fees the lender may charge.

CHOOSING A FINANCE BROKING FIRM

In choosing a finance broking firm to assist with a loan application one MUST consider the following:

– How many years have they been in the industry, thereby determining their overall experience.
– Have they had any exposure to property and other business investment? All personal experiences gained in investment areas related to clients requirements can only assist in general discussion.

– Membership Accreditations in Professional Bodies representing the finance broking industry.
On your finance broker not retaining membership with one of two organisations representing the finance broking profession in the finance industry, is highly likely, that person or entity cannot assist.

Suggest proceed no further with finance enquiry on approached broker not retaining either:
– Membership of MFAA (MORTGAGE FINANCE INDUSTRY ASSOCIATION OF AUSTRALIA)
– Membership of FBAA (FINANCE BROKERS ASSOCIATION OF AUSTRALIA)

Lending institutions primarily accept applications only from finance brokers accredited with one of these two organisations. Prime reason is membership guarantees necessary industry education standards have been completed(evidenced by certificates issued) ,as requested by major lending institutions.

In summary be confident that a well experienced finance broker retaining professional membership of MFAA or FBAA can assist with your enquiry. Major lending institutions have great respect for the finance broking industry and this association will only continue into the future.

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Key elements in determining availability of a loan to purchase or refinance residential property are:

  1. Taxable income of borrowers. Generally lenders suggest our gross income is split three ways:

    (a)Loan repayments. Here all existing credit payments, including personal loan repayments ,credit card limits, other property mortgage repayments + planned new mortgage loan repayments, need considering.

    (b)Taxation –One’s gross monthly taxable income is included in the loan service affordability calculator ,to determine net taxable income available for loan repayments.
    New rental income is also included where borrower is purchasing a property for rental return.

    (c)Living Expenses where lenders provide guidelines to borrowers, determined by number of borrowers and number of dependants.

    Installing (a) (b) and (c) into the lenders serviceability calculator determines loan amount available.

  2. Employment History. Stability in borrowers employment is another key determiner of loan availability .Generally lenders like to see two years employment with same employer.If not the situation , lender will consider similar employment with a previous employer within past two years.

  3. Credit History An adverse current or past credit history will significantly weaken one’s chances particularly if you need to borrow more than 80% of the asset value.

    Funding may still be available particularly if self employed as alternative lenders become available all be it at higher interest rates.Generally the number of default’s, the default $$ amount and how long ago,are important here.

  4. Mortgage Insurance. To secure borrowing greater than 80% of property’s purchase price or valuation(if refinancing) the lenders must submit all borrowers applications to a Mortgage Insurer to have that amount above 80% insured.This means in case of default (a forced sale occurs) the lender is guaranteed 100% return of monies advanced. No mortgage insurance approval here,no loan.

    With mortgage insurance it is possible to borrow up to 95%(including allowance for mortgage insurance premium $$ amount).The mortgage insurance premium is charged once only covering the entire loan term.

Summary

The above detail highlights relevant information necessary to determine loan amount available and key factors that come into consideration in determining loan approval .

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A commercial property could be deemed as a property not of a residential nature,(namely ones home or residential investment property) which is either:

– leased out for a term for a rental income return OR.
– Owner occupied, or, by a related third party.
– vacant land with zoning of a commercial industrial nature, acquired for future commercial development.

Commercial Property types include but not limited to:
showroom warehouse, warehouse, retail outlets, shopping centres, office block ,factory units, multi-level apartment developments, multi residential unit developments (generally >3) ,strata offices.

Commercial Property Features

Prior to entering an Offer to Purchase contract one should determine:

(1) Is the property acceptable to a financier as adequate security? Some securities are deemed as specialised by lenders (in other words purposely built) and funding may be refused or limited.

(2) Is location of property to be acquired, or refinanced, in a suitable location?
For instance the property may be located in a regional centre or other rural centre. Funding may not be available, or again reduced, because of location.

(3) If a leased /tenanted property, is the remaining lease term sufficient to secure necessary finances? Should further lease options be sought to assist finances and for future sale purposes?

Finance Guidelines

Lending guidelines are in place for a purchaser, seeking finance to assist with a purchase namely:

(a) Income streams of leased property must cover planned interest expense by 1.50 times. For example if loan interest expense is $100000pa property’s net rental income needs to be $150000pa. (Net of gst and variable, for example rates and taxes)

(b) All associated loans secured against a deemed commercial property must illustrate loan can be finalised within fifteen years (by principle and interest repayments).

(c) Lending against a deemed acceptable commercial type property is limited to a 65%-70%LVR (Loan to Value Ratio). It is common for multi level apartment developments to attract an LVR approaching 80% during construction, with initial loan amount not exceeding 65% of completed end valuation.

(d) Other borrowings whether they be of a commercial or personal nature (home loans etc) must also meet lenders guidelines, on purchasing or refinancing a particular commercial property.

Like all investments one needs to take care in sourcing a property of commercial nature.

The above summary provides a guideline only and any contract to purchase should be conditional to suitable finance and any other conditions a would be purchaser requires.