In October last year, a ÌÇÐÄVlog investigation into the strata insurance industry revealed widespread backroom dealings between strata management companies and insurance brokers that secretly ratcheted up costs for unit owners.

With most body corporates and unit owners disengaged from the process of obtaining insurance for their building, outsourced strata management companies and insurance brokers concocted their own self-enriching strategy.

It generally works like this: The strata management company goes to a favoured insurance broker to find cover for the building, and the broker receives a commission from the insurance company for selling the policy – generally around 20% of the premium.

The insurance broker then passes this along to the strata manager, and the strata manager turns around and pays the broker a fee to make up for the lost commission.

Everybody makes out except unit owners, who are generally oblivious. But the combination of commissions and fees can push the premiums they pay up by as much as 40%.

Earlier this month, an ABC Four Corners program, titled The Strata Trap, investigated conflicts of interest in strata management – in insurance and other areas – and the lack of government intervention and consumer protections for consumers. The program exposed how entrenched the problems are.

ÌÇÐÄVlog and allies call for government inquiry

Now ÌÇÐÄVlog and a range of allied organisations, including the Financial Rights Legal Centre and Financial Counselling Australia, have issued a joint letter to the federal government calling for a full-scale inquiry into the strata insurance sector led either by the ACCC or the Productivity Commission.

The letter cites 146 specific instances in which strata managers appointed insurance brokers without the informed consent of body corporates, causing significant financial harm to strata title holders. But there are likely many more instances out there. 

Karen Stiles of the Owners Corporation Network of Australia, one of the signatories of the letter, says “We are witnessing an alarming trend in strata management practices that are not only unethical but potentially unlawful. It’s time for the government to step in and ensure that there is a robust framework protecting consumers who are currently at a disadvantage. The lack of transparency and accountability in the current system has left many of us vulnerable.”

Acting CEO of the Financial Rights Legal Centre, Alexandra Kelly, says “Strata managers should not be getting paid by an insurer for recommending their products. Conflicted remuneration should not be allowed to continue. We want the ACCC to take a good look at this industry, and state governments to be vigilant in making sure consumer rights and interests are upheld and protected.”

The scope of the proposed inquiry would include reviewing industry practices, examining regulatory frameworks and improving consumer protections. 

CEO of Mortgage Stress Victoria Nadia Harrison says it’s time to wipe the slate clean and start over. “Strata management is in need of root and branch reform – it’s expensive for everyone and doesn’t seem to be working for anyone.” 

The post Inquiry overdue into secret payments in strata insurance  appeared first on ÌÇÐÄVlog.

On this page:

• What happens during the settlement period?
• How to avoid settlement delays
• Steps to take to reduce the risk of delays 
• What to do if your lender delays settlement
• Case study: 'I was told my case couldn't be escalated'

In the best case scenario, everything goes according to plan and before you know it, you’ve got the keys to your new place. But landmines can crop up during your settlement period, which may delay or even stop you from being able to take possession of the home. 

Potential issues can include damage to the property discovered at the pre-settlement inspection, tenants not vacating the property in time, and disputes over inclusions. 

One of the major concerns as a potential buyer, however, is having issues with your finance. Here are our tips for avoiding and resolving problems with your lender.

What happens during the settlement period?

When you apply for a mortgage, the lender uses the settlement period – the time between when you exchange contracts and take possession of a home – to assess your finances and consider whether you can make the repayments. This is still the case even if you have pre-approval from your home loan provider; you’ll still need to apply for the actual mortgage.

The lender will also consider how much you’ve paid for the property versus what they think is its approximate market value.

What can delay settlement?

Your finance can be delayed if you don’t answer your lender’s questions straight away, forget to include the documents they’ve requested, or provide incorrect information. But even if your documentation is in order, delays can occur as a result of problems on the bank or lender’s end. 

Issues may include:

• a higher than usual number of applications
• your application being lost or misfiled
• a staff member taking unscheduled leave and not properly handing over your file to someone else. 

If you can’t secure the loan by your settlement date, you’ll likely be charged interest and penalty fees, and the seller may even be able to cancel the sale and keep your deposit. So what can you do to prevent this?

How to avoid settlement delays

Choose your lender wisely

Choosing a lender can seem like a no-brainer: the cheaper the better, right? But different lenders also focus on different types of customers. 

Lenders with the cheapest interest rates may be dealing mainly with people who are refinancing and whose applications are likely not as urgent as someone who’s just bought a home and needs to meet a specific settlement date.

Be prepared

Preparation is key to making sure your settlement process runs smoothly.

Standard settlement periods in some Australian states are 30–90 days, and contracts can include painful penalty clauses for buyers who delay settlement, such as fees for late settlement or the ability for the vendor to cancel the sale and keep your deposit. So it’s important to know what steps are required during the loan application process. 

“Talking to the bank in advance [of applying for the loan] as much as possible and sorting everything out is the way to go,” says Evelyn Halls from the Australian Financial Complaints Authority (AFCA), the external dispute resolution body that handles complaints about lenders and mortgage brokers.

“Definitely there’s an expectation that your loan application should be processed within a reasonable period of time, but what is reasonable will vary depending on circumstances: the type of loan, the amount, the type of property that has been purchased … and various other factors, such as whether you’re refinancing or applying for a new loan,” Halls says. 

“It’s advisable to have conversations with your bank or mortgage broker early on about what steps are required, what documents need to be provided, and what timeframes are involved, so everything is clear at the outset and everyone has clarity around the process.

“That initial planning is going to pay off down the track.”

Consider applying for pre-approval

Loan pre-approval, also sometimes called approval-in-principle or conditional approval, is a process in which a would-be home buyer applies for an in-principle loan from a lender, and receives approval for a maximum amount. 

To get pre-approval, your lender will look at any existing debts you might have (such as other loans or credit cards), your assets, how much you earn, and your expenses. 

Getting pre-approval isn’t mandatory, but it can be useful in giving you more certainty about how much you’ll be allowed to borrow. It also means you’ll get more of your paperwork in order earlier in the process. 

But beware, pre-approval isn’t a guarantee from the bank about how much you can borrow, or even whether you’ll get a loan. Factors such as changes to your circumstances or government regulations, as well as the lender’s valuation of the property you eventually buy, could affect the outcome of your formal loan application. 

Also, avoid applying for pre-approval too early. Pre-approval is generally time-limited, so depending on how long it takes you to find your home, you may need to reapply. But because any applications for pre-approval will appear on your credit file as a loan enquiry, having several in quick succession and with various lenders could affect your borrowing ability, as it could appear as though you’re financially insecure.

What about using a mortgage broker?

You may consider using a mortgage broker to act on your behalf, as they’ll have the contacts to escalate any issues. 

However, we’ve heard of cases where the mortgage broker has actually been the cause of delays due to badly filled out paperwork or not keeping on top of deadlines. We’ve also reported on some of the problems within the broking industry, such as brokers pushing borrowers into loans that are bigger and riskier than they can afford. 

A law subjecting brokers to a best-interest duty will come into effect on 1 July 2020. This should address some of the issues we’ve called out, such as putting consumers’ interests ahead of their own (previously, brokers were only required to offer a loan that was “not unsuitable”). 

“The new best-interests duty will be a game changer for the industry,” says Patrick Veyret, policy adviser at ÌÇÐÄVlog. “Now, throughout the entire process of securing a home loan, brokers are legally required to act in your best interests. The industry is on notice to clean up its act and recommend to people high-quality loans, free from conflicts.” 

If you still want to use an intermediary, read our guide to finding a good mortgage broker. 

Steps to take to reduce the risk of delays 

• Before applying for the loan, prepare a spreadsheet of your monthly living expenses. 
• Consider applying for pre-approval, which can provide more certainty regarding whether the bank or lender is likely to approve your loan. 
• Ask lenders for their expected processing time for new applications. 
• Beware of shorter-than-standard settlement periods in contracts. 
• Apply for the loan as soon as possible after signing the contract of sale (even if you have pre-approval).
• Respond to any questions from your solicitor, conveyancer, broker or lender as soon possible. 
• Ask how long each step of the application should take, and follow up if there are delays. If your issue isn’t resolved to your satisfaction, ask to speak with the lender’s complaints officer. If you’re still unsatisfied, contact AFCA. 
• As soon as you think you mightn’t be able to meet your settlement date, talk to your lawyer or conveyancer. According to Richard Harvey, president of the Law Society of NSW, they may be able to come to an arrangement with the seller’s solicitor.

What to do if your lender delays settlement

You should act as soon as you suspect things are off-track.

“The first step is always to contact the bank and to try and identify, if you can, what might be the hold-up – whether it’s a question of processing time, or if there’s any piece of information outstanding,” says Halls. 

If the lender doesn’t provide you with a satisfactory explanation, you can raise a complaint with their internal dispute resolution department, which should be listed on the lender’s website. 

If that doesn’t help, you , who will consider who was responsible for any unreasonable delay. 

If the lender or broker is at fault, AFCA can order they pay you compensation for any damage caused, such as if you needed to defer property settlement and were charged interest or fees. AFCA may also award compensation for non-financial loss, such as any stress and inconvenience you may have suffered.

Case study: ‘I was told my case couldn’t be escalated’

The day after Nadia* bought a home at auction in NSW, she applied for a home loan with UBank, an online-only subsidiary of NAB, which offered one of the lowest interest rates on the market. She hadn’t applied for pre-approval with UBank. Four weeks into her six-week settlement period, she still had no idea whether UBank would grant her finance. 

After repeated requests for information, the case manager emailed to say that her credit assessment had been assigned to a staffer who was on leave, and would need to be reassigned to someone else, which could take another seven to 10 days. 

The case manager then stopped replying to her emails and phone calls, and after spending hours on hold on the general UBank contact line, the call centre staffer said the case couldn’t be escalated as the manager of the relevant team had gone home, and refused to give her their direct phone number. It was only when she got in touch with a senior member of UBank’s executive team that Nadia’s case was escalated and resolved.

So what went wrong? Because of low interest rates and the renewed heat in Australia’s property market, UBank said it was experiencing a surge in customer numbers at the time of the application. Plus, a large proportion of its home loan book is made up of refinancers. 

Someone who applies for a loan with UBank who has all their documents in order and responds to queries in a timely manner will take roughly seven to eight weeks to go from application to settlement, the bank tells ÌÇÐÄVlog. This means that if you’ve bought a home in a state where standard settlement periods are four to six weeks, you could be staring down the barrel of an expensive delay.

*Not her real name.

The post How to deal with home loan delays during your property settlement appeared first on ÌÇÐÄVlog.

We explain how to stay safe and follow public health directives when moving, whether renting or buying. 

The information in this article is accurate at the time of publishing. But the situation is evolving quickly, so keep an eye out for or call the national coronavirus helpline on 1800 020 080.

Can I move into a new home during the COVID-19 crisis?

In a word – probably. The broad directive from the federal government is simply to stay at home. But there are a number of exemptions, which vary from state to state. In general, you should be able to move house you’ve bought or are renting, as long as you follow your state or territory’s laws on social distancing and public gatherings.

ACT: There is currently no specific legislation preventing people from leaving their home. The operator we spoke to on the COVID-19 helpline indicated that moving house is allowed.

NSW: Yes, moving is a reasonable reason to leave your home. 

NT: There are currently no fines for leaving your home for non-essential reasons, although this may change. You should be able to move house without incident.

QLD: People moving to Queensland from other states are exempt from the border closure. The state government website says: “You will also be allowed to enter Queensland if you are moving to make Queensland your permanent place of residence, but you must enter quarantine for 14 days (which could be at your new residence).”

SA: There are currently no fines for leaving your home for non-essential reasons, although this may change. The operator we spoke to at the SA COVID-19 Information Line indicated that moving house is considered essential and should be allowed.

Tas: Performing essential maintenance or inspections on a property you own is allowed, as is “attending another location if you have a reasonable excuse to attend the location in the opinion of the Director of Public Health.” So it is likely that you’ll be able to move home but it’s not explicitly stated.

Vic: Yes, moving is a reasonable excuse to leave your home. 

WA: The WA government strongly advises people to stay home. The operator we spoke to at the 13COVID helpline said people should use “common sense” to determine whether or not their move was essential (e.g. the end of a lease) and, if so, whether it would count as a valid exemption to the advice to stay home.

What if you need to move interstate?

ACT, NSW and Vic: The borders of these three states are still open and people entering don’t need to go into compulsory isolation or quarantine, so moving here should be relatively uncomplicated.

NT: You can move interstate to the Northern Territory, but you’ll need to fill in a border arrival form and complete 14 days of forced quarantine on arrival. Forced quarantine means you’ll be escorted to a designated location where you’ll be monitored for 14 days. You’ll have to cover the accommodation costs for this period yourself. 

QLD: The Queensland border is closed. But if you’re moving there to live, you’re considered an “exempt person” and you can enter as long as you apply for an and complete a 14-day quarantine once you arrive.

SA: You can move interstate to South Australia, but you’ll need to self-quarantine for 14 days on arrival.

Tas: You can move interstate to Tasmania, but you’ll need to fill in a Tasmanian arrivals form and complete 14 days of self-isolation in government-provided accommodation.

WA: The WA border is closed and the state is also divided into nine regions that residents can’t move between without an exemption.  If you want to move to WA from another state, you’ll have to apply for a special exemption for non-essential travellers. Unless there are extenuating circumstances, you may not be able to enter WA. 

As for moving from one region to another within WA, “returning to a place of residence” is listed as an exemption to the regional travel restrictions, so you’ll probably be allowed through the checkpoint if you bring proof of your new address. 

Essential traveller exemption

Essential travellers are exempt from compulsory quarantine when crossing borders, but you’ll need to check the state’s published list of exemption criteria to see if you qualify.

Can I still use removalists?

Yes. Transport and logistics are classified as essential services nationwide, so removalists can still operate. This means they can enter your home to perform their duties, although you’ll need to practise social distancing.  

They’re also exempt from border closures and quarantine requirements, so you can use a removalist if you’re moving interstate. 

Can I still hire a van or a truck and move myself?

Yes. Car rental companies are still open across Australia. But some branches are temporarily closed, so make sure you check the company’s website to find your nearest one.

If you’re planning to get a friend to help you move, remember to follow the nationwide social distancing guidelines and two-person rule (which is being applied slightly differently by each state and territory).  

Given the restrictions on leaving your home for non-essential reasons (helping a friend move is unlikely to be considered “essential”), you might be better off hiring removalists instead.

What are the rules when looking for a rental?

The federal government has announced a nationwide ban on open-home inspections, but one-on-one private inspections are still allowed. Many agents have also made efforts to transfer most of the home-hunting process online (through virtual tours, for example).

Head of property management for The Hopkins Group, Lorena D’Amico, says real estate agents are working hard to adapt their practices to the government’s rapidly evolving directives.

“We’ve implemented 360-degree virtual reality tours of our properties so tenants can do a digital walk through,” she says.

If a potential tenant likes what they see, they can apply online and wait until they’ve been approved before committing to a private in-person inspection.

“You can book an inspection time online and we will provide hand sanitiser and gloves as well as maintaining social distancing and advising potential tenants not to touch anything during the inspection,” she says. 

“You can then sign your lease online and the agent will meet you at the property to hand over the keys so you don’t need to travel to our office.”

Extra restrictions in Victoria

If a rental property is occupied, the inspection must take place when the tenants are out of the property for an acceptable reason (shopping, work, exercise or care). Only two people – the real estate agent and one other person – are allowed on the premises at the same time.

What are the rules when looking for a share house?

Moving into a rental property is relatively straightforward. But looking for a new share house is much more complicated. 

Steve Caddy, executive manager of popular share accomodation website Flatmates, says households should keep the number of in-person inspections to a minimum by conducting online video interviews and inspections.

“At Flatmates we’re just about to launch our own video tours, which will allow members to upload a video tour of their home and their flatmates, to help cut down the number of video calls or interviews that need to be done,” says Caddy. “It will also help the house seeker to quickly decide if the house is right for them.”

Unfortunately, there has been no specific legislation or guidance around moving into a share house. This raises a particular issue in states such as Victoria and NSW, where home visitors generally aren’t allowed. 

Because this is a legal grey area, common sense and caution are the best guides. Adopting the same practices the real estate industry is using for house inspections is probably your safest bet:

• Delay your move, if you possibly can.
• Arrange to meet your potential housemates online so you can get to know each other a little without meeting face to face.
• Ask for a virtual tour of the property.
• If the online meeting and tour go well, arrange an in-person inspection.
• Arrange for one person to show you around at a time when any other housemates are out (for work, care or exercise, for example). 
• Wash your hands thoroughly before and after the inspection, try not to touch anything and respect social distancing. 
• Don’t inspect any property if you’re feeling unwell.

What happens if we enter stage-4 lockdown?

It’s impossible to know for sure what a stage-4 lockdown would look like for Australia, but the current situation in New Zealand is probably a good guide.

The rules in New Zealand under stage-4 lockdown

• Moving home is not allowed. Tenants are advised that they must not move except in extreme circumstances (e.g. if otherwise they would have nowhere else to live). 
• Home owners in the process of buying or selling are advised to come to an agreement to delay settlement. 
• Furniture moving is not considered an essential service. 

Seven tips for moving home during COVID-19

1. If you’re inspecting properties, practise social distancing and good hygiene.
2. Take a virtual stroll through the neighbourhood using Google Maps and Street View to check out local amenities.
3. Delay moving, if you can.
4. Don’t move if you’re feeling unwell.
5. Minimise contact with service providers (e.g. arrange for cleaners to arrive after you’ve vacated the property).
6. Pre-pack your belongings into boxes to minimise contact for removalists.

The post How to move house safely during COVID-19 appeared first on ÌÇÐÄVlog.

Mortgage broking businesses that claim they can find you the best deal are probably misleading home loan customers.

Aussie Home Loans, owned by Commonwealth Bank, is a prime offender for making such claims, and we’ve singled them out in a complaint lodged with ASIC this week.

The CBA subsidiary is Australia’s largest mortgage broking business; it spent $25 million to advertise its services between 2016 and 2018. 

In our investigation, we spotted claims by Aussie Home Loans that included: “Aussie will shop around to find you the best deal which could save you thousands”, and “find the best mortgage rate by comparing from over 3000+ home loans”, along with similar pitches. 

One ad said brokers could find you the “perfect loan”.

In our complaint to ASIC, we’ve contended that such language misrepresents how Aussie Home Loans mortgage brokers and the industry as a whole actually operates. 

“Aussie Home Loans is a well-disguised sales outpost for the Commonwealth Bank,” says ÌÇÐÄVlog CEO Alan Kirkland. “Aussie Home Loans makes claims of finding Australians the ‘perfect loan’ or the ‘best loan’, yet ASIC research found it sent two in five loans straight back to the Commonwealth Bank.”

In our ASIC complaint, we make the case that Aussie Home Loans advertising claims are potentially misleading and deceptive because they make the following representations:

• Brokers will find people a high quality loan.
• Brokers will scan the market to find the best product.
• Mortgage brokers are ‘free’.

“ÌÇÐÄVlog is concerned that people who have seen these ads are likely to have formed the incorrect impression that mortgage brokers will scan the market to find them a high-quality loan, when the industry has failed to achieve this,” Kirkland says. 

The investigation was conducted with the assistance of ÌÇÐÄVlog supporters, who tracked Aussie Home Loans advertising claims for a week and documented what they found.

We make clear in the ASIC complaint that the Aussie Home Loans advertising claims are not an isolated case; they’re indicative of what has long been happening across the mortgage broking industry.

No duty to put the client first 

Despite the marketing claims, mortgage brokers at Aussie Home Loans and other businesses are only required to match aspiring homeowners with loans that are “not unsuitable” and have no duty to act in the client’s best interest or find the best loan. 

As we’ve reported previously, the commission-based mortgage broker remuneration model currently incentivises brokers to recommend loans that pay the highest commissions, and to push for bigger loans to increase the size of that commission.

For some brokers, these considerations can and have taken priority over what’s best for the client.

Contrary to the advertising material, aspiring homeowners are finding better loans by going straight to the lender, 80% of broker-recommended loans go to just four lenders, and commissions paid to brokers add 16 basis points per annum to the cost of every residential mortgage in Australia. 

Earlier this year we investigated the questionable training mortgage brokers are required to undergo, which focuses heavily on lining up business and closing the deal, and gives scant attention to meeting the client’s needs.

Key recommendation on hold 

We believe the mortgage broker industry is due for an overhaul, and we’re not the only ones who hold this view. 

One of the key recommendations of the recent banking royal commission’s final report is that a mortgage broker best interest duty be introduced to ensure brokers put client interests above their own. 

The current government has promised to introduce this law by the end of 2019.

We’re calling on government to turn this recommendation into law, and we’re calling on ASIC to investigate dodgy mortgage broker claims across the industry.

The post ÌÇÐÄVlog calls out Aussie Home Loans’ dodgy advertising claims appeared first on ÌÇÐÄVlog.

If you use a broker to find a mortgage, you probably think they’ll get you the best deal, despite the fact that a broker is only obliged to provide a “not unsuitable” loan. 

You wouldn’t be alone in this misconception – research released today shows that people engaging a broker expect to be provided with the “best” home loan for them. 

That’s just one of the key findings in a new report from ASIC, ‘Looking for a mortgage: Consumer experiences and expectations in getting a home loan’.

The regulator followed more than 300 people in the process of taking out a home loan, and surveyed more than 2000 others who’d either recently taken out a home loan or were in the process of doing so. 

“This research demonstrates just why we need strong professional obligations for mortgage brokers, as recommended by the royal commission and proposed by the government,” says ÌÇÐÄVlog CEO Alan Kirkland. “ÌÇÐÄVlog is fighting for this new law to be as strong and clear as possible, with no loopholes.”

Seven key findings

The findings of the report suggest that most Australians are unaware of how the mortgage broking industry works, that they don’t get the best possible deal on their loan when using the services of a broker, and – more worrying still – that a significant proportion will struggle to meet repayments.

The key findings are:

1. Consumers expect brokers to find them the “best” loan.
2. Consumers are most likely to take out their loan with a lender they have an existing relationship with.
3. Consumers who use brokers are different from consumers who go directly to a lender.
4. How brokers present loan options to consumers is inconsistent.
5. Consumers have a mixed understanding of how brokers are paid.
6. The importance of finding a good rate seems to decrease throughout the journey.
7. One in 10 consumers in the survey say they’re struggling to meet their repayments.

We need better

“Nearly half of all people who see a broker end up with a loan with their existing bank. One in ten people are struggling with their home loan costs within a year,” says Kirkland. 

“We have a major competition problem in the home loan sector but the mortgage broking sector isn’t fixing it – it’s making it worse. 49% of people who see a broker still end up with their existing bank. Given that most people have accounts with one of the big four banks it’s very unlikely that they’re getting the best deal.

“In 58% of cases, mortgage brokers are recommending just one or two loans and are not giving people the information they need to understand whether these loans are good options.” 

Finding advice you can trust

Requiring brokers to act in the best interests of their customers will help drive predatory sales practices away from the sector.

“Mortgage broking can and must be better. Australians, particularly younger, less experienced and less wealthy borrowers, are relying on mortgage brokers to get them a fair deal. They should be able to get advice they can trust,” says Kirkland.

Until we have these much needed reforms, borrowers should be aware of what to look for when engaging the services of a broker. It’s also important that you understand the sales tactics you’re likely to encounter when dealing with a mortgage broker, something identified in multiple investigations we’ve undertaken.

The post Most people don’t get the best deal through a mortgage broker – report appeared first on ÌÇÐÄVlog.

On this page:

• How skilled are mortgage brokers?
• The focus on sales
• Learning how to handle customer objections
• What happens after you get your certificate
• Broking's battered reputation

Press play to hear Andy Kollmorgen talk about his mortgage broker investigation

The mortgage broking sector has been doing pretty well for itself in recent years.

A broker’s commission is based on the size of the home loan, which got bigger as the property market climbed skyward.

In 2015, brokers were being paid a cumulative $2.4 billion in commissions, up from $1.5 billion in 2012, which increased the cost of mortgages by 16 basis points.

And in the final three months of 2018, 56.8% of all residential home loans were settled by mortgage brokers – the sector’s biggest market share to date.

The leading bank-owned mortgage aggregators settled $48.77 billion of those loans.

Banks also incentivise brokers to steer business their way with “soft dollar benefits” such as free entry to conferences linked to the sale of home loans, and “broker clubs” that include various perks, travel and hospitality. Their budgets for these incentives and for commissions are substantial.

And mortgage broking is a profession open to just about anyone, as long as you’re over 18 and know how to use a computer.

How skilled are mortgage brokers?

Unlike financial advisers, for whom minimum knowledge, skills and educational standards became mandatory in January 2019, mortgage brokers only need to acquire a comparatively less onerous Certificate IV in Finance and Mortgage Broking before they can start broking.

To find out how hard this course really is, or isn’t, we paid $695 for on online version provided by the National Finance Institute (NFI), which is largely staffed by people with mortgage broking backgrounds.

The first unit lets you know this probably won’t be the toughest course you ever took, saying “as a minimum, they [brokers] should be familiar with sending emails”.

The multiple choice and simple true or false questions covered such subjects as what software you might use to produce a letter and whether or not a well-trained sales person would provide prompt, efficient service to their customers.

The course is presented in 12 units, each of which is followed by a series of online multiple choice questions. You receive your grades immediately after submission for this part of the course.

The questions range from really easy to pretty easy in this trainee’s estimation, mainly because the wrong answers are so obviously wrong in most cases.

Then there are four exercises and two assignments that you have to send in to the NFI for grading.

There’s a heavy focus here on marketing and salesmanship, on how to grow your business or help someone else grow theirs. You’ll need to submit a marketing plan and competitor analysis and demonstrate administrative skills.

The toughest bits are probably the actual loan application forms (from ANZ and Westpac) and related documents, where you’ll need to break out your calculator. But you can refer back to the course examples and take as long as you like to get it right – as long as you stay within the six-month deadline for completion.

If you suffer from exam phobia, rest easy – you can take the mortgage broking course online and have the textbook open when you do the quizzes, exercises and assignments.

Better yet, you get three tries to get it right on all parts of the course. 

The course has a number of quirks, such as recommending you use MySpace and Bebo for networking, two services that had long since fallen out of favour last time we checked.

And fact checkers might want to question the reference to Telstra as a “government agency”.

Aside from such curiosities, you will have to make your way through a lot of heavy reading, and the exercises – where you fill in actual mortgage applications and related client documents – do take a bit of practice. If numeracy is not your strong suit, you may have to check your maths a couple of times.

But once you get the hang of doing the calculations and filling in the forms, you’re well on your way to setting up shop as an independent operator, as most mortgage brokers are.

As the course material puts it, “it may take six months to acquire a reasonable and regular volume of loans but you will be rewarded with repeat business if you have the right attitude.”

It took this trainee about 10 working days to complete the course. I might have finished it faster were it not for various other demands of my full-time job.

The mortgage aggregator Mortgage Choice (partially owned by Commonwealth Bank) even says: “It is important to note that a lack of experience is not a deal breaker when it comes to becoming a mortgage broker. As long as you have a drive to succeed, love sales, and are a people person, you have everything you need to become a successful mortgage broker.”

The focus on sales

The course gives some questionable tips, like how to trick prospective clients into thinking you don’t actually work out of your bedroom lest they get the wrong idea. (Once you’ve earned their trust, you say you recently relocated to a home office.)

And there is this sort of guidance: “An interview for a mortgage broker is a sales situation. Cleanliness, neat hair, and good hygiene are extremely important to a mortgage broker’s success.”

And this: “Selling product to a client is not always easy because of the client’s own preferences and risk tolerance. They will provide many objections and the mortgage broker must overcome these.”

The course is clear on one controversial point: the size of the commission on offer from different lenders can influence the broker’s recommendation.

Many in the mortgage broker industry have claimed that brokers earn their ongoing commissions by doing follow-up work for the client.

The Certificate IV in Finance and Mortgage Broking course doesn’t say anything about this, but it does say “if a lender doesn’t pay commissions, the broker might not include their loans on the list of products they recommend”.

And it describes trail commissions as “a customer service cost by the lending institutions for retaining the client” not an ongoing fee for continuing services to the client.

Learning how to handle customer objections

A long section entitled “overcoming objections” goes into more detail on how mortgage brokers earn their commissions.

“Without objections, mortgage brokers would simply be commission-based salespeople, taking enquiries and processing loan applications. To develop into a successful mortgage broker you will need to become skilled at overcoming objections that prospects raise during the enquiry and pre-application stages. An objection is anything that the prospect says or does that interrupts or blocks the progress of the mortgage transaction.”

Meanwhile, the industry itself recognises that commissions can influence what brokers recommend. The Mortgage Finance Association of Australia’s Advertising Guidelines of February 2007, for instance, says “if a broker receives commissions or other benefits from a lender there is potential for the broker to be influenced by factors other than the consumer’s best interest”.

What happens after you get your certificate

Once you get your mortgage broking certification, you’ll have to do business under the mentorship of a more seasoned broker for the first two years if you don’t have previous experience in the finance sector.

But the mentoring can be remote, and you don’t actually have to work for your mentor.

You can more or less strike out on your own, though you’ll need to make arrangements with a mortgage aggregator.

The aggregators already have deals in place with a range of lenders – deals you wouldn’t be able to set up on your own. They’ll take a cut of your commission.

Being a representative of one of these financial services licence holders means you won’t have to go through the vetting process they have to undertake, including police checks, credit checks and having professional indemnity insurance. You can stay an unlicensed representative for as long as you want.

Your main job is to find the client for the lender. 

To the course’s credit, it bends over backwards to remind trainees of responsible lending legislation, chiefly the National Consumer Credit Code (NCCP), which stipulates that brokers should only recommend loans that are “not unsuitable” for the client.

Aside from regular mentions of consumer protections and the need to honour them, being a good salesperson and closing the deal is the overriding theme of the Certificate IV in Finance and Mortgage Broking course.

Broking’s battered reputation

Though the housing boom has been profitable, it’s been a rough past few years for the mortgage broker industry reputation-wise.

In early 2017, ASIC released a report that said going through a mortgage broker has a number of downsides for an aspiring homeowner, mainly due to the conflict of interest created by commissions.

The ASIC investigation – which focused on four years’ worth of mortgage broker data gleaned from a range of industry stakeholders – found that brokers were recommending riskier lending strategies than banks and were sending most clients back to just four lenders.

It also found that the loans mortgage brokers line up for clients aren’t any better – and are often costlier – than what the clients could have gotten by going directly to the lender.

And the research showed that brokers often push clients into inappropriately bigger loans because they’ll get a bigger commission.

The result of all the upselling? Borrowers who go through a broker were found to be up to 25% more likely to default on a home loan.

According to both the recent banking royal commission report and the UBS research, the mortgage broking industry as a whole is significantly overpaid. 

ASIC recommended that the industry part ways with its current approach to a commission-based remuneration model.

It’s a position that ÌÇÐÄVlog has long agreed with, and was also a recommendation made by the banking royal commission earlier this year.

The mortgage broker industry is less keen on the idea, claiming that ending commissions would leave borrowers at the mercy of the banks.

And apparently the industry has some lobbying muscle: the idea of ending commission-based remuneration in mortgage broking was quickly quashed by the federal government.

What industry groups say about mortgage broker qualifications

We asked both the Mortgage and Finance Association of Australia and the Finance Brokers Association of Australia (FBAA) – the two peak industry bodies for mortgage brokers – to comment on the quality of the Certificate IV in Finance and Mortgage qualification, saying we didn’t think it was a very high standard.

Both groups declined to comment. The Financial Planning Association also took a pass.

Following the election of the Morrison government in May, however, FBAA managing director Peter White issued a triumphant statement.

“The royal commission findings and the political fallout saw many brokers retreat into a holding pattern, driven by fear about their very financial survival and what that would mean for borrowers. Now that the election is over, I want to urge all brokers to commit to doing everything we can to grow our businesses now that banks know we are a force to be reckoned with.”

The post What we learned at mortgage broking school appeared first on ÌÇÐÄVlog.

Choosing a mortgage will probably be the biggest financial decision you’ll make in your life – and one of the trickiest to navigate. There’s a vast array of mortgage loans available, each with different loan conditions. 

A good mortgage broker can help you navigate this complexity to find the loan that best suits your needs. 

But the broking industry is controversial. A number of inquiries have found problems within the industry, such as brokers pushing borrowers into loans that are bigger, riskier and take longer to pay off, and brokers not finding loans any cheaper than what you’d get going straight to the lender.

If you do want to use a mortgage broker to get a home loan, follow our tips on how to find a good one.

1. Do your homework

Be prepared before you start looking for a broker. Look for potential loans online and get a clear idea of the type of loan you want. That way you’ll be in a strong position to assess the recommendations of the broker. 

Then phone several brokers to compare what each can offer. Use our list of questions to ask a mortgage broker to help you assess their offering and service.

Remember that a broker isn’t obliged to provide you with the ‘best’ or even a ‘high-quality’ loan. They’re only legally required to provide a ‘not unsuitable’ loan. Be prepared to scrutinise their recommendations. 

It’s also important to remember that brokers don’t necessarily find borrowers lower interest rates or cheaper priced loans. If you get a better quote from a bank than your mortgage broker, consider dealing directly with the bank. 

2. Know how they get paid

Rather than charging you for their services, most brokers get paid commissions directly from the banks for arranging their loans. This has the potential to affect the quality of advice a broker might provide. 

There are two types of commission the broker gets: 

1. An upfront commission is a percentage of the total value of the loan, so the larger the loan, the greater the pay-off for the broker. So be wary of a broker recommending a larger loan than you’ve budgeted for. 
2. A trail commission is a percentage of the mortgage that brokers continue to receive over the life of the loan. The issue with trail commissions is that brokers have no obligation to provide any service to you during the life of the loan, and the less ongoing work brokers do, the better it is for them – they’re getting paid for doing nothing. 

3. Check educational qualifications and experience

As a starting point, make sure the broker is licensed to provide you with a loan. They should have their own Australian Credit Licence or be qualified to act as an authorised credit representative. 

Ask your mortgage broker what qualifications and experience they have. While financial advisers have to achieve minimum education standards which now includes a university degree for new advisers, mortgage brokers only need to have a Certificate IV in Finance and Mortgage Broking and they can start working. 

Look for brokers that go above this standard. Most members of the Mortgage & Finance Association of Australia (MFAA, a professional association for brokers) will have a diploma, and some brokers have other qualifications such as degrees in finance, economics or accounting.

A ÌÇÐÄVlog investigative journalist took an online Certificate IV course and became a certified mortgage broker. He found that “being a good salesperson and closing the deal” was the overriding theme of the short course. 

4. Ask about their lender panel

Brokers are restricted by the list of banks they can access – this list is known as the “lender panel”. Where many brokers only offer loans from their panel, a good broker will have a wide range of lenders on their panel and will regularly draw on the full range, depending on the borrower’s circumstances. 

We’ve found that some brokers only have nine banks on their panel, while some have more than 50. If a broker has a limited number it can be a red flag that suggests they’re focusing on a small variety of lenders and could be limiting your options. 

But it’s not just about the number of lenders on a broker’s panel, it’s also about the broker using the wide range. Despite claims of scanning the market, many brokers funnel mortgages to a small group of banks. On average, brokers send 80% of their loans to only four banks.

So ask your broker for the top 10 banks they send loans to and what percentage of loans they send their way. This should tell you if they actually are scanning market. 

It may look like a broker sends loans to different banks and is scanning the market, but in reality they may be sending 50% to CBA, 40% to Westpac, and then 1% to each other lender. 

A good broker should easily provide you with this info. 

5. Check their ownership structure

Ask your broker who owns them. In many cases, they’re owned or part-owned by big banks. In fact, seven out of every ten loans arranged by brokers come from bank-owned aggregators (this is a business that acts between the banks and the brokers, such as Aussie Home Loans).

These commercial ties can distort the quality of advice and incentivise brokers to sell you loans that flow straight back to the bank that owns the brokerage. 

Take Aussie Home Loans for example. They’re owned by the Commonwealth Bank (CBA), and they funnel two in every five loans back to CBA. They often do this under the guise of ‘white-label loans’. White label loans are branded with a different name, obscuring the fact that they’re actually from a big bank. 

Be wary if a broker claims to provide ‘special access’ to the banks that own them. This may simply be a tactic to sell you into a loan from that bank. A good broker won’t be influenced by their ownership structure and will recommend a wide range of loans from across the market. 

6. See if your broker explains your options clearly

There are many types of loans on the market. A good broker should present you with a number of options and clearly explain their reasons for recommending specific loans. 

Be especially wary of brokers selling you risky interest-only loans. These loans have a cheaper repayment for the first few years, but that’s because you’re only paying interest and nothing off the principal (the loan itself). When the interest-only period ends, typically after five years, you’re going to be up for much higher repayments. These loans may suit your financial needs at the time, but be extra careful as they can leave you in financial hardship. 

Also, a good broker won’t pressure you into purchasing a loan. Stay away from any broker who’s putting the hard word on you to sign anything before you’ve received full and adequate information about your options. 

In 2015, ÌÇÐÄVlog undertook a shadow shop of mortgage brokers. Our borrowers encountered “pressure sales tactics, inappropriate advice, lack of commission disclosure and upselling with little consideration of risk”. In one example, a person was looking to buy a $600,000 investment property, and the broker recommended taking two loans with a combined value of over $1 million. 

7. Get it in writing

Credit assessment

A broker is legally obliged to follow responsible lending laws and shouldn’t sell you into an inappropriate or risky loan. Brokers must assess your income and expenses along with your financial objectives and expectations. This is all contained in a document called a credit assessment. Make sure to request a copy – brokers only have to provide it if you ask them. 

It pays to double check this document to see that what you told your broker matches up with the written assessment. The banking royal commission caught out many brokers lying on these documents to sell people into loans they couldn’t afford. 

Credit guide

A broker is legally required to provide you with a document called a credit guide – so make sure they do. It provides the broker’s contact details and a record of the commission the broker will get if you go ahead with the loan. The credit guide also lets you know who to contact if you have a problem or complaint with the broker. 

It’s important to hang on to these documents and read them carefully to make sure the broker has accurately captured your financial position and your financial objectives. 

8. Shop around for a cheaper loan

A mortgage should never be ‘set and forget’. Regularly shopping around for the best available loan can have real financial pay-offs. The ACCC has found that simply renegotiating with your lender to pay the same interest rate as a new borrower can save you up to $850 a year for an average-sized loan, and even more for some borrowers. Switching banks can save you tens of thousands of dollars over the life of the loan.

What to do if you’re not satisfied

If you think you’ve been sold a loan that’s inappropriate for your needs, follow our guide to lodging a dispute with your broker.

Questions to ask your mortgage broker

• How will you be paid? Do you earn more if I borrow more or choose a particular lender? Most brokers receive a percentage-based commission for their work. They’re paid by the bank, not you. This introduces two risks – that you’ll be encouraged to borrow more, and that you’ll be encouraged to go with a particular lender. Some brokers have a self-imposed rule to receive the same commission for every loan, which reduces these risks to you – but doesn’t remove them.
• Is your business owned by or associated with a lender, like a big bank? Research shows that broker companies owned by big banks send more loans back to their parent company. Steer clear of these broking companies unless you want a loan with the big four.
• What’s your experience with the lending market and what training have you done to understand home lending? Look for brokers who’ve been members of the MFAA for more than one year – members need to meet a high education standard to belong, and will have a bit of experience after 12 months.
• How many lenders are on your panel? This will let you know how many loans a broker can look at for you – some have lots of options but others offer a surprisingly limited selection.
• How many lenders did you send loans to in the last year? What are the top 10 banks you send loans to? What percentage of the loans you secure do you send to each of these? Some brokers send most loans to just four lenders. Look for a broker who has used a lot of different lenders. These brokers will be more likely to genuinely scan the market and find a loan that fits your circumstances.
• Are you a member of any broker clubs or tiered service arrangements? Broking clubs have a controversial history – they were previously used to reward the best salespeople with high-end perks like cruises to the Caribbean. Industry has promised they’ve stopped this practice, but it’s worth asking what benefits your broker may receive from a club.

The post How to find a good mortgage broker appeared first on ÌÇÐÄVlog.

Unfortunately, whenever such a strong cultural and emotional influence pervades a market, it is ripe for exploitation.

Central to the debate on home ownership is the growing role that mortgage broking plays in our housing market. With the broking sector arranging half of all home loans, problems in this sector have the potential to shape or shake Australia’s economy.  

People go to mortgage brokers for trusted, professional advice but the broking industry is failing to live up to this expectation.

When we seek help from a trained professional we rightly expect that they will consider our circumstances and advise us of our best course of action. When you go to the doctor, you expect a thorough examination, a diagnosis and a treatment plan that’s right for you. While buying a home isn’t a matter of life and death, it is one of the riskiest financial decisions we will make. 

That is why it may come as a surprise to learn that mortgage brokers are not required to help you to decide what’s best for you. They legally are allowed to recommend a loan that isn’t your best option, one that may earn them a higher commission or line the pockets of one of the big banks that own major mortgage broking businesses. It’s the equivalent of a doctor recommending an unnecessary and risky surgery because the local hospital pays them a kickback. We would rightly be outraged if that was the case, so why is it allowed when we seek advice on a home loan?

It remains the industry’s worst kept secret that the mortgage broking industry has been captured by the big banks. The competitive forces that the broking industry first brought to the home lending market years ago have almost entirely dried up. 

Take Aussie Home Loans. It burst onto the scene in the early 1990s, revolutionising the lending market and offering real price competition for hopeful homeowners. But since then, it has been acquired by the Commonwealth Bank, dulling any competitive power. Now Aussie Home Loans directs two in five loans straight back to the Commonwealth Bank. 

Treasurer Josh Frydenberg has an opportunity this year to fix this broken system by legislating a duty for brokers to act in their customers’ best interests. Borrowers already expect that brokers are acting in their best interests. Brokers advertise they will find customers a “good” or the “best” loan. But the law requires ´Ç²Ô±ô²âÌýthat brokers offer a loan that is “not unsuitable” – a feeble test at best.

Requiring brokers to work in our best interests was a prominent recommendation of the banking royal commission. Commissioner Kenneth Hayne said this ²õ¾±³¾±è±ô²âÌýwould reflect what borrowers already expected.

But since the release of the royal commission report, the broking lobby has been pushing back ±è³Ü²ú±ô¾±³¦±ô²âÌýon this reform, calling for exceptions and clarifications that will distort the duty into a simple box-ticking exercise. 

In an attempt to deflect government oversight, the industry has proposed a “customer first duty” but this would fail to address the core issue: the quality of loans brokers recommend. There would still be no obligation to find the “best” or even a “good” loan as many brokers promise.

With the economy in a precarious state and the government seeking to stimulate the housing market, the last thing we need is people borrowing more than they can afford at uncompetitive interest rates. The best way to protect against this is by acting fast on the royal commission’s recommendation, to ensure that brokers genuinely represent the interests of their customers, not the banks.

Similar reforms to financial advice rewarded good financial advisors and drove the worst out of the industry. For good mortgage brokers, this will mean they have a level playing field – they’ll compete based on the quality of their service and Australians will secure better deals. We’ll see fewer instances of irresponsible lending and fewer households stretched beyond their means.

Brokers who seek to do the best by customers have nothing to fear from this reform. The only people who have anything to lose are the banks that profit from loans organised by the broking businesses that they pay or own.

Disclaimer: This article originally appeared in The Australian

The post How to make home loans safe for Australian consumers appeared first on ÌÇÐÄVlog.

On this page:

• We Buy Houses bites the dust
• What is vendor finance?
• Why do people turn to rent-to-buy schemes?
• How do vendor finance and rent-to-buy schemes work?
• We Buy Houses: A cautionary tale
• Who's still in the vendor finance game?

We Buy Houses bites the dust

Property investment spruiker Rick Otton and his “We Buy Houses” operation had a pretty good run until the Federal Court shut it down in August last year.

Between 2011 and 2014, We Buy Houses generated about $20 million in revenue from its “boot camps” and mentoring sessions as well as from books and videos. The business had been running since 2000 and Otton was its only director.

What were the boot campers learning? The secrets of Otton’s so-called “wealth creation” strategies, which had names like “sandwich lease option”, “handyman special”, “deposit builder”, “sweat equity” and “some now, some later” – all variations of vendor finance schemes including what is arguably the least advisable variety, rent-to-buy.  

Otton’s pitch would have sounded like pie in the sky to many, but for people priced out of the property market it offered a sliver of hope delivered with slick salesmanship and complicated techniques – not unlike vendor finance in general.

What is vendor finance?

Vendor finance (the vendor being a home owner instead of a bank) is a form of property finance that has early 20th century roots in Australia and made a comeback in the early 2000s.

Then as now, its practitioners often target people in tight financial circumstances who wouldn’t otherwise be able to own a home, especially through the rent-to-buy approach.

Are the schemes dodgy? They come in many flavours and may work out for some if the participants act in good faith, but for many others they push the dream of home ownership even further away.

It doesn’t help that the legality of the schemes is often unclear and falls under a mishmash of legislation that varies from state to state.

One law firm specialising in vendor finance puts a positive spin on the concept, saying “vendor financiers provide a service which matches and betters what the banking system provides because the seller works with the buyer to tailor a vendor finance solution for the sale to meet the circumstances of both the seller and the buyer”.

The firm also says vendor financiers “willingly step in where bankers fear to tread by accepting buyers who are self-employed, or with low deposits, or with black marks on their credit file”.

Bankers fear to tread for good reason. There is no shortage of vendor finance horror stories out there, with buyers often the victims.

Why do people turn to rent-to-buy schemes?

It’s no secret that it’s tough out there for aspiring home owners. Home prices have doubled nationwide over the past 20 years and jumped 70% in Sydney and 50% in Melbourne since 2012.

At the moment, median housing prices in Australia are about seven times the median annual income, and the ratios are worse in the capital cities.

For renters, the lure of turning a weekly rental payment into what appears to be a mortgage downpayment may seem too good to be true – and it usually is.

Otton maintained you could build a property portfolio without taking out a loan, investing any of your own money, or having any previous real estate experience.

But the zinger was the promise that you could buy a house with a dollar.

At the seminars, students who had supposedly been successful in implementing Otton’s techniques were known as the “big Kahunas” and wore loud Hawaiian shirts.

A red flag? Apparently not for the 2000 or so boot-campers who paid about $3000 per ticket, or to the approximately 700 people who took part in special “mentoring” programs with Otton that cost up to $26,000 a pop.

In reality the seminar attendees were learning how to theoretically take advantage of already hard-pressed people while being swindled themselves, since the techniques Otton promoted rarely if ever worked.

How do vendor finance and rent-to-buy schemes work?

There are many variations, but to pull off the rent-to-buy technique you generally have to have three things in place.

1. A home owner (or “vendor”) who’s desperate to sell.
2. A buyer who’s desperate to own a home but can’t qualify for a mortgage.
3. Property in an area where values are on the downturn, or new housing where buyers can qualify for the First Home Owner Grant.  

The rent-to-buy broker, a middleman or “transaction engineer”, sets up the deal between the strapped home owner and the would-be buyer and takes a cut of the profits (or a home owner familiar with the technique might set the scheme up themselves).

To come up with the deposit, hopeful buyers often turn to a First Home Owner Grant, and vendor finance contracts generally run from two to five years.

The idea is that some of the money the would-be buyer is paying in inflated rent and option payments, along with initial down payment, will go toward building equity in the home so that eventually they’ll be able to qualify for a loan to buy it.

But that rarely works out. In many cases the renter/buyer can’t afford the payments and bails out on the deal or still doesn’t have enough equity in the home or other assets to qualify for a mortgage at the end of a contract.

Meanwhile, the successful rent-to-buy practitioners are lining their pockets by:  

1. Collecting more in rent and option payments than the monthly mortgage payments on the property – a passive income stream split between the broker and the home owner.
2. Keeping the property in the owner’s possession when the option to buy period comes and goes, pocketing the option payments, and lining up the next rent-to-buy customer.

Here’s a breakdown of one deal gone wrong:

• aspiring home owner finds a rent-to-buy broker online
• enters a three-year rent-to-buy agreement at a purchase price of $429,000 (significantly more than the house is worth) without consulting a lawyer
• pays an $8000 deposit plus $20,000 from a First Home Owner Grant
• agrees to pay $670 a week for three years, totalling $104,520 – well above market rent but part of the rent-to-buy deal
• after three years, the buyer would need to get a $401,000 home loan to make the purchase
• would end up paying $533,520 to the vendor (through the broker) and then payments plus interest on the $401,000 bank loan
• deal goes bad – aspiring home owner can’t qualify for the $401,000 loan after three years and in any case the property value is far less than the $429,000 agreed to
• aspiring home owner is back at the start, deeper in debt, and may not be able to get back the amount paid above market rent (about double what it would have been outside the rent-to-buy deal), his deposit or the First Home Owner grant.

We Buy Houses: A cautionary tale

The vendor finance sector already had a credibility problem; the We Buy Houses case made it worse.

The Justice called Otton “a very unreliable witness who was prepared to maintain or defend statements that were obviously untrue or misleading and who is habitually careless with the truth in making statements and claims designed to promote his business interests”.

It didn’t go over well with the court that Otton had never actually used the wealth-generation techniques himself, though he claimed on one of his websites – howtobuyahouseforadollar.com – that he had become “a real estate millionaire without money, finance or even a mobile phone to start with” and had purchased more than 300 properties in Australia and the US “using little or none of my own money”.

Nine former students of Otton’s took part in the ACCC’s case, none of whom had successfully utilised We Buy Houses techniques, though three had tried.

The big Kahunas, it turned out, couldn’t provide any evidence of success either. That was just a sham.

Extreme end of the spectrum?

Otton may have made money from real estate in the distant past, but it wasn’t through the schemes he spruiked at the seminars. No evidence was provided in the court case that he had bought a house since 2006.

It turned out his $20m in We Buy Houses revenue came from boot camp and mentoring fees along with sales of his books and other materials, which is often the case with property investment seminars.

We Buy Houses may have been at the extreme end of the vendor finance spectrum, but the Otton case serves as a cautionary tale about property investment spruikers regardless of the methodology.

One distraught consumer who recently got in touch with ÌÇÐÄVlog told us how he had been led astray by a Melbourne-based property investment advice business and ended up in disastrous real estate deals involving vendor finance.

Despite his $4855 “gold” membership in the operation, he went from being a home owner with a fully paid-off mortgage to a renter deeply in debt after a number of losing transactions.

“A comparison of our position in 2010 [when he and his brother got involved with the property investment scheme] and our current financial situation is almost unbearable to contemplate,” the man told us. (He is pursuing the matter with the Credit and Investments Ombudsman and a solicitor.)

Fringe or mainstream?

The vendor finance and rent-to-buy industry hovers on the margins of the property investment world and certainly has a dark side, but it’s not as obscure as it may seem.

In 2014 the Finance Brokers Association of Australia (FBAA) set up a New Vendor Finance Committee to “bring vendor finance into the mainstream”.  

The FBAA argued at the time that vendor financing can be a viable option if a qualified vendor finance broker is involved and responsible lending rules set out in the National Credit Code are followed.

But the FBAA is less sanguine about the rent-to-buy form of vendor financing, saying in 2016 that only in “well less than 50%” of cases does the buyer end up owning the home at the end of the deal.

Asked about the FBAA’s current stance on vendor finance, executive director Peter J. White told us “we are no longer in this space”.

Who’s still in the vendor finance game?

ÌÇÐÄVlog reviewed the website information of a number of vendor finance firms, some of which made reference to the National Credit Code. Others conspicuously lacked such references.

Signs of shadiness are not hard to come by. The Vendor Finance Institute, a representative body of sorts, lists a vendor finance accountant whose bare bones website promotes a book called “Money Secrets of the Rich”.

We contacted the Vendor Finance Institute to ask whether consumers should have concerns about vendor finance in general and rent-to-buy schemes in particular but didn’t get a response.

ÌÇÐÄVlog weighs in

In our submission to the Senate Inquiry into banking finance last year, we called for property investment advice to be brought in line with overall financial investment advice, and to be regulated by the Corporations Act under the watchful eye of ASIC.

We also want property investment advisers to qualify for a financial services license before they start spruiking their deals.

The post Vendor finance and rent-to-buy schemes appeared first on ÌÇÐÄVlog.

On this page:

• Hidden contract costs
• One residents experience: Trapped in the contract
• How it works: Funding the property developers
• Government regulations
• How the village operators see it
• The legal view
• Your retirement village contract checklist

The lease agreements ÌÇÐÄVlog reviewed from major village developers such as Australian Unity and Lend Lease were long, complicated, and confusing, and appeared to contain terms that weighed heavily in favour of the village operators.

It doesn’t help that every state has different retirement village regulations, with different rules about disclosing the true costs of living in, or trying to leave, the village.

And it’s not just retirees who stand to lose out. Depending on how long you stay, the ongoing management fees and exit costs allowed by the contracts can do as much damage to your children’s (or other beneficiaries’) financial future as your own – especially if you move out within the first five years. A big chunk of whatever inheritance might have come their way could end up in the village operator’s pocket.

It’s complicated…

Why can’t you know the full costs beforehand? Well, in Victoria especially, that’s the whole issue. The Victorian Retirement Villages 1986 has allowed village contracts to have complicated and confusing fee rates and payment schedules, making cost comparisons between villages all but impossible.

Despite a number of inquiries and strident criticism from consumer advocates over the years, these types of contracts are allowed by retirement village regulations nationwide, affecting about 80% of Australia’s nearly 200,000 village residents.

The model stands in stark contrast to retirement village arrangements in markets like Europe and the US, where simple, pay-as-you-go lease contracts are the norm and price comparisons between village units are consequently much easier.

Hidden contract costs

The upshot is that it’s very hard to know how bad the deal is until you decide to leave the village, whether because the operator exaggerated its charms or because you just need to move out.

At that point you might find out the undisclosed and unexpected exit costs have made your village unit a very poor investment indeed. And to rub salt in the wound, the village operators often don’t have to pay you back what’s left of your loan until months after you’ve left, and sometimes even longer.

Even worse, village residents (or their children) generally have to keep paying for the units after they’re vacated, until the operator finds a new tenant. And in Victoria some residents have to pay extra every time an agent shows the unit, even if the prospective tenants don’t move in.

One residents experience: Trapped in the contract

Colin (not his real name) is a longtime ÌÇÐÄVlog member and an advocate for reform in the retirement village industry. As he tells it, many retirees find they can’t afford to leave in the early years of the contract. After the high early management fees and other exit costs and commissions are deducted, retirees may not have enough money left to pay for other comparable living arrangements.

“Once you’re in the contract, there’s nothing you can do. I know of quite a number of cases where people trying to leave have been very disappointed,” Colin told us. “And I’ve heard children of residents say, ‘Why did you sign this contract? It’s a rip-off’.”

Colin and his wife moved to a retirement village in the suburbs of Melbourne 15 years ago. “The service fees in the village we ended up choosing were towards the high end, but the village suited our needs and the locality suited.”

Unexpected developments

“However, the village was only half finished, and it was clear that if we did not find it suitable down the road, the scheduling of the management fees – 8% the first year and 3% per year for the next eight years – was a rip-off that would make it prohibitively expensive if we wanted to terminate.” 

In a move that’s not uncommon in the industry, the village operator ended up raising the management fees significantly to balance the operating budget “with the implied threat that if we did not agree services would be cut”, Colin said.

He’s convinced that moving into the village was a “bad financial decision” due to the nature of the contract and because it would have been much cheaper to rent a non-retirement village residence. But Colin acknowledges that the place is “satisfactory physically and socially”.

New safeguards have come into play in some states (including WA and SA) in recent years that mandate better cost disclosure for retirement village contracts, but there’s still plenty of opportunity to be caught unawares.

How it works: Funding the property developers

Retirement village residents pay what’s euphemistically called an ‘ingoing contribution’ or ‘ingoing loan’ (also known as a ‘loan lease’) – anywhere from $300,000 to $900,000 or more depending on the village location – in order to be able to sign a contract and move into a village.

In effect, it’s an interest-free loan that reimburses the property developer’s capital costs. While parts of retirement village vary from state to state, the handing over of retirees’ nest eggs in a lump sum, and the surrendering of the money’s earning power, is the norm throughout Australia.

The village operator can do whatever they want with your ingoing contribution, which usually comes from selling the family home. You lose the earning power of that money, and whatever you end up getting back will be devalued by inflation (though with many contracts a portion of the capital gains is returned to the resident).

The bill for checking out

If you decide to move on, the operator puts your life savings through a complicated series of fee calculations that you’re unlikely to anticipate or understand – especially the hefty ‘deferred management fee’ – and hands you back what’s left over. (The deferred management fee is based on the per-year value of your unit. If it’s calculated at 3% a year, you’ll give up 15% of the sale price if you move out after five years.)

What you end up with can be a lot less than you bargained on, not least because the ongoing management fees are generally highest during the early years of your tenancy.

Government regulations

In May 2015 Consumer Affairs Victoria () launched a campaign “to help Victorians make informed decisions about retirement villages”. In 2013–14, CAV was contacted roughly 690 times for advice on retirement villages and received 71 complaints.

The campaign includes video testimony from two retirees, Helen Vallack and Daisy Ellery, who say they suffered both financial and emotional hardship as a result of signing retirement village contracts they didn’t understand. According to CAV, Vallack lost more than $30,000 of her life savings.

Then Victorian Minister for Consumer Affairs Jane Garrett said in a statement accompanying the campaign launch that Victorians “can avoid unnecessary financial and emotional hardship by doing some research, and seeking independent financial and legal advice before buying into a retirement village”; she urged consumers to “clarify specific terms and conditions” in contracts.

Is the law protecting consumers?

ÌÇÐÄVlog asked Ms Garrett’s office at the time if an overhaul of the Retirement Village Act was in order – such as moving to a simple pay-as-you-go system in line with the US and European models.

A CAV spokesperson told us the Retirement Villages Act 1986 “recognises that the ingoing contribution and deferred management fee contract model is the most popular retirement village business model in Victoria and Australia. In recognition that this model contains some problematic features, the Act sets out a range of protections for residents living in such villages.”

The spokesperson also pointed out that the Act “does not prevent the pay-as-you-go retirement village payment model” and that some villages in Victoria are regulated under the Residential Tenancies Act 1997.

(About 20% of Australia’s approximately 2300 retirement villages are standard residential tenancies according to the Retirement Living Council, an industry body that represents the interests of property developers and is part of the Property Council of Australia.)

CAV says there are two main ways the Victorian Retirement Villages Act protects consumers:

• By mandating that retirement village operators provide prospective residents with a standardised fact sheet that enables them to see what sort of ingoing contribution and deferred management fees will be required for the various types of units.
• By requiring that operators provide a disclosure statement prior to residents signing a contract that sets out the exact costs of entering, living in and leaving the village, including an estimate of their refunds after one, two, five and 10 years of residence.

Not enough protection

But consumer advocates like Colin and Melbourne’s Consumer Action Law Centre () say such measures don’t do much to prevent financial damage to village residents who want to move on.

CALC has called for such estimates to be provided as per-month figures so residents can get a clearer picture and make cost comparisons with other villages.

“The current system used by retirement village operators to collect fees (comprising ingoing, ongoing and exit fees) conceals the true cost of moving into a retirement village. For many, deferred management fees (or exit fees), shares of capital gains and renovation costs are particularly unclear,” CALC said in a submission to CAV.

CALC has also argued that the deferred management fee structure is an unfair contract term and has pushed that point with the Victorian Civil and Administrative Tribunal on behalf of residents of a Willow Lodge – part of a chain of Victorian villages.

How the village operators see it

Former Retirement Living Council (RLC) executive director Mary Wood told us in 2015 that the ingoing contribution model was originally set up in the interest of retirees by public-minded people: “One reason it exists is so people without a lot of money can live in a higher quality, age-adaptive environment with amenities that wouldn’t be affordable to them otherwise. Most people who live in retirement villages are pensioners on low incomes.”

Without access to the funds upfront, most retirement villages would not be built, Wood argued. It’s a view that’s shared by others in the industry, who say retirement villages are generally not attractive investment prospects. “The exit fees represent the profit margins for developers,” Wood said.

Around the time Wood made such statements, major retirement village developer Stockland announced the purchase of eight villages in South Australia, comprising 980 units, in what analysts saw as a further move toward the corporatisation of the industry. And some investors do see a profitable future in retirement villages.

Some contracts are better than others…

Wood acknowledged that signing on to a retirement village can be confusing. “There are a lot of misconceptions, and I can see why they arise. Like any property purchase, you need to read the contract and get independent legal advice. Some contracts are certainly better than others, and good operators have nothing to hide. Exit fees, for instance, are tremendously variable, but people who live in villages for more than a few years tend to get good value for money.”

Wood said the RLC was developing a model contract “with some standardisation and simplification of terms” that it would hold up as a best-practice example for village operators, though operators won’t be obligated to use it. And Wood admits qualified legal advice can be hard to come by.

The legal view

In 2015 ÌÇÐÄVlog contacted the law firm y, an RLC partner, to get a lawyer’s view on retirement village contracts.

“I agree that historically there has been limited pre-contract disclosure required by retirement village operators,” Rosemary Southgate, who heads up the firm’s property and development team, told us. “Although many operators provide useful plain-English summaries of their village documents, this was not a legal requirement.”

But Southgate said things are improving, especially in eastern states. “The operator must now complete a disclosure form which clearly sets out the financial obligations of the resident, the services they will receive, the type of accommodation they will occupy and the procedure for vacating the village when they wish to move.”

Two-way street

And Southgate made the point that retirement village living entails an ongoing financial relationship with the operator. “Where the financial structure provides for the resident and the operator to receive a share in the capital gain – and for the operator this may form part of the exit fee – this ensures that the resident and the operator are equally invested in the upkeep of the village assets.” She also recommended getting independent legal advice before signing a contract, and says most operators do as well.

But Southgate declined to address our question about the availability of qualified legal help. Colin, who’s been researching and documenting the issue for years, says most lawyers “just don’t understand all of the implications”.

Your retirement village contract checklist

If you or someone you know is considering moving into a retirement village, due diligence is critical. 

• Have a lawyer who understands retirement village issues review the contract and make sure you understand all fees and how they’ll be applied. In particular, ask about the deferred management fee schedule and how it will affect you if you choose to leave the village earlier than planned.
• Instead of an upfront lump sum, is there an option to pay by the week or month?
• If you pay a lump sum, how much will you get back when you leave and how is this calculated? Ask what the total cost would be if the village didn’t meet your expectations and you left after eight months or two years, for instance.
• What ongoing fees will you have to pay and what exactly do these fees cover?
• Can fees increase during the term of the contract? If so, can you dispute them?The alternative to fee increases may be to cut services.
• What are all exit fees – including a deferred management fee – and how are they calculated? This will likely require a spreadsheet and some careful calculations, since exit fees decrease the longer you’re in the contract.
• Who’s responsible for selling your unit if you leave, and who receives any capital gain on the sale price? Will the village operator receive a commission if it sells the unit, and if so what is the rate? 
• How are refurbishment or infrastructure updating costs established? 
• Are you still liable for weekly fees after you move out – especially if the unit takes a while to sell? If so, how long will you be liable for these fees? 
• Do you have to pay recurring fees if you leave the village for extended periods due to travel or hospitalisation?
• Does the company that owns the village operate the village? If not, who’s the operator? What is the operator’s legal name in case it’s needed for a tribunal or court proceeding? 
• Always get two or three quotes for units in different villages in the same area.

The post The hidden costs of retirement village contracts appeared first on ÌÇÐÄVlog.