FAQ

A finance broker is an agent who negotiates with lenders to arrange loans on the behalf of their clients. A finance broker will be accredited to provide loans from a variety of lenders and this means they can usually provide more options than a traditional bank. Their role is to help you choose a loan product and manage the application process through to settlement.

Fundamentally a mortgage broker is a broker who deals primarily in home loans. Finance brokers have a broader scope dealing with other forms of lending including business lending and vehicle lending as well as home loans. Finance brokers usually require a more diverse range of knowledge.

There are three major milestones in a standard loan application. These are:

1. Submission- This occurs when your application has been completed by yourself or by your broker and submitted to the bank for assessment.
2. Approval- If your application is successful you will be issued with a formal approval by the lender. In some cases before formal approval you will be given a conditional approval. This means that your loan is approved as long as you can meet all of the noted conditions.
3. Settlement- Once your loan has been formally approved and you have signed your loan contracts your loan will settle and the loan funds will be dispersed or made available.

LVR is an initialism meaning “Loan to Valuation Ratio”. Your LVR is a figure that represents the percentage of your property’s value that you are borrowing. Lenders look at the LVR as an indication of how much risk is involved in giving you a loan.

Security or collateral refers to the asset that the lender will take a charge over to reduce their risk in giving you a loan. When your loan is secured by an asset the lender will be able to repossess and sell that asset if you default on your loan.

The term “P&I” stands for “principal and interest”. Principal & interest repayments are repayments that make a reduction to your loan amount as well as paying the accrued interest that is due.

Interest only repayments are payments that cover the accrued interest on your loan however don’t make any reduction to the actual loan amount. Interest only repayments are commonly used for investment loans.

An offset account is a transactional account that is attached to a loan. When the lender calculates the interest on your loan they first subtract the balance of your offset account, meaning you pay less interest without actually putting your money into the loan. The benefit of placing your money in the offset account rather than paying it directly into your loan is that you still have complete access to it and can withdraw it anytime.

Some of the most common lending facilities taken out by businesses in order to operate and expand are:

• Business Overdraft Accounts
• Business Term Loans
• Commercial Property Loans
• SMSF Loans
• Inventory Finance
• Debtor Finance
• Equipment Finance

You won’t always be required to have a business plan to get business finance. It will depend on the type of loan you are looking for and the lender that you approach. This being said, a strong business plan will improve your chances and will be a very useful tool for you in setting out your goals and objectives as well as highlighting potential risks and opportunities for your new business.

When looking for startup finance lenders will generally want to see a significant amount of cash contributed from you towards the venture. This is because the lender won’t want to meet the full risk of your prospective business in the event of its failure. The exact size of your contribution will depend on your business and financial objectives. Your cash contribution can be sourced from number of places such as the equity in your home or other assets.

Generally, yes, the lender will require some form of collateral to secure your loan. Collateral, also referred to as security, is an asset that the bank can take a charge over and potentially sell to recoup their losses in the event that you can’t repay your loan. Some forms of collateral can be personal assets like your home or business assets such as stock, debtors or plant & equipment.

Generally speaking, lenders will look more favourably on applicants who have experience in their specific industry, however if you have been successful in business in other areas this can improve your chances of being approved.

The first step is understanding what assets and cash you need to run the business and meet all of your expenses. Then you need to approach lenders or a broker to gain an understanding of what finance is available and what you have to do to qualify. It is important understand this implement of your startup before you leave current employment and commit fully to the process.

Depending on the lender you will be required to provide between 25% and 40% of the purchase price and the associated costs as a minimum contribution. The equity that you provide will need to be a cash contribution or come from either residential property such as your family home, or any other commercial property you may own.

The standard costs involved in purchasing a commercial property include stamp duty, solicitors fees as well as the government and lender fees associated with establishing your commercial property loan.

For some commercial property purchases you may need to pay the GST on your purchase upfront. This equals 10% of the purchase price and can add up to being a substantial upfront cost that won’t be refunded until the lodgement of your next business activity statement. Many lenders won’t finance this upfront GST component, however there are a select few who can under certain conditions.

Commercial property loans generally attract higher interest rates and are paid out over a maximum of a 15 to 20 year term, as opposed to the 30 year terms of home loans. Equity requirements for commercial property loans are also higher, generally being between 20% and 45% minimum contribution. Unlike home loans which can only be secured by residential property, commercial loans can be secured by any acceptable commercial or residential property.

When you own your own commercial property you have greater security in the long-term occupation of your business premises. You will have greater freedom to improve, renovate and change the property to meet your business’s current needs and those of its future growth, without having to get permission from a landlord.

One potential method to purchase your commercial property when you don’t have the required equity in your business or residential property is to establish a self-managed superannuation fund (SMSF) and use this as the purchasing entity for your commercial property transaction.

The best way to find out if this option is something you can pursue is to seek advice from an accountant or financial planner. Beyond this, the two most important things to consider from a borrowing perspective for this option is the income that your fund will generate through rental returns on the property, super contributions and any fund investments, as well as the existing equity in your fund that can be used to secure the loan. If your fund can generate strong income and has good equity then this could be a viable strategy.

One of the major benefits of this option is that you don’t have to put your family home up as security to your loan when you buy your commercial property. While if you purchase your own business premises through your SMSF you continue to have a rental expense, this expense now goes directly to your super fund and ultimately builds equity for your future. In your retirement the rental income from your property can be drawn as retirement income.

Cashflow problems often arise when you have to meet regular expenses, but your income is delayed by trade or invoice terms or other circumstances. Taking out a loan to finance these expenses while you await payment from your customers is a common strategy and one that is vital for many businesses to operate.

The most common cashflow solution is to take out a business overdraft account to draw funds from when needed, and have revenue deposited into when available. However, there are more specialised types of cashflow lending such debtor finance and inventory finance that might suit your business. In some cases, a broker or banker might be able to recommend other cashflow solutions after examining your financials. These might include financing equipment rather than hiring it, or buying your own premises rather than renting.

Business overdraft accounts are the most common cashflow solution because they are easy to use and provide simple access to credit for the day to day operation of your business. They are essentially a line of credit, that is usually secured by a significant asset such as your home. The business overdraft can also be used as a day to day business transaction account that you can have your business revenue deposited into and all your expenses drawn from. The line of credit can allow to meet your regular expenses during periods where you are awaiting your own payment for your goods or services.

If you don’t have the security for the standard business overdraft option a debtor finance facility is a great alternative to ease cashflow issues. A debtor finance facility allows you to receive upfront money from a lender based on the invoices that you have issued to your debtors. This saves you from waiting the entire agreed trade term for them to pay you.

How this works is that when you issue an invoice to a client who will pay you up to 90 days in the future the lender will provide you with a line of credit for 80% to 85% of the face value of your invoice. The facility will take into account all the unpaid invoices in your ledger and advance you that money until the time they are paid.

Often times you need to pay for your materials upfront with the supplier either within Australia or overseas, however this can be difficult when you are still awaiting payment from your own invoices. An alternative to paying upfront is to engage a specialist inventory financier who can fund up to 90% of the upfront cost of your materials.

The funder’s loan is then repaid either when your clients pay you for the completed goods, or from a debtor finance facility if you need to provide your clients with extended trade terms.

Generally lenders like to see a minimum deposit of 5% of your purchase price. When saving for your deposit you will also need to consider a few other things, including the associated costs with purchasing a property, whether you will pay LMI and whether the bank will consider your savings as “genuine savings”.

Many lenders will ask for genuine savings as a deposit on your home loan. For savings to be classified as genuine, most lenders will look at three months of your bank statements to see that regular deposits are being made towards your savings and they can find an upward trend.  They examine this to figure out if you will be a reliable borrower.

LMI stands for “Lenders Mortgage Insurance”. Generally, when your deposit is less than 20% of your purchase price you will need to pay LMI. This is an insurance cost that is paid by the borrower to protect the lender in any situation where they make a loss on your loan.

If your parents are happy to help you secure your home loan and they have enough useable equity in their home you may be able to get around the lender’s normal savings requirements. In a family guarantor loan part of the value of your parents’ home is used as a secondary security to your loan to make up for a smaller deposit.

There are a range of extra expenses that many aren’t aware of until they buy their first home. These range from government costs and lender costs to other professional services you will need to seek out to complete your purchase. In most cases these can be added into your loan amount so they don’t necessarily represent ‘upfront’ costs, but they still add up to make the whole process more expensive.

• Legal Fees
• Building & Pest Inspection
• Stamp Duty
• Mortgage Registration Fee
• Lender Fees
• LMI

When you are looking to sell your current property and purchase a new one it can be difficult to know what to do first. Step number one is to figure out what your options are. The four main options you have in this situation are:

• Buy first and hold two properties and two mortgages at the same time until you can finalise your sale.
• Sell your home first and rent until you can finalise your purchase.
• Sell and purchase at the same time by organizing a simultaneous settlement.
• Take out a bridging loan.

Each different option for moving to your next home could suit you depending on your circumstances. This is a general guide for deciding which option is best for you:

• Buying first is usually a good option if you have a strong enough income to meet mortgage repayments on two loans and if there is enough equity in your existing home to contribute to your purchase.
• Selling first is a less desirable option however, for those on a lower income it is more suitable. If you are lucky you might be able to rent your existing home back from the buyer until you’ve found a new property.
• Arranging a simultaneous settlement takes strong organizational skills as well the guidance of an experienced solicitor. When the settlement works out successfully it is a very convenient result, however this option has a large margin for error.
• Similarly bridging loans have a large margin for error and have the potential to cost you a large amount of interest. This option is usually taken by those who have a low income stream but a very strong equity position in their home.

If your home loan is for investment purposes then the associated interest is treated as tax-deductible. For high income earners looking to reduce their tax burden this can make property investment more appealing.

Traditionally interest rates for owner-occupier and investment loans were very similar, however in recent years the interest rate gap between the two types of loan has widened. Investment borrowing is now accompanied by higher interest rates.

If there is sufficient equity in your current home you will be able to use this towards your new purchase. Generally, your bank will want to keep 20% of your existing property’s value as security for your existing home loan. Usually anything past this 20% figure will be considered ‘useable equity’ that you could use in the place of, or in combination with, a standard cash deposit toward your new property.

Negative gearing is an investment strategy that is used to reduce the income tax of investors. Essentially to encourage investment the government treats most costs associated with investment as tax-deductible. In the case of property investment some of these costs can include:

•  Interest & fees on investment loans
•  Repairs and maintenance
•  Property management fees
•  Insurances

If these investment costs are greater than the rental income that the investor is receiving, in other words they are making a loss on their investment, then the property will be classified as being negatively geared. Whatever loss the investor makes on their investment can reduce their taxable income for the year. Make sure you seek advice from a qualified tax adviser before using this strategy.

The home loan marketing is a dynamic industry that is constantly fluctuating. It makes sense then that when you take out your home loan it won’t remain competitive forever. If you have a broker managing your loans then they may be able to negotiate for you whenever your bank raises their rates, but your bank can only offer you so much. The key to keeping your home loan competitive is comparison. In a lot of cases there are better rates elsewhere.

Moving to a new bank can save you thousands of dollars in interest.

It is recommended that you review your home loan interest rate every two years to ensure it hasn’t moved outside of competitive standards. Having a broker to assist you with your review is a great help. A broker will be able to tell you quickly if there are better options available or if you will be able to reduce your interest rate with your current bank.

As interest rates are always in a state of fluctuation the concept of a ‘good interest rate’ is always changing. You can figure out what is competitive and what is not by comparing lenders. Brokers are the ultimate comparison tool, with experience and industry connections they can spot the pitfalls that often lurk in the fine print of loan comparison websites. They can find interest rates and loan policies that fit your unique situation with a human touch that makes all the difference.

Refinancing often presents real savings to borrowers. If you refinance to a lower interest rate you can see immediate benefits with a lower interest rate and lower repayments, but it is important to note that there are costs involved in refinancing and these are often added into your loan. To give you a real idea of just how much money you will save your broker should present you with an accurate estimate based on your interest savings and your refinance costs.

Perhaps you need some extra money to complete renovations to your property or payout a high interest credit card. Sometimes it can be difficult to get a loan increase with your current lender and may be easier elsewhere.

The short answer is no. Many people believe that by moving their mortgage they have to move their transaction accounts and savings accounts, however this isn’t the case. You can continue to do your everyday banking wherever is most convenient for you.

Unlike home loans, car loans do not always require a deposit to be made and there is no set amount required across the board. Lenders will be less likely to require a deposit from you if you have good credit history or if you are a home-owner.

Usually the documents you will need to provide when applying for a car loan include but aren’t limited to:

• Identification: Drivers License, Passport, Birth Certificates
• Proof of Income: Recent Payslips or Tax Returns
• Proof of Property Ownership / Residence: Rates Notice
• Proof of Liabilities: Credit Card, Personal / Car Loan and Home Loan Statements.

You will also need to provide information about the vehicle you are buying such as:

• Year of manufacture
• Make and model
• Kilometres
• Seller Information (Dealer or Private Sale)
• Quote or Contract

An approval on a car loan can take as little as two hours and as long as two business days. There are several factors that affect this timeframe, and the first of these is your ability to provide all the required documents upfront. If you are prepared and can submit your documents with your application then this will mean a quicker assessment.

When financing a car you might hear the term “balloon payment” or “residual value” mentioned. A balloon payment is a lump sum payment that is usually paid at the end of the loan term or financed through an extended loan term and repayment schedule. If you choose this option your lender will calculate your balloon payment to ensure that it is no more than what your car will be worth at the end of the loan term.

Yes, as always depending on your circumstances. Lenders don’t like to lend against cars that are too old, however it does vary depending upon the car that you are purchasing. For example, vintage cars in excess of 20 years can be financed if their value can be demonstrated.  Normally, financiers don’t wish to provide a loan term for cars that will be more than 11 years old at the expiry of the loan facility.

Normally, you can have a five to six year term on your car loan. Some lenders may charge you an early termination fee to prepay a loan when you sell the car, so it is a good idea to match your loan term to the sort of timeframe that you expect to keep the car. You can also shorten or lengthen the term so that your repayments reflect how much you can afford to repay each month.

Yes. In some instances, you may need to provide your business financials, however if your vehicle is for business purposes then the funder may approve based on your ownership and equity in real estate property.

If you are registered for GST, and you purchase a vehicle in your business, then normally you can claim the GST paid on the purchase price as an input tax credit on your next Business Activity Statement. You can usually claim part or all of the interest paid on your car loan as a tax deduction if your vehicle is used for business purposes. We recommend speaking to a tax adviser or an accountant regarding the tax implications of your purchases however.

In some instances, you may not be required to present your business financials.  If you have been in business (ABN registered) for a minimum of 2 years, and if you own real estate property, then this may not be required.

Financiers are more picky when it comes to purchasing a vehicle via a private seller. They will need to do some more ownership checks and also will need to inspect the vehicle. Their vehicle inspection will usually come with an extra fee.

Brokers can provide car buyers with a far greater range of lenders and credit policies. This means that buyers can often get more favourable terms, competitive rates and repayments by seeking out the services of a broker. Being presented with options also gives buyers a clearer perspective on their finance rather than simply having to trust dealers or banks when they say their offer is competitive.

Some of the different types of equipment finance include, but are not limited to:

• Chattel mortgages
• Operating leases
• Fleet leasing and management arrangements
• Novated Leases
• Other general forms of business lending such as an overdraft account or business term loan.

The loan terms for equipment finance arrangements are governed by the expected useful life of the equipment. For example, if you were financing IT software or hardware the term will likely be restricted two years, given that the equipment could be deemed obsolete in this timeframe. For other equipment which will have a longer life cycle, such as trucks or cranes, the loan term could be extended out to six years.

For second-hand equipment the funding term will often be shorter to accommodate for the length of the equipment’s remaining useful life.

Often you won’t require an upfront deposit to finance your equipment, however this will depend on your financial position and how old you business is. If the equipment is seen as a higher risk, for example if it were highly specialised equipment, the financier may request an upfront contribution.

In the case of a lease the full 100% of the purchase price must be funded, however in some cases an upfront or early significant payment might need to be made to offset the bank’s assessed equipment risk.

When you finance a piece of equipment using an operating lease the lender retains ownership of the equipment while you pay them a monthly rental cost. This means that normally the full rental payment for the equipment is tax deductible, however you won’t be able to claim interest or depreciation on the equipment if you choose this option. As always it is important to seek the advice of a professional tax adviser about the tax implications of your finance arrangements before proceeding.

At the end of the lease period you will usually be offered the option of purchasing the equipment by making an end term balloon payment which represents the residual value of the equipment.

This type of funding does not result in the equipment or the lease being shown on your balance sheet as an asset or liability. The full cost of renting the equipment however, including maintenance, registration, insurance and other costs will instead be recorded as expenses on your profit & loss statement.

Unlike operating leases, chattel mortgages allow the borrower to take ownership of the equipment from the beginning of the arrangement. Chattel mortgages operate under the principle that the equipment is the security to the loan and the lender has a charge over this security to repossess and sell it if you are unable to meet your loan repayments. Chattel mortgages have flexible options including funding with an end term balloon payment or fully repaying the equipment via regular monthly instalments over the term.

For chattel mortgages, both the asset and the liability will be recorded on your balance sheet, while your profit and loss statement will disclose the interest costs and the depreciation of the asset.

This is a specialist funding option which includes the financing and management of the costs and services associated with running a fleet of vehicles. This arrangement usually funds the vehicle acquisition rental, as well as maintenance, insurance, registration and other associated costs. This option is usually more cost-effective as the ongoing costs are provided on a discounted basis due to the value of the lender’s relationship to the relevant service providers. Once again it is advisable to speak to your qualified tax advisor about the implications these arrangements may have on your business.

A novated lease is an arrangement that allows employees to acquire a work vehicle as part of their salary package. The employee effectively leases the vehicle while the employer agrees to pay the rental costs and in some cases the maintenance costs directly from the employee’s salary. The novated lease is a portable facility that can follow the employee if they decide to change jobs. It is vital for clients to seek advices from their employers and tax advisors before going forward with this type of vehicle funding.