Case study 1 - Malcolm and Susan Johnson
Background
Malcolm and Susan Johnson are a young couple about to buy their first home. They have been married for five years and during that time have rented an apartment while also saving for their own home.
They have been looking at properties for the last month and one has really caught their eye, although the bathroom and ensuite could do with a little work. They had planned on shopping around the various lenders themselves to find the most appropriate loan for their needs, but as they both work, they have little time to do the research necessary. And, as they both admit, they have limited knowledge of the loan products available and might have difficulty in evaluating the options.
They have not paid a deposit at this stage.
On a suggestion from Susan's brother (one of your former clients) they have contacted you about the loan.
Following is a summary of the details of the property they wish to purchase, the couple's financial and employment details, and the loan features they require.
The property
|
Address:
|
Unit 12, 43 Seaside Parade, Coastville,
|
|
Purchase price:
|
$490,000
|
|
Description:
|
2 bedroom strata title unit
|
|
Agent details:
|
Steven Allstone
|
|
Phone:
|
8282 1113
|
|
Mobile:
|
0412 880 088
|
The couple
|
Current address:
|
Unit 12, 22 Wentworth Lane, Highville,
|
|
Malcolm and Susan have lived there 5 years
|
|
Home phone:
|
9001 2121
|
Funds position
|
Purchase price:
|
$490,000
|
|
Estimated costs:
|
$20,000
|
|
Total required:
|
$510,000
|
|
Loan:
|
$430,000
|
|
Own contribution:
|
$80,000
|
Assets
|
Capital Bank savings account (joint)
|
$92,000
|
|
Capital Bank cheque account (joint)
|
$1,600
|
|
Holden Commodore SS, eight years old (Malcolm)
|
$25,000
|
|
Suzuki Baleno, seven years old (Susane)
|
$9,000
|
|
Superannuation - Capital Bank (Malcolm)
|
$28,000
|
|
Superannuation - Capital Bank (Susan)
|
$62,000
|
|
Household effects (insured value)
|
$40,000
|
Liabilities
|
Capital Bank personal loan (Malcolm)
|
$3,600
(repayments $180 p.m.)
|
|
Capital Bank Visa card (Malcolm)
|
$200
(limit $2,000)
|
|
Capital Bank Visa card (Susan)
|
$600
(limit $3,000)
|
All debts have been repaid according to arrangements. In relation to the credit card debt, the minimum monthly commitment should be calculated at 3% of the credit limit.
Income/employment
Malcolm (date of birth 21/2/86)
|
Position:
|
Team leader (full time)
|
|
Employer:
|
ACME Limited
|
|
|
101 City Rd, Westside,
|
|
Phone:
|
9800 1111
|
|
Income (gross):
|
$55,000 p.a., net monthly income: $3,705
|
|
Employer contact:
|
Alison Johnson, HR Manager
|
|
Length of service:
|
10 years
|
|
Driver's licence:
|
8855KL
|
|
Email:
|
[email protected]
|
Susan (date of birth 8/10/87)
|
Position:
|
Accountant (full time)
|
|
Employer:
|
Phones R Us
|
|
|
804 High Street, City East,
|
|
Phone:
|
9910 2033
|
|
Income (gross):
|
$91,000 p.a., net monthly income: $5,629
|
|
Employer contact:
|
Stan Adams, HR Manager
|
|
Length of service:
|
12 years
|
|
Driver's licence:
|
17016C
|
|
Email:
|
[email protected]
|
Interest income
Approximately $40 per month from $12,000, remaining in savings account after home loan deposit. Interest 4% p.a.
Solicitor's details
Jones and Co
22 High Street, City East,
Phone: 8281 1382
Fax: 8290 1800
The loan requirements
• 30-year term
• Premium Option home loan
• standard variable interest rate @ 5.57%
• proposed settlement date - 6 weeks time
• ability to make additional payments from time to time without penalty
• fortnightly repayment option
• redraw facility
• funds access via card
• offset facility.
Task 1 - Initial disclosures
Following a personal introduction, and before you begin gathering information about the clients' existing financial situation or needs, there are certain disclosures you are required to make as a finance broker regarding the way you are remunerated and the range and limitation of your services.
Identify and describe three (3) of these disclosures. (200 words)
Task 2 - Gathering and documenting client information
Complete the Client Information Collection Tool using the information provided in the case study.
Task 3 - Assessing the clients' situation
1. Based on the information provided in the case study and using the tools available to you (e.g. loan calculators, including those available on lenders' websites), provide an assessment of the clients' borrowing ability and ability to service the loan they require.
Consider and comment on issues such as:
• borrowing ability in relation to the loan required
• deposit requirements for the loan required
• repayment ability based on the loan required
• likelihood that the clients will be able to meet their financial obligations
• do they require Lenders Mortgage Insurance (LMI), and if so, how much will it cost
• any other issues that may impact, now or in the future, on the clients' ability to meet their obligations, including any possible risks.
Provide data to support your comments and conclusions. (750 words)
2. Stress testing the loan repayments
Most lenders add an additional 2-3% on to the loan repayments to make sure a borrower can afford the repayments. If interest rates moved 3% higher, what would Malcolm and Susans loan repayments be, do you think they would be able to cope with the extra repayments, and what could you recommend that may remove this consideration as a risk factor?
Task 4 - Responsible lending obligations
The National Consumer Credit Protection Act 2009 imposes ‘responsible lending' obligations on brokers that must be satisfied by all people arranging loan applications. The primary objective under responsible lending guidelines is that the credit facility is ‘not unsuitable' for the borrower.
Identify and describe the key factors that must be taken into consideration when assessing whether a credit facility is ‘not unsuitable' for a borrower. (100 words)
Task 5 - Reasonable enquiries
In the course of gathering information about the couple, you are required under the National Consumer Credit Protection Act 2009 to make all ‘reasonable' enquiries to determine a borrower's objectives, requirements and financial situation.
Identify at least six (6) ‘reasonable' enquiries that you would make with the clients in the case study and explain why these enquiries are important in terms of NCCP compliance. (200 words)
Task 6 - Prepare your recommendation
1. Based on the information presented in the case study, prepare a written professional proposal to your clients. (750 words)
The style and language used in the proposal should be appropriate to the case study client's level of understanding. It should be clear and concise, and written in language that is easy to understand, while still remaining professional in its presentation.
You may base your response to this part of the assignment on either your knowledge of the products currently offered by your own organisation, or the products offered by a lender you have researched.
In your proposal, you should include:
• a summary of your understanding of the clients' needs
• a summary of their current financial position
• the product options you have considered to meet their needs
• the option you recommend and the reasons for the recommendation. Explain how the recommended product meets the clients' needs
• disclosures applicable to the situation (a summary of likely applicable disclosures is adequate). Consider disclosures that are required by both legislation and by lenders codes of practice.
2. (a) Describe the workings of any home buyer assistance schemes and stamp duty concessions that may be available in your State or Territory. Would your client be eligible for any of these? (150 words)
2. (b) Provide a summary of all additional costs and fees that the couple should be made aware of. (150 words)
Task 7 - Advising on strategies
Following the presentation of your proposal, Malcolm and Susan say that they would like your advice regarding strategies that will help them to pay down their home loan as quickly as possible.
List strategies or methods that will help them achieve their aim.
Provide the advantages and disadvantages of each. (250 words)
Task 8
Malcolm & Susan have called to discuss whether they should consider fixing the interest rate on their loan - they say their parents have said ‘you never beat the bank when you fix', and yet their friends are telling them about a loan where they can ‘have a bit of both'.
1. Explain the role of the RBA with respect to interest rates and why it is necessary to have these controls.
2. Suggest how Malcolm and Susan could potentially solve their dilemma.
Task 9 - Settlement
Outline in detail the steps a Lender should take post-approval in order to document, settle the loan and administer the loan post-settlement. (300 words)