Certificate IV in Finance and Mortgage Broking Study Material

This study material covers various topics related to Certificate IV in Finance and Mortgage Broking course, including regulations, credit proposals, Lenders Mortgage Insurance, First Home Owner Grant, loan types, and more. It also includes sample questions and answers for better understanding. The course code and college/university are not mentioned.

CERTIFICATE IV IN
FINANCE AND
MORTGAGE BROKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

PART A
Question 5
(c) Both unregulated and regulated
Question 13
1. Preliminary assessment
2. Credit Guide
3. Credit Quote
4. Credit Proposal
Question 15
Australian Securities and Investments Commission Act 2001, is a legislation which is
predominantly based on a “Risk” framework.
Question 16
1. It describes standards of good practice and service.
2. The information relevant and useful for customers are also disclosed by this code.
3. Their objective also includes the promotion of informed and effective relationship
between banks and its customers.
4. The code also state that banks have to disclose the procedures of resolutions of disputes
for customers.
Question 17
The full form of FBAA is “Finance Brokers Association of Australia”.
Question 18
The name of document developed by the MFAA as a set of principles for the guidance of a
member broker is “Code of Practice”.
Question 19

The repayment related to credit card is based on the limit of credit card. It is because
credit limit grant by the lender denotes the maximum amount that borrower can spend using the
credit card at the given span of time. Thus, the repayment of credit card is based on the credit
card limits grant by lenders or banks.
Question 20
False
Question 21
True
Question 22
(a) Debt Servicing Ratio
Question 23
The AAPR represent “Average Annual Percentage Rate”.
Question 24
The amount available to First Home Buyer under the First Home Owner Grant (FHOG) based on
the various states are as follows:
Queensland = In this state, the property is capped at $750000
New South Wales = Here, property capped at $ 650000
Victoria = In this state, property of first home buyer capped at $750000
South Australia = In this state, no property cap is applies
Tasmania = No property cap is applies
Australian Capital Territory = No property cap applies
Northern Territory = In this territory, property capped at $750000
Western Australia = Property capped is applies to first home buyer at $750000
Question 25

The purpose of Lenders Mortgage Insurance (LMI) is to protect the lenders from the
situation where borrower fails to make the repayments of loan. Also, it is also applicable when
the LVR exceeds 80 percent. The cost of LMI is passed by the lender to the borrower in case if
the total loan mortgage by the lender is more than 80% of the total property value. The LMI
premium is usually considers as a fee and capitalize into the loan amount of borrower.
Question 26
(d) All of the above
Question 27
True
Question 28
True
Question 29
The clawback is a sales commission payment which is repaid or taken back by the bank
from its employees if the customer ends the contract earlier the time expected. In simple term,
the clawback is refers to the recovery of commissions already paid to agents.
Question 30
In the year 1981, the deregulation of the Australian banking environment take place. It was
basically commenced in the mid-1960s.
Question 31
Conforming Loans are the loans which basically meets the defined level of risk. This risk is set
by the credit providers and also represents the majority of loans written in Australia. This loan
can be regulated or unregulated. In the conforming loan, borrowers usually have genuine
savings, clear credit histories along with the employment stability.
Question 32

1. First feature of standard variable loan is such that the borrowers can offset facilities and
redraw the loan amounts.
2. Also, the borrowers can repay the extra payments of the loan amount.
3. The ability to split the loan is also one of the features of standard variable loans.
Question 33
1. The flexibility for additional repayments is less in the fixed interest loans.
2. The repayments of loan will not go down in the case if interest rates goes down.
Question 34
1. The mortgage offset loan is will helps the borrowers in long term. It means it helps them
in repaying their home loan sooner.
2. It also helps the borrower to pay less amount of interest on home loan using that money
in every day and saving accounts to offset loan interest.
Question 35
Redraw facility is basically helps the borrowers to access the extra repayments that they
have made on their loan especially home loan. With the help of maintenance of redraw balance,
the borrower can reduce the amount of the interest payable on loan. The available redraw will be
of Zero balance. It is available on various financial products where terms and conditions vary on
the basis of credit providers.
Question 36
FIRB represents “Foreign Investment Review Board”.
Question 37
1. Capacity = The ability to repay the loan
2. Capital = The willingness to repay the loan
3. Collateral = the security provided to support the loan
4. Conditions = overall strength of applicants positions
5. Character = the applicants current status.

Question 38
Question 39
LVR = Loan Amount / Property valuation * 100
(a) $210000 / $350000 * 100 = 60%
(b) $425000 / $690000 * 100 = 61.59%
(c) $256560 / $700000 * 100 = 36.65%
Question 40
(d) $63314
Question 41
Actual NSI ratio formula = Net Disposable Income / Proposed Loan Repayments
= $63314 / $35220 = 1.80
Question 42
(c) 95%
Question 43
The purpose of Household Expenditures Measure (HEM) is to measure the average
amount of money that a particular household spent on the goods and services in a given period. It
is a proxy indicator for measuring income.
Question 44
The customers can request their own credit report on the website of
(www.mycreditfile.com.au).
Question 45
1. Personal details of borrowers such as name, residential address and date of birth.
2. During the last five years, the credit applications and enquiries made by the borrowers.
3. Any information regarding their public records such as directorships and proprietorships.

Question 46
Conditional approval on a loan application means that the mortgage underwriters has
satisfied with the mortgage application. It is basically a pre-approval which means that the lender
has agreed to lend money to the borrowers so that they can further use it for the purpose purchase
of home but it hasn't proceeds to final approval.
Question 47
As per Australian Securities and Investment Commission (ASIC), a company is defined
from its legal existence and status. It means a company is an entity which has separate legal
existence from its owners and if that company have same rights as natural person that it would be
said that such entity is a company.
Question 48
A family trust, which is also known as the discretionary trust is one of the most common
small businesses structures in Australia. This is ideal for families with private business along
with other income generating operations. They pay zero tax on income within the trust and
decides who will receives the distribution and how often payouts will occur. In simple term, the
trustee of the funds will decide who within the family will receive the amount of distributions.
Question 49
True
Question 50
The term NPBT represents “Net Profit Before Tax”.
Question 51
The “Add Backs” are the expenses of the businesses that is again added back to the
profits of the company. This includes the interest, taxes, depreciations and amortizations which is
added back in order to improve the profit situation of the company. This also includes the other
adjustments to the metric.

Question 52
Assets – Liabilities = Equities
Question 53
1. Depreciations
2. Superannuations
3. Interest on business loans being refinanced
Question 54
The First Home Owner Grant (FHOG) was introduced on 1st July 2000 by the Federal
government. The purpose behind the introduction of FHOG to help offset the impact of the
goods and services tax.
Question 55
Quick assets provides the analysis of the liquidity ratio of the company. In this, the ratio
more than 1:1 indicate that the company have more readily available or convertible assets which
they used to meet their current liabilities. The quick ratio is calculated using the Current assets –
Stocks / Current liabilities – Bank overdraft * 100. This indicates that stock are not easily and
quickly convert into the cash.
Question 56
The first home buyer in NSW, does not pay the stamp duty on their both new and existing homes
worth up to $650000.
Question 57
A guarantee is the legal promise or security provided by third party known as guarantor who
ensures coverage of borrower's liability or debt in the event of default made by the latter.

Question 58
Credit providers are required to give their borrower a pre – contractual statement and information
statement where the former is meant for an advance copy of the actual loan agreement consisting
of information pertaining to costs, fees, charges, commissions and insurance while the latter is
meant for making the borrowers known about the whole credit contract. This indicate that the
loan possibly may gets approved.
Question 59
PAYG stands for Pay As You Go.
Question 60
ASIC plays the role of national regulator for finance broking and consumer credit. Their role
includes maintenance, facilitation and improvements in the performance of overall financial
system and entities therein which helps in promoting informed and confident participation by
consumers and investors all across the financial system. They also issues licenses to the
participants of the financial system which is known as Australian Credit License (ACL).
PART B
Question B1
As Paul and Angela wish to make frequent additional repayments, so that they can access again
such loans if they require funds for other purposes as well, accordingly, the standard home loans
are the better option to be suggested to Paul and Angela. The reason behind choosing this option
is that it provides for more flexibility than other types of basic loan styles along with offering
following features:
 Redrawing facility
 loan splitting
 Fixed rate portions
 the various other advantages of this type of loan facilities are as follows:
◦ With the fall in interest rates, the amount to be repaid also came down.
◦ It allows for making additional repayments without incurring any penalties or
charges.

◦ It is very much flexible providing with many more features than other types of loan
options.
Question B2
Borrower's (John and Sally)
Gross income per week (John + Sally) = 850 + 450 = 1300 * 52 = 67600 per annum.
Less: normal taxation per week (John + Sally) = 164 + 57 = 221 * 52 = 11492 per annum
Net income = Gross income – Tax = 67600 – 11492 = 56108
Less: Living expenses per annum of John & Sally (couple with no dependents) = 17917
Net disposable income = Net income – Living expenses = 56108 – 17917 = 38191
Less: Proposed Loan repayments per month = 2161 * 12 = 25932
Net Surplus Income = Net disposable income – Loan repayments = 38191 – 25932 = 12259
Net Surplus Income ratio = After tax income – Living expenses / Total Commitments per annum
After tax income = 56108
Living expenses = 17917
Total commitments per annum = Proposed loan repayments = 25932
56108 – 17917 / 25932 = 1.47 (NSI ratio)
Question B3
Total assets = Existing property + Rental property + Motor vehicles + Investments + savings +
Investment in business
= 520000 + 285000 + 34000 + 10000 + 54000 + 4950 + 90000 = 997950
Total liabilities = Mortgage (Home) + Mortgage (Investment) + Personal Loan or Hire purchase
+ Credit card limit = 356000 + 190000 + 14500 + 10000 = 570500
Surplus = Total assets less total liabilities = 997950 – 570500 = 427450
Question B4
Particulars 2005 2006 Average
Net profit before tax 86450 40163 63306.5
Add backs allowable
Depreciation 15100 15100 15100

Salaries (drawn) 25000 30000 27500
Superannuation (John Brown) 15000 15000 15000
Gross income 31350 -19937 5706.5
Question B5
Loan amount = 460000
Property value = value of property 1 + Value of property 2 = 385000 + 290000 = 675000
LVR = Loan amount / property value * 100 = 460000 / 675000 * 100 = 68.15%.
Question B6
Borrower's fund position associated with property settlement includes consideration of certain
factors such as how much deposit they are providing, what kind of funds are held by the
borrower, what is the purchase price of the property, amount of refinancing, costs involved in the
settlement of the property such as stamp duty, Legal costs and insurance and other add ons
provided with the property.
Question B7
Steps involved in the process of the flow of a loan are as follows:
 Examining risk and mitigants the lender must be vigilant against the fraudulent acts of the
applicant for which five C's are taken into consideration.
 Collateral: First of all security examination is done where it is being determined what
security is available, how much secure it is and whether it supported by LVR or not.
 Capital: Overall financial strength of the applicant is identified by taking into account
their financial statements, assets, employment or business nature and its soundness.
 Condition: The current status of the applicant is determined by identifying how much
amount has been borrowed, fund position and its utilization, client's credit check and
verifying documents.
 Character: Applicant's character can be determined through their credit reports which is
provided by Veda. This credit report provided various information personal details, credit
applications made in the last 5 years, record of credit and overdue account, bankruptcy
information, default judgments, etc.

In this way through these five steps, process of the flow of a loan takes place.
Question B8
Calculation of LVR = loan amount / Property value = 290000 / 335000 * 100 = 86.56%
LMI rate = 0.98 (as determined through the LMI rate table by looking at the LVR bands in the
rows and loan amounts in the column)
LMI premium = loan amount * LMI rate = 290000 * 0.98% = 2842.
Question B9
Circumstances under which the following are used in serviceability calculation are as follows:
Overtime: When the overtime is considered to be an integral part of income, then it must be
taken into account for the serviceability criteria. On the other hand, there are many professions in
which a less proportion of overtime income has been used in serviceability calculations.
Second Job: The income earned from the second job is taken into account while calculating
serviceability when this second job is held continuously for the period not less than one year.
Unemployment benefits: Such benefits are not considered at all when the applicant is
unemployed and getting benefits against it.
Question B10
Please find attached completed loan application form.