Financial Management Case Study: Develop Complex Broking Options

This case study presents a financial management scenario where a mortgage broker, Fred Broker, advises two brothers, Tom and Steve Broad, on purchasing two investment properties. The case begins with a detailed fact find, outlining the brothers' personal and financial situations, including their income, assets, liabilities, and investment experience. The proposed investment properties, their expected income, and expenses are also provided. A memo from Fred Broker to the brothers summarizes the discussion and outlines the process for obtaining finance, including required documentation, the application process, and recommendations on loan types, terms, and interest rates. The broker suggests a principal and interest loan with a 30-year term and recommends a 20% deposit. The case concludes with a comparison of interest rates from different banks, endorsing CBA as the most suitable option. The case provides a comprehensive overview of the steps involved in securing a mortgage for investment properties and the factors considered in financial planning.

PRACTICE OF FINANCIAL MANAGEMENT
Case Study: Develop Complex Broking Options
INITIAL FACT FIND
I have been approached by two brothers for soliciting my advice as a Mortgage Broker,
for purchase of two investment properties, the details of which have been shown below.
One of the brothers, Tom Broad is single, has no children, and is in a PAYG position.
The other, Steve Broad is married, has no children and is self-employed. The brothers
have previous experience of having invested together in the purchase and sale of
properties. At present, they have disposed-off all their investment properties and these
units, which they plan to buy now, will be the only investments they make, until they
identify some more opportunities. The cash which they have in their bank account has
been accumulated from the sale of their previous investment properties.
Tom Broad’s Personal Information
 Annual salary $85,000.
 Single, no dependants.
 Cash in bank $250,000.
 Self-occupied property valued at $650,000, with debt of $300,000 and assumed
P&I of 4.3% pa.
 Credit card limit of $5,000 which is cleared monthly, assumed rate of interest is
3% pa.
 Contents valued at $100,000.
 Superannuation savings are $150,000.
 Motor vehicle valued at $60,000 with nil debt.
Steve Broad’s Personal Information
 Annual salary is $65,000.
 Married to Marie and have no dependants.
 Marie Broad’s annual salary is $30,000.
 Cash in bank is $150,000.

 Self-occupied property valued at $450,000, with debt of $100,000 and assumed
P&I of 4.3% pa.
 Credit card limit is $15,000 with debt of $5,000 and assumed interest at 3% pa.
 Contents valued at $130,000.
 Superannuation savings of Stephen are $150,000.
 Superannuation savings of Marie are $20,000
 Motor vehicle owned by Stephen is valued at $30,000 with nil debt
 Motor vehicle of Marie is valued at $15,000 with nil debt.
Details of the Investment Properties
The proposed purchase prices of the investment properties are:
 Ground floor unit - $350,000.
 Third floor unit - $385,000.
Expected Income and Expenses of the Investment Properties
 Body corporate fees - $2,500 per unit / annum
 Proposed income - $450 per unit / week if rented on permanent basis.
However, in case they are rented as holiday homes, the expected rental would be gross
of $45,000 per unit / annum.
MEMO
To: Tom & Steve Broad
Subject: Purchase of Unit 6 and Unit 18,
21/36 Flinders Lane, Rockingham WA 6168
From: Fred Broker
Date: 26/04/2018
Hi Tom & Steve,
Further to our meeting held earlier today, I am pleased to tell you that I am in the
position to accept your appointment and discuss the arrangements for arranging finance
for you to purchase the above mentioned investment properties.

As per our discussion, I have noted below all the available information in this
context and have also provided a list of documents which are required as supporting
documents for the loan applications. These are essential for preparing your
profile for assisting me in arranging your finance requirements.
01. Asset & Liability Statements, including rental income to be received from the
investment properties, the repayment arrangements on the loans, your credit card
limits and the balance owed on them.
02. Copy of your driving licence.
03. Latest Rates Assessment of the properties owned by you.
04. Your present residential address and period of stay there.
05. Your previous residential address and period of stay there.
06. Name of your partner/spouse, ages and number of dependents.
07. Your telephone, mobile and fax numbers and also email addresses.
08. Your employment details, including your period of job at the current and
the previous job. Also include details of employment of your spouse.
09. Details of your Centrelink and any other investment or personal incomes.
10. In case of PAYG, furnish two latest payslips and Group Certificate for current
year and Tax Assessment for the previous year.
11. In case of self-employed, furnish copies of your tax returns for last two years.
12. Name and address of Accountant, if any.
13. Name and address of Solicitor, if any.
14. Details of your past investments in property.
15. Details of cash at bank and its source.
16. Details of Superannuation savings and/or other investments.
17. Contracts for the investment properties to be purchased. Please include their
Strata Plan and details of Title.
18. Floor plans (if available) of the above mentioned properties.
THE PROCESS
I have outlined here the process which shall be followed by me for obtaining
the finance for my clients’ requirement of procuring two investment properties which

have been detailed above in the FACT-FIND SECTION. Although I may make it clear
that the time required for completing the process of procuring the loan shall depend on
the quantum and quality of the information which shall be provided by the clients.
From my experience of dealing in these type of loan arrangements, I can say with
authority that in case of simple transactions, it takes the process of between 5 to 10
working days. Bur for complex transactions and for obtaining unconditional approval of
finance, the lender would normally take another 5 to 10 days, which makes it a total of
15 to 20 days for the finalisation of the loan contract to be prepared, signed by the
applicants and settlement made ready to be booked.
All this process cannot be completed until all the following requirements have been
fulfilled and checked by me before being submitted to the lender for approval. This
means that I must have –
1. Received all the required information and the supporting documents.
2. Provided the Privacy Act form and the Lender’s Application form to my clients.
3. Completed the application and would have submitted the same to the lender and
advised my clients that the application has been lodged.
4. Ensured that the lender has obtained the credit check, assessed the application
and confirmed to me the approval after subjecting it to security valuation and that
the client has been informed accordingly by me/my office.
5. Ensured that the Valuation Report has been received and has been found to be in
order.
6. Ensured that the selling agent & the settlement agent have prepared the mortgage
insurance as is required by the lender.
7. Ensured that based on the recommendations made in the valuation, the broker has
advised the client about the minimum amount of insurance required.
8. Ensure that the broker meets with the client
for going through the loan contract and the mortgage documents for ensuring that
there are no errors and also answers any queries if required and acts as a witness
when the clients sign the documents.
9. Ensured that following the return of the signed mortgage documents to the lender,
the broker has advises the settlement agent and is monitoring the progress of the

settlement and also ensures that there are no undue delays or problems in the
execution of the documents.
MY RECOMMENDATION
 You must know that you can have the option to borrow up to 100% of the purchase
price plus stamp duty in case you offer your private residences as additional
security against the borrowed amount. However, the final decision about this
prospect is in your hands.
 I recommend that you make a deposit of 20% ($147,000) of the loan demanded
($735,000) to be secured over both the investment properties you desire to
purchase. Your cash contribution will have to be such that it meets the cost of
the stamp duty and the estimated conveyancing costs. Your total deposits and costs
shall be intimated by the lender after finalising the loan amount and the costs
involved for each of the properties.
 In respect to the type of loan to be availed, we have already discussed the
two options - interest only or principal and interest payments, which can be
arranged either as monthly or on fortnightly basis.
 As you have indicated that this will be long term investment, I suggest you to
select principal and interest payments as the asset value will increase, the loan
balance will decrease gradually and this will maximise your equity over time.
 With regard to term of the loan, my suggestion is to select the 30 year term. This
will minimise repayment servicing from your net rental income. Moreover, in case
of increase in the rental income over time, the repayment amount of the loan can be
increased, thereby shortening the tenure of the loan.
 Based on the assumption that the will be repayable over the 30 years period at
interest rate of 6.5% pa, the fortnightly repayment of principal & interest will be
most appropriate.

 Based on the details provided in the table below, my advice is that the indicative
5 year fixed rate being offered by CBA is most appropriate. The Establishment Fee
shown in the table includes the valuation of the two investment properties.
 As CBA is the most competitive as compared to other banks I endorse your choice
of selecting CBA for the loan.
Bank Interest Rate Establishment Fee Monthly Fee
CBA 6.50 % $750.00 NIL
BankWest 6.51 % $700.00 NIL
WestPac 6.65 % $850.00 $8.00
ANZ 6.49 % $750.00 $10.00
NAB 6.69 % $600.00 NIL