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THAT MADE ME A PROPERTY MILLIONAIRE

BY JAMIE McINTYRE
WHAT I DIDNT
LEARN FROM MY
FINANCE
BROKER
BUT WISH I HAD!
THAT MADE ME A
PROPERTY MILLIONAIRE
Jamie McIntyre
Disclaimer - Important information
This information has been prepared to provide general

information only. It is not intended to take the place of
professional advice and you should not take action on
specific issues in reliance on this information. In preparing this
information, we did not take into account the investment
objectives, financial situation or particular needs of any
particular person.
Before making an investment decision, you need to consider

(with or without the assistance of an adviser) whether this
information is appropriate to your needs, objectives and
circumstances.
First published November 2008
Published by 21st Century Publishing

Suite 20, 75 Lorimer Street
South Bank, Docklands VIC 3006
Australia
Tel: (03) 1800 999 270

Fax: (03) 8456 5973
Email: customerservice@21stca.com.au
Web: www.21stcenturyacademy.com
www.21stcenturypublishing.com.au
Copyright 2008 21st Century Publishing
All rights reserved. No part of this book may be reproduced or

transmitted in any form or by any means, electronic or
mechanical, including photocopying, recording or by any
information storage and retrieval system, without prior
permission in writing from the publisher
National Library of Australia Cataloguing- in-Publication entry:
McIntyre, Jamie
What I didn't learn from my finance broker but wish I had
ISBN 978-0-9581922-9-3
Printed and bound in Australia by Griffin Press

Foreword
Finance is such an important subject. It is the backbone behind
any investment strategy, such as purchasing investments, shares,
and acquiring businesses to name just a few.
Without finance virtually everything that you see would not
be possible. Shopping centres need finance to fund their
development of each new shopping centre. Airlines require
finance to fund the purchase of new aircraft that can cost
hundreds of millions of dollars. Even successful sporting teams
require finance.
Many people perceive finance to be a boring subject, but
finance is not boring if it is mastered. If mastered well then it is an
investors best friend.
I never became a property millionaire by learning off finance
brokers or taking their advice! Most finance brokers are not
trained in finance broking, but are simply commissioned sales
people who will often do anything to gain a sale to earn
commissions and trailing commissions as this book will highlight.
In my two previous books What I didnt learn from my
financial planner but wish I had and What I didnt learn from my
real estate agent but wish I had, I questioned the need for
consumers to use these people and also highlighted some of the
seemingly immoral, unethical and illegal practices used by these
people.
In the case of finance brokers, a largely unregulated industry,
consumers probably suffer on a greater scale than with financial
planners and real estate agents, but this suffering and huge losses
receives little publicity in the media. When a consumer
(customer) of an unethical finance broker is forced out their
home their losses can be catastrophic, in fact sometimes their
complete life savings and investment, compared to losses which
might be caused by unethical financial planners and real estate
agents.
Increased competition in Australia has led to changed
lending practices. More loans are being made with higher loan
to valuation ratios; brokers are involved in about 30 percent of
new loan transactions; the emergence of low-doc and no-doc
loans has led to more borrowers "self-verifying" their income,
and there has been a movement towards alternative and less
rigourous property valuation methods.
Australians have also taken on much more debt. Australia has
gone from having one of the lowest housing debt to income ratios
in the world in the mid-1980s to one of the highest. Real house
prices have more than doubled in 20 years, a greater rise than in
most advanced economies, despite comparatively high interest
rates. Australia, along with the US and Canada, was cited in a
recent Bank for International Settlements' report for rapid growth
in lending to households with poor credit histories.
It is the "fringe problems" - predatory lending practices used
at the edges of the industry - that are crying out for action. There
is a small segment of the lending market that preys on vulnerable
people by providing loans to borrowers who cannot afford to
repay them. The Australian Securities and Investments
Commission (ASIC) says this often involves the lender or broker
refinancing borrowers into a higher-cost loan on the basis that it
would solve their financial problems.
The lenders charge excessive fees and commissions to
establish the loan and foreclose at the first sign of default. The
borrower is then forced to refinance or sell their home, but in
either case a significant portion of their equity in the property has
already been stripped by the lender.
A recent government report says it finds problems with rogue
operators. Grant Warner of the Australian Property Institute says
his working group found some brokers shopping around for
valuations that gave them the right price to support loan
applications.
The Consumer Action Law Centre says almost all the
problem mortgages it took on had been set up by a broker, and
in many cases the broker had been involved in some degree of
dishonesty.
The reason these sorts of practices are able to flourish is that
lending by non-deposit taking lenders, and credit advice, largely
slips between the regulatory gaps. The government report
recommends national regulation of credit products and advice;
the states have been promising uniform national regulation for
several years but progress has been painstaking.
This book highlights some of these immoral, unethical and
illegal practices used by finance brokers that you may wish to
avoid. More importantly though, it highlights how by becoming
educated about finance and the strategies to obtain the correct
finance, enough of it for investing, you can become rich.
I dont have a Ph.D. in finance but by learning these
strategies it enabled me to get a Ph.D. in results and become a
self-made millionaire.
I dont promise the same for you. However not knowing
these strategies will surely reduce the financial future you could
obtain using some of strategies in this book.
Jamie McIntyre
November 2008
Contents
1 How You Can Save Thousands of Dollars and Take Years
Off Your Mortgage! ...................................................................1
Paying off your mortgage.......................................................... 2
How to pay off a mortgage quickly .............................................3
How to save thousands of dollars in interest on your mortgage
and how to pay your mortgage off in less than 10 years ............4
Save thousands on your mortgage - a starting example ............5
Can you pay off a 30 year mortgage in 10 years or less?...........6
Your first mortgage.................................................................... 8
Choose a basic package and get a lower interest rate............... 9
Offset accounts..........................................................................9
Honeymoon periods.................................................................11
Pre-pay Your Mortgage........................................................... 12
The advantages of a bi-weekly mortgage payment.................. 12
Pay off your mortgage quickly with a bi-weekly plan..................13
How many tens of thousands of dollars in interest will you
pay between now and the end of your mortgage? .................. 14
Get rid of your credit card.........................................................15
The Debt Reducer - The correct way to pay off personal debt . 16
Learn to calculate the amount of interest on your loan ............19
Pay all your mortgage fees and charges upfront...................... 20
How does your home loan compare? ...................................... 21
Additional payments ................................................................22
Is todays dollar worth the same as a dollar in 30 years?.......... 23
How to waste $175,000 in 10 years......................................... 24
The Philosophy of Money ........................................................25
2 What is a mortgage? .............................................................. 26

The Calculation of APR (annual percentage rate) ....................27
Foreclosure and non-recourse lending .................................... 30
Mortgage loan basics ..............................................................31
Mortgage loan types ............................................................... 31
Loan to value and down payments ......................................... 33
Standard or conforming mortgages ......................................... 34
Capital and interest .................................................................35
Where does the money come from for mortgage loans? ..........36
Low-doc loans: are they for you? ............................................ 38
Reverse mortgagees............................................................... 40
Higher standards of product information needed .....................43
Unscrupulous finance brokers ................................................. 44
Bizarre sales practices .............................................................45
3 What do finance brokers do? .................................................46

The Australian Banking system ............................................... 47
Fees and charges ...................................................................49
Borrowing statistics ..................................................................50
What role do finance brokers have? ........................................51
Lender beware ........................................................................52
Difference between a mortgage broker and a lender?............. 53
Difference between a mortgage broker and a loan officer? ......54
What should I do if a broker approaches me? ......................... 55
Will a broker find me the best loan? .........................................56
Some questions you should consider when choosing a Broker 58
Should I get a finance broker to arrange my loan? ..................59
Smart ways to use mortgage brokers .......................................60
How do I know if I can afford my proposed mortgage payment. 62
4 The banks............................................................................... 65
Banks create money by creating credit ....................................66
Bankers depression of the 1930s ............................................68
Competing banks co-operate .................................................. 69
Banks try to buy respectability .................................................70
Impossibility of paying off all debt.............................................71
Banks and low doc loans ........................................................ 72
Punitive banking fees ..............................................................73
Loan application fee / package fee: $600 ...............................74
The Future Fund .....................................................................75
Predatory lending ....................................................................76
House repossessions up after interest rate rises.......................76
The lenders behind the majority of house repossessions..........77
Tenants are being forced out of their homes at a dramatic rate 78
Non-bank lenders up mortgage interest ...................................80
Banking complaints .................................................................81
Are the banks' illegal penalty fees tantamount to theft?..........81
5 Who can you trust? Can you trust your finance broker? .......85
Broker facts .............................................................................86
Fraudster's greatest ally .......................................................... 86
Predatory mortgage lending and mortgage fraud .................... 87
Sophisticated attempts at mortgage fraud................................88
The behaviour of rogue and fraudster brokers who target the
poor, desperate and nave ......................................................91
The Code enables the broker to charge a commission even
when the loan agreement is not completed..............................91
Fraud ......................................................................................92
Interest only loans to inappropriate client borrowers................. 91
Fraud.......................................................................................92
Finance brokers, Consumer Credit Legal Centre NSW (Inc)
(CCLC) and the Australian Securities and Investments
Commission (ASIC).................................................................. 92
Finance brokers caught out .....................................................93
Regulation of Mortgage Broking Industry required to protect
home buyers, says Macquarie Bank.........................................93
WA mortgage broker jailed for fraud ........................................ 95
Mortgage shoppers need to know how to protect themselves ..95
You can't lend without regard for the borrower and their
circumstances ......................................................................... 97
Deal was no scam, just too good to be true .............................99
We are independent brokers! Yes, but is it legal? ..................102
Steering people in the wrong direction................................... 103
Western Australian investors lose $100 million .......................105
NSW Dept Fair Trading takes action against shonky finance
broker ................................................................................... 105
Matt and John's special mortgage deal.................................106
Orphan boy wins lottery prize, buys house through finance
broker................................................................................... 106
Who is the finance broker acting for?..................................... 107
Mortgage brokers according to Choice Magazine .................. 108
Brokers need fixing ............................................................... 111
Australian mortgage brokers frustrated by the lack of service
provided by lenders ...............................................................111
Mortgage processes and service............................................112
A report on the finance and mortgage broker industry ...........112
The NSW government is proposing new legislation ................114
The U.S. subprime mortgage crisis ........................................ 114
6 Predatory lending .................................................................116

Avoiding predatory lending ....................................................117
What tactics do predatory lenders use? .................................118
Abusive or unfair lending practices.........................................118
Underlying issues of predatory lending ..................................119
Seven signs of predatory lending - common abuses ..............121
Mortgage broker accused of predatory lending ......................122
ABA response to report on home loan lending ......................123
Home loan predators targeting vulnerable .............................124
Pay-day loans .......................................................................125
Concerns with pay-day lending...............................................126
Sheriffs feel strain of repossessions ...................................... 127
21st Century Education tips for avoiding predatory lenders.... 128
7 Australian attitudes to debt ..................................................129

In Australia after the great depression in the 1930s ..............130
Debt not a problem, on balance? ..........................................131
Debt in Australia ....................................................................134
Debt, savings, bank and user-pays retirement .......................135
Peer disparity in attitudes towards mortgage lenders and
awareness of interest rates ................................................... 138
8 Finance tips you wont learn from your finance broker....... 140
Understand the basics .......................................................... 142
Hold onto your paperwork and keep good records ................ 143
Buying a house .....................................................................143
Bells and whistles can make your home loan expensive ........145
A 21st century education ...................................................... 147
Keys to financial success ...................................................... 148
Some painfully obvious but rarely followed finance tips...........149
Financial profiles.................................................................... 152
Budgeting.............................................................................. 153
9 Advanced Finance Strategies ..............................................155
How to build a multimillion dollar property portfolio ................. 156
Millionaires from real estate ................................................... 157
What about a line of credit? .................................................. 159
A 10-year plan ...................................................................... 161
Fast track property strategies to make you money while you
sleep .....................................................................................162
How wealth is generated .......................................................163
Property versus buying stocks on the Stock Market ...............164
Property organising principles ................................................164
Three types of investors.........................................................165
Inside the box and outside the box lending ...........................166
SLICE....................................................................................167
Negative Gearing ..................................................................169
Property tax benefits..............................................................169
When will the property bubble burst? ................................... 171
Sydney median house prices 1901 to 2006 .......................... 172
The Australian Property Cycle ............................................... 173
Top of the boom ................................................................... 173
How is property performing?.................................................. 174
Obstacles to financial independence .....................................176
Should I buy my own home first or buy investment
properties? ............................................................................177
Good debt vs Bad debt .........................................................177
Optimise your structure...........................................................178
Cross-securitised lending........................................................178
Debt vs cash-flow ..................................................................178
The educated investor vs the average person........................179
21st Century Cash-Flow Manager Loans................................179
Some other ways to make property cash flow positive............ 181
Capital appreciation or positive cash flow: which is better? .... 181
Taking advantage of capital growth........................................184
Property - a less volatile investment........................................184
Tax deductions and successful property investment...............185
Negative gearing and the Australian economy ...................... 186
Tax incentives for the property investor ................................. 186
Another way to buy property, no money down........................187
10 Success Stories of Financial Entrepreneurs..................... 188

Well save you - Aussie John..................................................189
Wizard Mark Bouris.................................................................190
RAMS Home Loans................................................................193
Index ........................................................................................196
1.
H OW YOU CAN
SAVE THOUSANDS
OF D OLLARS AND
TAKE YEARS OFF
YOUR MORTGAGE!
What I didnt learn from my finance broker, but wish I had
The first thing I didnt learn from my finance broker or banker

that I wish I had was simple ways to reduce my home mortgage
in record time.
Paying off your mortgage

You have taken the leap and decided to buy a home. After
signing a mountain of paperwork you are now the proud owner
of your own residence. Thirty days later, when the first mortgage
payment comes due, you are hit by the reality of what you have
done. You have taken on 30 years' worth of massive payments in
an economy that makes no promises about long-term job
stability.
Lets look at the benefits of paying off your mortgage as soon
as you can and some pointers on how to do it.
Why pay off your mortgage or loan?

The first and most obvious reason to pay off your mortgage or
loan as soon as possible is that it will save you tens of thousands
of dollars. Read the papers you signed when you bought the
place. Take a close look at youramortisation schedule.
How mortgages work: the amortisation schedule

A mortgage'samortisation schedule provides a detailed look at
precisely what portion of each mortgage payment is dedicated to
each component of PITI (principal, interest, taxes, insurance). As
you are probably aware, in the first years mortgage payments
consist primarily of interest payments, as it gradually moves
toward the principal becoming greater.
In the example below of a $100,000 30-year mortgage, the
amortisation schedule consists of 360 payments. The partial
amortisation schedule shown below demonstrates how the
balance between principal and interest payments reverses over
time as later payments consist primarily of principal.
Payment Principal Interest Principal Balance

1 $99.55 $500.00 $99,900.45
12 $105.16 $494.39 $98,772.00
180 $243.09 $356.46 $71,048.96
360 $597.00 $2.99 $0
2
1-How you can save thousands on your mortgage!
As the chart shows each of the required payments is $599.55, but

the amount dedicated toward principal and interest varies from
payment to payment. Because of the inverse relationship
between principal and interest paid, at the start of your mortgage
the rate at which you gainequity in your home is much slower.
This demonstrates the value of making extra principal payments
if the mortgage permits pre-payment. Each extra payment results
in a larger repaid portion of the principal and reduces the interest
due on each future payment, moving the homeowner toward the
ultimate goal: paying off the mortgage.
How to pay off a mortgage quickly

Once you have a mortgage the key to paying it off is simple:
send money. Some mortgage plans offer a bi-monthly payment
schedule, which results in one extra payment per year. It is a
great strategy, unless there is a fee associated with it. If there is
simply set aside some cash and make an extra payment on your
own.
If your career advances over the years put those raises and
bonuses to work by sending them to the mortgage company. You
were doing just fine without that money and you won't miss it if
you don't get used to having it in your budget.
Keep an eye on interest rates and if they fall, consider
refinancing. If you can reduce your interest rate, shorten the term
of your loan or both, refinancing can be an excellent strategy.
Just don't make the mistake of keeping your term the same and
taking money out.
Get started now

There is no time like the present to begin your quest to pay off
that mortgage. Start by reading your amortisation schedule.
Once you see exactly how much of your monthly payment
goes to interest, and what a tiny portion goes toward paying off
the principal, you will realise that every extra dollar you pay off
reduces the portion of your payments that services your interest
expense.
It is a powerful motivator for financially smart individuals. If
you focus your efforts on the task at hand, you may be surprised
at how quickly you can retire a mortgage. With your mission
accomplished, you will find that the comforts of home are even
more pleasurable when it is you - not the bank - who owns the
home.
3
How to save thousands of dollars in interest on your mortgage

and how to pay your mortgage off in less than 10 years.
What is it that many people bend over backwards to obtain, then
once they have it, spend the next few decades trying to rid
themselves of it again? A mortgage!
For some reason, (is it because the banks and lenders will
achieve their maximum possible return) 25 years has become a
key length of time when it comes to mortgages. Traditionally, this
was the period over which lenders expected borrowers to repay
their loan, so affordability was calculated accordingly.
For a 25-year mortgage loan, the lender will expect a
payment each month over 25 years, which amounts to 300
payments. Though you probably don't want to know, the final
figure you will pay back under these circumstances is more than
double what you borrowed.
However, these days, borrowers are not tied down to this
unfavourable situation and the arbitrary nature of a 25-year term
is increasingly being recognised. As a homeowner, you are now
in control of your mortgage debt and can choose to pay it off
more quickly than a quarter of a century. With some mortgage
deals in fact, you can pay it off as soon as you are able.
Even a small amount ($25, $50, $100) added to your
mortgage payment each month when applied to the principal
can have a significant impact on the total amount of interest you
pay as well as how long you pay it.
For example, if you divide your monthly mortgage payment
by 12 and add that amount to your monthly payment each month
by the end of the year you will have paid the equivalent of an
extra mortgage payment for the year - a 13th payment - all
invested in principal reduction!
That 13th payment can make a big difference. For example,
lets say you borrowed $200,000 at 6.5 percent interest with a
30-year term. Your monthly payment would be a shade over
$1,264 a month for principal and interest. By adding an extra
$100 per month ($1,200 per year) you would pay off your
mortgage in just over 23 years, knocking almost seven years off
the loan and saving over $73,000 in interest.
Contact your lender to find out how they apply extra
payment money from you. Some lenders may apply your extra
money that you pay above your monthly payment amount
automatically to your principle.
However some may apply it to your escrow account to pay
4
taxes or insurance which is not what you want them to do! Make
sure you read the fine print, and call or write your lender to
confirm what they will do, or how you can assure that the extra
money goes to reducing your principal balance.
Some tips
Sending a separate cheque and clearly marking the Pay field
with your loan account and the phrase, Apply to Principle will
help assure proper credit and provide strong documentation of
your extra payments. Again, check with your lender.
Dont bother with offers from your lender or third party
companies that offer to charge you money (often as much as
$200-$300) to set up a bi-weekly payment program. You can
accomplish the same thing yourself without their help for free.
Bear in mind, although this is a great strategy to accomplish
the twin goals of saving money and increasing equity in the
capital asset that is your home, this may not be the best use of
your financial resources.
Interest rates for home mortgages tend to be lower than most
other consumer loans and your financial profile may suggest a
better use for this money, such as paying off higher interest
consumer loans first.
Anytime you prepay extra money on any instalment loan it
has the same effect as investing your money at that interest rate.
So if you had an extra $100 should you prepay it on a home loan
at 6.5% or a consumer loan at 10%, for example?
Therefore, we recommend consulting a qualified financial
advisor for a proper evaluation of your total financial picture
before proceeding with this strategy.
Save thousands on your mortgage - a starting example

Your new home costs $450,000. You have a $45,000 deposit and
borrow $405,000 over 25 years at 7.5% interest. Monthly
mortgage repayments are $2,993.
Total interest paid over the term of the loan is $492,874.
Now, let's change some of those variables to see how much
interest you can save.
Increase your deposit by $35,000

You now have a $80,000 deposit and only need to borrow
$370,000 over 25 years at 7.5% interest. Monthly repayments
are $2,734.
5
Total interest paid over the term of the loan is $450,280. By

increasing the deposit by $35,000, you have saved $45,594 in
interest costs and you have an extra $259 each month.
Or, reduce the length of your mortgage to 15 years

You have a $80,000 deposit and borrow $370,000 over 15 years
at 7.5% interest. Monthly repayments are $3,430.
reducing the term of the loan by 10 years, you have saved
$202,890 in interest costs.
Or, increase your payments

For example, if you were able to increase your monthly
repayment by $300 in the original example, from $2,993 to
$3,293 per month, you would reduce the length of your
mortgage by almost 5 years and 6 months. This would result in a
saving of $124,148 in interest costs.
Or, reduce the interest rate by just 0.25%

You have a $45,000 deposit and borrow $405,000 over 25 years
at 7.25% interest. Monthly repayments are $2,927.
reducing the interest rate by just 0.25%, you have saved $19,664
in interest costs.
Did you know you can pay off your 30-year mortgage in
half the time without refinancing by making extra principal
payments?
On the first of the month when you make your regular
mortgage payment, make a second payment for the
principal only portion of the next months payment.
Can you pay off a 30-year mortgage in 10 years or less?

Without winning the lottery or having a huge life insurance pay
out, paying off your mortgage within 10 years is going to take
many sacrifices. Deep down we know that these sacrifices are
for the best, but to achieve the goal you will need to sacrifice the
new car, sacrifice the overseas holiday, bring in at least an
average wage as well as sacrificing cigarettes, alcohol and
takeaways. If you have the strength of character to achieve this
then you are well on the way to being able to pay your mortgage
off in a decade.
6
By using the five steps below you may be able to pay off a
30-year mortgage in 10 years or less.
Most people would like to pay off their mortgage early, but
finding enough money to pay off their mortgage always seems
incredibly difficult. Often the major reason why is because most
people don't understand the steps to pay off their mortgage fast
and save interest. Here are some proven ways to get rid of your
mortgage and make a plan to be debt free.
A good first step to getting out of debt is to stop running up even

more debt on your credit cards. It is impossible to reduce your
debt if you are constantly adding to it. Leave your credit cards at
home the next time you go shopping. Credit card interest rates
are very high and store cards usually have rates of more than 20
percent. Better still, cut them up! Make sure you apply the
money you saved on expenses to your debt. Concentrate on
paying off one credit card at a time and then move on to the next
one.
Live within your means and pay cash for any purchases. Find
ways to cut back on expenses and save money. Stop creating
more debt. Allocate a fixed amount each month that you can
apply to paying off debt. Can you take your lunch to work every
day instead of buying it? You would probably save well over
$100 a month which could go to your mortgage payment.
Take a close look at what you really don't need to spend money
on and apply those savings to paying off debt. Find ways that
you could save money on eating out, clothes and household
expenses. One couple stopped buying lottery tickets and saved
$60 a week.
Another couple cut back on their spending at the bottle shop
and saved around $100 per week. The same couple stopped
eating out as much as they used to and saved another $200 a
week, for a total saving of around $15,000 which went straight to
reducing their mortgage. As for the struggling couple whose
husband spent (lost) an average of $250 per week at the local
TAB while waiting for the big one: they are still struggling with
their mortgage.
Are all your expenses really necessary? Prepare a budget
and calculate how much you could save monthly on your
expenses and apply your savings to paying off debt. This process
may take a little time, but it can be well worth the time you
7
spend. You may even discover ways you could save money you
never even thought of this week and find more in other weeks.
Do you really need that expensive motorcar with high running
and maintenance costs? Do you and your partner really need
two cars between you? After your credit cards are paid off, start
paying off your car payments. Can you downsize to a more
practical and more affordable car?
After your cars are paid off, make a point of allocating that
money to your mortgage. Use the money that you were wasting
on credit card payments and car payments to pay off your
mortgage.
If you continue this process, you could have your mortgage
paid off in around 5 or 10 years. How would it feel not to have a
big house payment waiting for you each month?
Is parking your extra funds in the mortgage to pay it off sooner
really the most efficient use of this money?
By paying off the loan you are investing this money in debt.
Your return is your applicable interest rate. For instance if the
standard variable rate on a new loan in the market at the
moment is 7.75%, in effect, your extra money will return 7.75%.
Your first mortgage

It is often difficult to get a foothold on the homeownership ladder.
Here are some tips for getting into the market.
In brief, start with as large a deposit as possible, make extra
repayments, negotiate a deal and put aside a small amount of
extra money each week.
By following these hints you could slash years off your
mortgage. A mortgage is one of life's necessary evils. You cannot
get onto the homeownership ladder without one, but it is
probably the biggest debt you will ever have and a massive
amount of your time, energy and money will be dedicated to
paying it off. It makes sense to get rid of your mortgage as
quickly as possible. That way, you can minimise the interest you
pay and build up equity to fund other enterprises, such as
renovations or property investments.
But how do you pay off your mortgage quickly? The answer
is: with a mixture of common sense and shrewd strategies.
Save as large a deposit as possible. While financial institutions
may lend 95 percent of the purchase price of a property, this will
8
leave you paying more interest and coping with the added cost
of lender's mortgage insurance. If you can save a 20 percent
deposit you will put yourself in a much better position from the
outset.
Make extra repayments. If you do this consistently you will
obviously pay your loan off faster than if you only meet the
monthly minimum. You will also cut down on the amount of
interest you are paying.
Choose the right loan. The home finance market is one of the
most fiercely competitive in the country and there are new
products hitting the streets every week. Some packages seem
attractive at first glance, but watch out for hidden costs - in
addition to interest rates you need to find out about loan
establishment fees, monthly fees and any other expenses.
Negotiate a deal with your lender. If you are a high-income
earner you can often qualify for a 'professional' loan the lender
grants you favourable terms because you are seen as a 'safe'
client. If you don't fit into this category, you can often negotiate a
more favourable income rate if you take out a package where
your mortgage, credit cards and transaction accounts are all with
the same lender.
Choose a basic package and get a lower interest rate
If you are a budget conscious borrower there is a good chance
that you don't need all the bells and whistles of a standard
account. Watch out though as there may be a penalty if you
want to make extra repayments or pay off your loan early.
If you find a lender with a better rate and options part way
through your mortgage, you can refinance and potentially save a
lot of money. However, loan establishment fees and penalties
from your current institution will probably cut deeply into any
benefits.
Offset accounts. Over time savings in an offset account can help

reduce the loan principle allowing you to pay off your loan
sooner or to build up equity. There are two different types of
offset accounts: a 100 percent offset and a partial offset account.
If we consider a typical couple with earnings of $55,000
each with a $500,000, thirty-year Principle and Interest Home
Loan, their outgoings and loan repayments will be held constant.
The only variable is how they use their money.
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Get an offset account or an all-in-one package. Although not

exactly the same, both work on a similar principle. Your salary is
placed in an account attached to your mortgage. Interest is
calculated on the amount you owe minus the amount in your
account. This means your salary works to pay off your loan. All-
in-one accounts include a credit card, which you use for your
expenses and pay off in one hit at the end of the month. This
maximises the amount of time your salary is being deducted from
your principle. However, if you are not disciplined you can get
yourself into trouble.
An offset account example

Scenario #1
$500,000 home loan, 30 years, Principle & Interest 8.0% p.a.
Interest saved over term of loan
Scenario #2
$500,000 home loan, 30 years, Principle & Interest 9.5% p.a. - with
an offset account
The difference between scenario # 1 with an 8% interest rate

and scenario # 2 with a 9.5% interest rate is:
Interest with scenario # 1 $837,484
Interest with scenario # 2 $426,608
Interest saved with an offset account $407,876
This also equates to 15 years off your mortgage!
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If you are still not convinced that structure is far superior than
that of the interest rate, lets compare a 6.5% p.a. standard 30-
year Principle & Interest home loan to 11.5% p.a. Interest only
loan with an offset facility account.
Scenario #3
$500,000 home loan, 30 years, Principle & Interest 6.5% p.a.
Scenario #4
$500,000 home loan, 30 years, Principle & Interest 11.5% p.a. - with
an offset account
The Difference Between scenario 3 at 6.5% p.a. and Scenario 4

@ 11.5% p.a. is
Interest with scenario 3 $645,813
Interest with scenario 4 $503,974
Interest saved via offset $141,839
The difference is also 16 years off your mortgage!
Honeymoon periods may seem attractive, but they expire

quickly. Low introductory rates often don't represent great value.
The lender generally recoups its initial discount by requiring you
to stay in your mortgage for a certain period and charging you
penalty fees for getting out early.
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Every little bit helps. Just putting aside a small amount of

extra money every week could potentially cut a couple of years
off your mortgage. And remember if you have built up significant
equity and you want to borrow again (to finance renovations, for
example) you can top up your mortgage and avoid repaying loan
establishment fees or mortgage stamp duty.
Pre-pay Your Mortgage

What is the single best investment that most people can make?
Probably the single best investment that most people can
make is an investment with a guaranteed high return. It is nothing
fancy - it is simply paying off your home mortgage as quickly as
possible.
Mortgage pre-payment is especially important in the initial
years when most of the mortgage goes towards interest. Take a
hypothetical $200,000 mortgage on a fixed 5% interest rate
amortised over 25 years. The monthly mortgage payment works
out to $1,163.21 and after the first year the principal balance is
still $195,845.49.
After five years, the balance is still $177,015.00 or 88% of the
original mortgage is still outstanding. In those five years, a total of
$46,807.61 in after-tax dollars has been spent to carry the
mortgage.
Now imagine that an extra $200 can be paid towards the
mortgage principal. After the first year the principal owing is
$193,390.30 and after five years it has shrunk to $163,431.59.
The loan period will be 6 years shorter and interest savings of
$41,255.47 can be realised.
The beauty of prepaying the mortgage is that an extra
payment reduces the mortgage balance and a little bit of every
future mortgage payment that would otherwise have serviced the
loan will now go towards reducing the loan. And over time every
little bit adds up to a lot of money.
The advantages of a bi-weekly mortgage payment

Do you know that every year you are giving away the hard-
earned equity in your home by paying more than you have to in
interest? Most homeowners don't realise they can cut up to seven
years off of the length of their mortgage and save thousands of
dollars in the process.
For instance, if you have a small $80,000 mortgage and are
paying an interest rate of 7 percent. How much will a bi-weekly
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payment method save you, versus paying the conventional

mortgage off over 30 years?
You would be saving over $25,000. The more your loan
amount or the higher your interest, the more money this you can
save. When you pay your mortgage bi-weekly, there are a
number of factors that come into play.
You are reducing the term of your loan by up to eight years,
you are paying less interest over the life of your loan and you are
building up equity in your home sooner because more of your
money is going towards principal than interest. The savings don't
end there.
Due to the fact that your mortgage will be paid off years in
advance, you will be able to discontinue your private mortgage
insurance earlier than you would if you were paying over a full
30 years, thereby saving you even more money.
The bi-weekly mortgage method is also a wonderful option
for people who want to pay off their homes in a shorter period of
time than the conventional thirty-year mortgages allow, but who
don't qualify for a standard 15-year mortgage. It offers
homeowners more convenience and flexibility than a fifteen-
year mortgage.
With a fifteen-year mortgage, if you want to change to a
thirty-year mortgage, you would have to refinance. With the bi-
weekly payment plan, if your circumstances temporarily change
and you need to pay on a monthly basis for a period of time,
there is no refinancing necessary. Unless you are independently
wealthy and don't care where your money goes, then you will
definitely want to look into paying off your mortgage on the bi-
weekly plan, and learning how to do it on your own.
Pay off your mortgage quickly with a bi-weekly plan

If you are a homeowner and suffer under your home loan you
can probably understand why people are keen to learn about
switching to a bi-weekly system of mortgage payments.
While the system has been around for a while most people
don't know about it - I wonder why banks and mortgage
companies would want to hide something of that sort?
The answer is so simple, it is surprising that no one seems to
be taking advantage of it. By simply paying a mortgage every
other week, instead of monthly, it shaves off years from the
mortgage, saving the homeowners thousands of dollars in interest
payments.
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Consider for example a loan of $100,000 at the interest rate

of 7.875 percent for a term of 30 years. If you were to use the bi-
weekly system to pay the loan off, you would be done with it 7
years before the end and in the process would have saved about
$40,000! Yet most homeowners are in the dark about the system.
It is not hard at all to set up the bi-weekly system and with
the proper tools you can do it yourself. So no more excuses of not
having enough to pay someone to set up the system for you.
There is absolutely no reason to not adopt this system except if
you just don't have the money and are living pay-day to pay-
day. Why is it that no one seems to know of this system? Probably
because the banks don't want people to know about this! Every
dollar that a homeowner saves with the system is another dollar
that the lenders lose in profits! Losing profits is not something that
bankers and lenders look favourably upon.
What steps you can take to get started with this information?
Create a budget to see what suits you better and how to go about
it. Then consider whether you should go with the bi-weekly
system of payments. Contact your mortgage company if they
offer services to their clients after the loan is closed and ask them
about this system.
How many tens of thousands of dollars in interest will you pay

between now and the end of your mortgage?
Here are a range of suggestions one young couple, Les and
Maureen, used to free themselves from their mortgage sooner.
By using these tips Les and Maureen paid off a three
bedroom brick home in three years on a combined income of
less than $56,000 when interest rates were 17 percent.
After saving a deposit, Les and Maureen took great trouble to
secure the right loan, find a house that was right for them and
negotiate what they considered the right price.
Les and Maureen realised that time was the biggest factor
affecting the amount eventually repaid on a loan and worked out
strategies to shorten this substantially and found the savings can
be astounding!
After preparing a budget Les and Maureen looked very
carefully at budgeting and saving money on general expenditure
so that more money could go into their mortgage payments.
Some hints for keeping to budget offered by Les and
Maureen: include preparing a grocery shopping list and sticking
to it (no buying) of extras and no shopping when hungry; buying
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groceries in bulk, taking discounts for paying cash, bartering and

trading in lieu of paying cash, insurance savings by using a
broker and doing household repairs and renovations themselves,
rather than paying tradespeople.
Get rid of your credit card. Use a debit card instead. If the
account you want to debit has no funds available you will not be
spending the money you may have carelessly spent with your
credit card. If you must have a credit card (for travel purposes for
instance) make a point of paying it off every month without
accruing very expensive interest.
Using a debit card will also deter you from drawing
excessive spending money out of your account to have in your
wallet to meet expenses. Les and Maureen used to withdraw
$500 a week for spending and shopping money. By changing to
a debit card they now withdraw only $200 per week and have
managed sizeable savings by avoiding impulse buys.
Regardless of how short you intend your loan to be it should be

arranged for a period of 25 or 30 years. This makes the basic
repayment calculated by your lender as small as possible, and
provides a safety net in case you lose the ability to repay the
rates you will be setting for yourself. It will also buy you time if
you can't make payments because of loss of your job or health.
Instead of abiding by the standard settlement period of six

weeks when buying a property dont be afraid to ask for a longer
term. If the vendor agrees, then a three-month settlement or even
longer could provide you with enough time to save for all the
legals, increase the amount of your deposit and reduce the
amount you need to borrow. This may also assist in reducing
stamp duty and other fees.
Most loans have a full month between settlement date and the
time when your first repayment is due putting you at a
disadvantage in reducing the cost and time to pay of your
mortgage from the outset. During this time, you and your partner
should have been paid your salary at least once each without
any repayments to make.
If you pay as much of this salary as you can (at least one
person's entire salary) into the loan before your first repayment
falls due, then with many loans you will never pay any interest
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on that part of the principal and will effectively make every

basic repayment a little more than it needs to be. By doing this,
you will be instantly and forever in front! ,
When your interest rate drops - remember interest rates

fluctuate. Australia had nine consecutive rate rises before a
0.25% rate decrease in September 2008 - keep paying the same
amount off your loan. You will never miss money you never had
and that little extra payment will help shorten your loan period
perhaps even by years.
Can you arrange for your repayment and your partner's

repayment to go automatically to the loan as soon as the money
is in the accounts instead of waiting for due dates? There are 52
weeks in every year and an average of four weeks to every
month. If your monthly repayment is $2,000 you will make 12
months worth of payments totalling $24,000 (or $500 per weekly
pay x four pays per month x 12 months per year). But if you
make the same $500 repayment every single week you will pay
an extra month's worth of repayments (an extra $2,000) every
year.
Each extra dollar you pay off the loan in the beginning of its life
decreases the term of your loan exponentially.
Can you take advantage of the daily reducing facility to
reduce your principal by as much as you can (even if it's just
$50) as often as you can?
Make sure that the first automatic payment is large enough
and early enough to cover the basic repayment when it falls due
and keep it that way. If you get a lump sum, a bonus payment,
some back pay, or a windfall of any kind, pay that in as soon as
possible too.
The Debt Reducer - The correct way to pay off personal debt
If you have a certain amount of money available to pay off a
portion of your debt each month, even if that certain amount
changes, there is a mathematically correct way of paying off that
debt. We call this approach the Debt Reducer. With the Debt
Reducer you will pay off your debt faster and pay less total
interest to banks and lenders.
The simple calculation for the Debt Reducer requires only
the interest rates for each debt account. This assumes that all debt
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accounts have the same tax liability, but if that is not the case,
determine your interest rate after taxes for this calculation.
Step 1. Order your debts from highest interest rate to lowest.
You may find credit cards at the top of the list. It is typical to see
interest rates from 12% to 20% and even more. Credit cards
offered by stores often have the highest interest rates, so you
might find these at the very top. Watch out for promotional rates
ending, which they may do on the date promised when you
enrolled, or earlier.
Card issuers also re-evaluate their customers every so often,
and will not think twice about raising your rates midstream. Note
that if your credit improves, they will not magically lower your
rates. While lenders will notify you if they intend to raise your
rates, you may have missed the notice.
Your mortgage and home equity loan may be the next debts
in line. It is important for your list to capture every debt for which
you make a monthly payment. Student loans may be the last on
the list, particularly if you qualify for tax credits. The Debt
Reducer formula wont work properly if it covers only a portion
of your debt, so consider and include all accounts.
Order your list from the highest interest rate (after tax) to the
lowest. You may have noticed we didnt factor in your account
balances in the above formula. That is because your individual
account balances are irrelevant. The issue solved by the Debt
Reducer is the best way to pay off your total debt with all
available funds.
Step 2. Pay the minimum to all debts every month. If you are
writing down your list, or using a spreadsheet on your computer,
add a column next to each debt to list its minimum monthly
payment. This is the amount you will pay towards each debt,
except for the one account listed at the top of the list.
Another column should list the payment due date if it is
relatively static from month to month. For example, if your credit
card payment is due on the last date of almost every month, write
30. This indicates the last date of every month. Your payments
should always arrive before the due date. In some cases, you can
reduce your total interest paid by paying weeks in advance of
your due date.
Step 3. Send all extra available cash to your debt with the
highest interest. If you have an emergency fund, this step is
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simple. Since it is unlikely that you can earn more in savings than
you can earn (reclaim) by paying off your debt, all your unused
income after paying expenses (necessary and discretionary as
you see fit) should be dedicated towards the debt account with
the highest interest rate.
Step 4. Repeat every month. You cover all your bases by
ensuring every creditor receives the minimum payment, but you
hone in on only your debt with the highest interest. Once a debt
account has been eliminated - and it may not be the account at
the top of the list if other balances are smaller - remove it from
the list and reorder if interest rates have changed.
It is really a very simple process. This is mathematically the
best method for paying off your personal debt. No other method
will get you out of debt faster and save you as much money.
The Debt Reducer will also provide early success, but if you
need special motivation to continue your monthly payments,
consider this: By choosing the Debt Reducer method, you will
pay off your total debt faster, you will pay less interest, and you
are mathematically efficient.
One of the many reasons people can fall into debt is the
difficulty of separating emotional thinking from rational thinking.
The Debt Reducer helps separate these two methods of thinking,
as the best financial decisions are almost always the rational
decisions. But it helps to pay attention to some of the psychology
involved, as well.
The possible motivation due to the early success aspect of
the debt snowball method is cited by many followers to be its
strongest point, encouraging debt reducers to continue down the
path. Followers of the mathematically and financially superior
Debt Reducer, if they need this sort of motivation, can achieve
the same effect by defining milestones.
Rather than celebrating when your first full credit card or
other debt account is paid off, take note and reward yourself
when you have paid off your first $1,000 (or $500 or $10,000,
whatever is applicable to you). Setting and achieving these short
term goals influences the same area of the brain (the mesolimbic
system) as the act of paying off the first credit card and are
similar enough to provide the same motivational results.
Quick wins may help to motivate debt reducers to continue
along the path, but the real win comes in knowing youve made
the smarter choice.
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Learn to calculate the amount of interest on your loan

You can calculate the amount of interest that will accumulate on
your loan on your computer or calculator using the formula
shown below. Alternately you can use the reckoners or
calculators provided by many lending organisations on their
website.
Being aware of the huge amounts of interest that will
accumulate on your loan over long payment periods will
hopefully raise your awareness of the benefits of paying your
loan off quickly. This formula will also allow you to calculate the
effects of interest rate fluctuations.
Compound Interest
P = principal at the beginning
i = rate of interest per period (expressed as a fraction or decimal)
n = number of periods for which interest is accumulated
S = accumulated value at the end of n periods
The accumulated value at the end of n periods is S = P(1 + i)n
The accumulation factor is the factor by which you multiply the original
principal in order to obtain the accumulated value accumulation factor
= (1 + i)n
Amount of compound interest

= accumulated value - original principal
= P(1 + i)n - P
= P{(1 + i)n - 1}
= P x accumulation factor
Get ahead and stay ahead of your repayments by making

whatever payments you can afford automatically out of each pay
as soon as the money is in your account.
Stay up to date dont forget about your mortgage

With any long-term commitment, there is always the temptation
to let your mortgage roll along, make your repayments as they
fall due and think as little about it as possible.
This attitude can be a big mistake. Keep yourself up to date
with whats happening in the marketplace. You might find that
theres an opportunity to put yourself well ahead of the game.
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Rates change, new products and changes in the market itself

may allow you to seize an opportunity or negotiate a better deal.
Information is your greatest weapon against the mortgage
monkey on your back. By staying informed about what is going
on in the home loan market, you might be able to stay a step or
two ahead of your lender. And if you can stay one step ahead,
you are already on your way to paying off your mortgage faster.
Pay all your mortgage fees and charges upfront

Some lenders allow you to add to the amount you borrow instead
of coming up with cash for your upfront costs. While this can
seem a blessing try to avoid doing this.
Pay your first instalment before its due. With most new loans,
the first instalment may not become due for a month after
settlement. If you can manage it (and your lender will let you),
pay the first instalment on the settlement date. If you do this, you
will be one step ahead of the lender for the term of your loan.
Every little bit counts.
Shop around and make sure your lender knows it

One of the most powerful tools you can have in the search for the
best home loan is information. Make sure you have rung half a
dozen lenders and brokers - and done some internet research -
before you start talking to your preferred lender about getting a
new loan or refinancing your existing loan. Ensure you know
what rates and features are offered by each of your lenders
competitors on comparable products. Dont be afraid to walk out
if you arent getting the best possible deal you can.
Make sure your loan is portable

If there is any chance that you will move house during the course
of your loan - and lets face it, there is a strong chance - make
sure that your lender will allow you to transfer your loan to a
new property and that it wont charge you the earth for the
privilege.
Make a point of checking your bank statements and loan

account statements. Banks and lending institutions are not
infallible. If there are charges that you disagree with, or do not
understand, take it up with your contact person.
When you receive a pay rise always increase the repayment by

at least half of the pay increase after tax.
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Use a mortgage offset facility. Many lending institutions have

some form of mortgage offset facility. This is a simple way of
reducing your loan by putting all your spare savings (usually set
aside for emergencies) as well as having your regular pay
deposited to a savings account which pays any interest earned
off the top of your loan, instead of depositing it to your account.
Always remember, every little bit helps!
How does your home loancompare?

Should you consider refinancing?
Many of us go through life with the Australian mental attitude of
once set-up, time to forget. We seem to spend extraordinary
and diligent time to make sure that we can get the first mortgage
loan, but then we just sit back on our couches or lounge chairs
and let the world goby not realising that we have justlost control
of our own finances! The biggest problem we as homeowners
face today is that the old mortgage probably becomes outdated
with the ever increasing changes in finance products that
become available.
Are you slipping away from being in charge of your own
finances? With the property market slowly changing, a lot of
funders are generating new loan packages that will finally
benefit you the customer and not the bank.
Many different products are available now including the no
frill type home loans, professional packages and super
professionalbank reducer loan packages. Selected funders
were easing the lending criterias for non-conforming loans and
also increasing their maximum LVR (Loan to value Ratio) as they
are starting to see the signs of the marketplace turning around.
It may be time for you to take a fresh look at your finances
andat the possibilities of modernising your existing debts.
There may be a better package that will save you many
dollars each month and allow you to return to that lifestylethat
you and your family deserve. Check and explore the various
home loan packages and whether or not your loan is still the best
around and working for you.
A lot of people will go into their first mortgage with great doubt
whether they are doing the right thing and whether they can
afford the future liabilities and associated costs to own their own
little castle. Once the loan is set, the majority of people will put
it on a shelf and forget about it.
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You should stay on top of the rules and rates of the modern
day banks and funders as they are forever competing for your
mortgage and will continually offer better rates and fees and
general charges.
If you decide to refinance your loan, the key to setting up
your new loan is to set it up at the right rate from the beginning -
one that benefits you the client and not the bank. This could
potentially mean thousands of dollars saved on the life of the
mortgage.
For example, if you can lower your annual interest rate by

1.00% on a $400,000 mortgage you could stand to save more
than $125,000 over a 30-year term! Imaging paying off that
dreaded mortgage in one third of the schedule time. Happy
days!
For those who already have mortgages, start comparing your
current rate with a broker and see what is available in the
market place. It is intriguing that the average person would go
and see a dentist or doctor for a check up, or get a regular
service done on their mode of transport (car/bike) and yet the
thing that costs us most in life we usually take for granted and
forget. You will find that the financial institutions like major banks
have greater overheads than those of the non-branch types. It
is logical to note that all these branches, due to the daily running
costs and hiring of personnel would add to the cost of your
mortgage.
Reputable brokers should be able to get a better rate for their
client and offer loan products from a multitude of lenders instead
of just the one bank you would walk into.
In a refinance situation, look at the initial cost in comparison
to the total dollars you possibly could save over the life of the
loan. At the end of the day you should be the winner and not the
bank!
Additional payments
Keep in mind that most mortgages will permit you to make
additional payments to your principal at anytime. Perhaps, five-
years after moving into your home you receive a larger than
expected tax return, an inheritance or a windfall such as a
lottery prize. You could apply this money toward your loan's
principal, resulting in significant savings and a shorter loan
period.
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Example: With a $100,000, 30-year, 6.5% fixed interest rate

mortgage loan, the borrower will pay a total of $227,542.98 to
pay back the loan in 30 years. That equals $127,542.98 in
interest payments.
If the same borrower makes a one-time $5,000 payment the
first day of year 6, he/she will pay a total of $204,710.75 and pay
off the loan in 27 years (324 months). That's a savings of
$22,832.23 in interest.
Is todays dollar worth the same as a dollar in 30 years?

A strong argument can be made for repaying your mortgage as
slowly as youwant. For years banks and financial advisors have
been recommending that you pay extra cash into your mortgage,
to cut down the huge interest amount and reduce the period over
which you pay back the loan.
For example, if you borrow $200 000 over 30 years at a rate
of 5 percent, your monthly repayments would be around $1074.
Over 30 years, you would actually pay $1074 x 360 (months),
which is $386, 640. Thats $186,640 in interest!
If you could find an extra $246 a month and pay $1,320 a
month into the mortgage, you would cut 10 years off the
repayment period - the loan would be fully paid in only 20 years.
Moreover, your total payments would be $316,664, saving
$69,756! The flaw in this technique is that it ignores the time
value of money.
Everyone knows that money is worth less now than it was
when they were younger. If you take that $1,074 mortgage
repayment, for instance, in 30 years time, when the last payment
is due, it would only be worth $437 in todays money.
A dollar now is always better than a dollar in a years time,
or in 10 years time.
How does the time value of money affect our example? You
cannot simply subtract the mortgage interest amount for a 20-
year mortgage from the interest on a 30-year mortgage. What
you need to do is calculate the Present Value of each mortgage.
The Present Value of a 30-year mortgage with repayments of
$1,074 at a 5 percent interest rate is $200,066.
The Present Value of a 20-year mortgage with repayments of
$1,320 at a 5 percent interest rate is $200,066.
The two repayment schemes are exactly equal.
The $69,756 saving in the interest rate is really just the
effect of adding the extra $246 a month into the repayments - in
23
fact, that $246 a month adds up to $59,040 over 20 years.

What if you took that $246 a month and invested it in, for
example, mutual funds?
If you could get a return of 10 percent p.a., after 20 years
you would have $186,804. With inflation at 3 percent, that would
be worth $102,597 in todays money. Why would the banks
recommend that you pay off your mortgage quickly? Surely the
longer the income stream lasts the better?
The banks love being able to prove that their
recommendations will save you money. But in reality the banks
do understand the time value of money. They know the true
value of that extra $246 a month that you are giving them now,
not in the future. The shorter the time you take to repay the
mortgage, the lower their risk and the sooner their money comes
back to them to be loaned out again.
There are some arguments for paying your mortgage back
quickly - for one thing, the quicker you pay, the quicker your
equity grows. But you should understand that every dollar you
give the bank now is a dollar that you cannot invest.
Giving your money to the bank to avoid paying 5 percent
interest means that you cannot use that money to earn 10 percent
or 12 percent or 15 percent somewhere else.
How to waste $175,000 in 10 years

How many of us really stop to think about how much we are
wasting each week, month, and year? Accountant Tracy Coenen
posed this question and provided the rhetorical answer, I bet not
many.
And when people complain about being broke, an analysis
like this makes it clear how many of us probably have plenty of
fat that can be trimmed from our budgets.
In an analysis of Top Ways to Waste Money, it was found
many of the common extras we buy on a daily or monthly basis:
coffee, sweets, lottery tickets, poker machines, unwanted items
on sale or special, regular pedicures, clothes we dont wear,
bottled water, manicures, car washes, memberships we don't
use, pay television and the like.
Add up all those extras over ten years, and what would be
the result if you had instead saved and invested the money? A
windfall $175,000!
There are probably some items on the list that you never
buy and wouldn't affect you. An average rate of return of 8%
24
compounded monthly might be a little optimistic. But even if you

only indulged in half of the items on this list, we are still talking
$87,500 over ten years. That's a whole lot of extras, most of
which really are not necessary and don't truly enhance our
quality of life.
I know it is nice to treat ourselves sometimes and we are all
guilty of doing that often enough. But I think that when
consumers start to look at this type of spending over the long
haul, they will see how truly wasteful it is. Do I really want a
fancy coffee today? Or would I rather save that money and ten
years from now have a nice nest egg that will offer me flexibility?
What would you do with an extra $80,000 or $125,000 or
$175,000 in the bank? It might allow you to leave a job you don't
like, take some time off for a family medical crisis, or start the
business of your dreams. I hope more of my readers start looking
at their own lifestyles and looking at where they can trim
expenses and save that money instead. Long term financial
stability is worth so much more than today's manicure or unused
gym membership.
The Philosophy of Money

Interest is calculated daily and charged monthly in
arrears.
Interest saved is better than interest earned.
By reducing your bad debt principal loan amount from
day 1, you can reduce a 30-year principal and interest
(P&I) loan to 15 years or even less by using a mortgage
offset facility.
25
2.
WHAT IS A
MORTGAGE?
Arranging a mortgage is seen as the
standard method by which individual
and businesses can purchase residential
and commercial real estate without the
need to pay the full value immediately.
What is a mortgage?
A mortgage is a method of using property, real or personal as
security for the payment of a debt.
The term mortgage (from Law French, lit. dead pledge) refers
to the legal device used for this purpose, but it is also commonly
used to refer to the debt secured by the mortgage, the mortgage
loan.
In most jurisdictions, mortgages are strongly associated with
loans secured on real estate rather than other property (such as
ships) and in some cases only land may be mortgaged. Arranging
a mortgage is seen as the standard method by which individuals
and businesses can purchase residential and commercial real
estate without the need to pay the full value immediately. In
many countries it is normal for home purchases to be funded by a
mortgage. In countries such as Australia and New Zealand
where the demand for homeownership is highest, strong domestic
markets have developed.
A loan has three facets:

1. Size (how many dollars you need to borrow)
2. Interest (the percentage rate you pay on the loan)
3. Term (how long it will take to pay off the loan)
Size is self-explanatory, although there are choices you can

make with regard to the down payment. The other two are more
complicated. Let's look first at the interest rate.
The calculation of APR (annual percentage rate)

The annual percentage rate is the actual amount of interest that
will be paid on a given loan, over the life of that loan. It makes it
easy to compare one mortgage to another by making it an
apples-to-apples comparison. You should, however, use the APR
as just one tool in evaluating a loan, not as the sole factor in
making your decision.
The term
The most common term for a fixed-rate mortgage is 30 years,
with 15 years the next most common.
A 30-year vs. 15-year mortgage debate rages, but one thing
is sure: you will pay much more interest over the term of the loan
(in most cases double) on a 30-year mortgage. On the flip side, a
30-year mortgage will offer lower monthly payments. On the
27
2-What is a mortgage?
other hand, in the first 15 years of your loan, you will line
someone else's pocket with interest while not building up
significant principal for yourself.
Example: Let's say you buy a $150,000 home. You put down
20 percent, or $30,000, which leaves you $120,000 to finance. If
you get a 30-year loan at 8.5 percent, your payments are
$922.70. After five years of payments, your balance owed is
$114,588. If, on the other hand, you obtain a 15-year mortgage
at 8.00 percent (rates are lower with shorter-term loans), your
payments are $1,146.00 ($224.00 more each month). After five
years in this loan, however, your balance is only $94,000. That's
quite a difference when it comes time to sell.
In sum, a 30-year loan is good for long-term stability. If you
can afford a 15-year mortgage, you will build principal faster.
Another option would be to pay what would be equal to the 15-
year payment on a 30-year loan, enabling you to pay it off in
about 15 years (slightly longer due to the higher interest rate),
while still having the cushion of the lower payment should
money problems arise.
At common law, a mortgage was a conveyance of land that on

its face was absolute and conveyed a fee simple estate, but
which was in fact conditional, and would be of no effect if
certain conditions were not met - usually, but not necessarily, the
repayment of a debt to the original landowner. Hence the word
mortgage, Law French for dead pledge; that is, it was absolute
in form, and unlike a live gage, was not conditionally
dependent on its repayment solely from raising and selling crops
or livestock, or of simply giving the fruits of crops and livestock
coming from the land that was mortgaged. The mortgage debt
remained in effect whether or not the land could successfully
produce enough income to repay the debt. In theory, a mortgage
required no further steps to be taken by the creditor, such as
acceptance of crops and livestock, for repayment.
The difficulty with this arrangement was that the lender was
absolute owner of the property and could sell it, or refuse to re-
convey it to the borrower, who was in a weak position.
Increasingly the courts of equity began to protect the borrower's
interests, so that a borrower came to have an absolute right to
insist on re-conveyance on redemption. This right of the
borrower is known as the equity of redemption.
This arrangement, whereby the mortgagee (the lender) was
28
on theory the absolute owner, but in practice had few of the

practical rights of ownership, was seen in many jurisdictions as
being awkwardly artificial. By statute the common law position
was altered so that the mortgagor would retain ownership, but
the mortgagee's rights, such as foreclosure, the power of sale and
the right to take possession would be protected.
A mortgage is method to secure or obtain a loan against any

property which an individual possesses. The lenders usually set
the credit limit at the beginning of the process and the mortgagor
may redraw unto this limit set by the lender.
Any property can be mortgaged to obtain a loan but land
happens to be the most common. A mortgage could be looked
upon as a security for the loan being taken. The mortgage is
terminated when the complete repayment of the loan has been
done.
Mortgage laws are different for different countries and the
method including various rules depend on the particular country.
The borrower or the person who requires a loan and who
mortgages his/her property is known as a mortgagor. The party,
which lends loan against the mortgaged property, is known as
the mortgager.
An offset mortgage is a type of mortgage used in the case of a
purchase of domestic property. The offset mortgage works in a
similar fashion to the current account mortgage except for the
customer, different balances are completely kept separate. This
type of a mortgage is useful to those people who pay huge sums
of interest, as this method is very tax efficient.
This type of a mortgage also helps in using both the current
and the savings to have a higher equity in their homes. Let us
now see how exactly the offset mortgage is different from the
current account mortgage.
In the offset mortgage three separate accounts are maintained.

1. Current account.
2. Mortgage account.
3. Savings account.
These three accounts are charged at a different rate, or there
is a possibility that the lender would charge the interests at a
fixed rate, or there also is a possibility that the interest would be
charged in accordance to the latest market rates.
29
The various advantages other than those listed above are:

1. It offers a very flexible method of mortgage.
2. The more money one has in his current account above the
monthly payment the lesser would be the interest paid on the
original amount of the capital loan.
3. It is a lot cheaper to get a loan from this account in comparison
to interest rates that would be offered on credit and store cards.
4. This proves to benefit a lot in terms of the amount of tax
savings it offers as it groups or classes the mortgage to the
savings account and thus reducing the mortgage debt.
As all good things come with a condition, the offset mortgage also
has some disadvantages:
1. To make the current account mortgage work properly and
efficiently requires a lot of planning, budgeting and discipline.
2. Offset mortgaging is a new field as compared to other
mortgaging options and thus this so called newer version of the
mortgage is limited in offer by only a few lenders.
3. The interest rate is different for the current and mortgage
account hence one does not have the option to save at the
standard viable rate.
Foreclosure and non-recourse lending

In most jurisdictions, a lender may foreclose on the mortgaged
property if certain conditions apply - principally, non-payment of
the mortgage loan. Subject to local legal requirements, the
property may then be sold. Any amounts received from the sale
(net of costs) are applied to the original debt.
In some jurisdictions, mortgage loans are non-recourse loans:
if the funds recouped from sale of the mortgaged property are
insufficient to cover the outstanding debt, the lender may not
have recourse to the borrower after foreclosure. In other
jurisdictions, the borrower remains responsible for any remaining
debt, through a deficiency judgement.
Specific procedures for foreclosure and sale of the
mortgaged property almost always apply, and may be tightly
regulated by the relevant government. In some jurisdictions,
foreclosure and sale can occur quite rapidly, while in others
foreclosure may take many months or even years. In many
countries, the ability of lenders to foreclose is extremely limited
and mortgage market development has been notably slower.
30
Mortgage loan basics

Mortgage loans are generally structured as long-term loans, the
periodic payments for which are similar to an annuity and
calculated according to the time value of money formulae. The
most basic arrangement would require a fixed monthly payment
over a period of ten to thirty years, depending on local
conditions. Over this period the principal component of the loan
(the original loan) would be slowly paid down through
amortisation. In practice, many variants are possible and
common world wide and within each country.
Lenders provide funds against property to earn interest
income and generally borrow these funds themselves, for
example, by taking deposits or issuing bonds. The price at which
the lenders borrow money therefore affects the cost of
borrowing. Lenders may also, in many countries, sell the
mortgage loan to other parties who are interested in receiving
the stream of cash payments from the borrower, often in the form
of a security by means of a securitisation.
Mortgage lending will also take into account the (perceived)
riskiness of the mortgage loan, that is, the likelihood that the
funds will be repaid (usually considered a function of the
creditworthiness of the borrower); that if they are not repaid, the
lender will be able to foreclose and recoup some or all of its
original capital; and the financial, interest rate risk and time
delays that may be involved in certain circumstances.
More recently, mortgage loan brokers have expanded their
businesses to include a web presence. There is now even a
market for standard web templates that are used by brokers who
want to quickly develop an online component to their business.
Mortgage loan types

There are many types of mortgages used world wide, but several
factors broadly define the characteristics of the mortgage. All of
these may be subject to local regulation and legal requirements.
Interest may be fixed for the life of the loan or variable, and
change at certain pre-defined periods; the interest rate can also,
be higher or lower.
Term: mortgage loans generally have a maximum term, that
is, the number of years after which an amortising loan will be
repaid. Some mortgage loans may have no amortisation, or
require full repayment of any remaining balance at a certain
date, or even negative amortisation.
31
Payment amount and frequency: the amount paid per period

and the frequency of payments; in some cases, the amount paid
per period may change or the borrower may have the option to
increase or decrease the amount paid.
Prepayment: some types of mortgages may limit or restrict
prepayment of all or a portion of the loan, or require payment of
a penalty to the lender for prepayment.
The two basic types of amortised loans are the fixed rate
mortgage (FRM) and adjustable rate mortgage (ARM) also known
as a floating rate or variable rate mortgage. In many countries
floating rate mortgages are the norm and will simply be referred
to as mortgages; fixed rate mortgages are typically considered
standard. Combinations of fixed and floating rate are also
common, whereby a mortgage loan will have a fixed rate for
some period and vary after the end of that period.
In a fixed rate mortgage, the interest rate, and hence periodic

payment, remains fixed for the life (or term) of the loan. The term
is usually up to 30 years, 15 and 30 being the most common,
although longer terms may be offered in certain circumstances.
For a fixed rate mortgage, payments for principal and interest
should not change over the life of the loan, although ancillary
costs (such as property taxes and insurance) can and do change.
In an adjustable rate mortgage, the interest rate is generally
fixed for a period of time, after which it will periodically (for
example, annually or monthly) adjust up or down to some market
index.
Adjustable rates transfer part of the interest rate risk from the
lender to the borrower and thus are widely used where fixed rate
funding is difficult to obtain or prohibitively expensive. Since the
risk is transferred to the borrower, the initial interest rate may be
from 0.5 percent to 2 percent lower than the average 30-year
fixed rate. The size of the price differential will be related to debt
market conditions, including the yield curve.
Additionally, lenders in many markets rely on credit reports
and credit scores derived from them. The higher the score, the
more credit-worthy the borrower is assumed to be. Favourable
interest rates are offered to buyers with high scores. Lower scores
indicate higher risk for the lender and higher rates will generally
be charged to reflect the (expected) higher default rates.
A partial amortisation or balloon loan is one where the
amount of monthly payments due are calculated (amortised) over
32
a certain term, but the outstanding principal balance is due at

some point short of that term. This payment is sometimes referred
to as a balloon payment or bullet payment. The interest rate for
a balloon loan can be either fixed or floating. The most common
way of describing a balloon loan uses the terminology X due in
Y, where X is the number of years over which the loan is
amortised, and Y is the year in which the principal balance is
due.
Loan to value and down payments

Upon making a mortgage loan for purchase of a property,
lenders usually require that the borrower make a down payment,
that is, contribute a portion of the cost of the property. This down
payment may be expressed as a portion of the value of the
property. The loan to value ratio (or LTV) is the size of the loan
against the value of the property. Therefore, a mortgage loan
where the purchaser has made a down payment of 20 percent
has a loan to value ratio of 80 percent. For loans made against
properties that the borrower already owns, the loan to value ratio
will be imputed against the estimated value of the property.
The loan to value ratio is considered an important indicator
of the riskiness of a mortgage loan: the higher the LTV, the higher
the risk that the value of the property (in case of foreclosure) will
be insufficient to cover the remaining principal of the loan.
Value: actual, appraised and estimated

Since the value of the property is an important factor in
understanding the risk of the loan, determining the value is a key
factor in mortgage lending. The value may be determined in
various ways, but the most common are:
1. Actual or transaction value: this is usually taken to be the
purchase price of the property. If the property is not being
purchased at the time of borrowing this information may not
be available.
2. Appraised or surveyed value: in most jurisdictions some form
of appraisal of the value by a licensed professional is
common. There is often a requirement for the lender to obtain
an official appraisal.
3. Estimated value: lenders or other parties may use their own
internal estimates, particularly in jurisdictions where no
official appraisal procedure exists, but also in some other
circumstances.
33
Equity or homeowner's equity

The concept of equity in a property refers to the value of the
property minus the outstanding debt, subject to the definition of
the value of the property. Therefore, a borrower who owns a
property whose estimated value is $400,000 but with outstanding
mortgage loans of $300,000 is said to have homeowner's equity
of $100,000.
Payment and debt ratios

In most countries, a number of more or less standard measures of
creditworthiness may be used. Common measures include
payment to income (mortgage payments as a percentage of gross
or net income); debt to income (all debt payments, including
mortgage payments, as a percentage of income); and various net
worth measures. In many countries, credit scores are used in lieu
of, or to supplement these measures.
There will also be requirements for documentation of the
creditworthiness, such as income tax returns, payslips, etc. - the
specifics will vary from location to location. Many countries
have lower requirements for certain borrowers, or no-doc /
low-doc lending standards that may be acceptable in certain
circumstances.
Standard or conforming mortgages

Many countries have a notion of standard or conforming
mortgages that define a perceived acceptable level of risk,
which may be formal or informal, and may be reinforced by
laws, government intervention, or market practice. For example,
a standard mortgage may be considered to be one with no more
than 70-80 percent LTV and no more than one-third of gross
income going to mortgage debt.
A standard or conforming mortgage is a key concept as it
often defines whether or not the mortgage can be easily sold or
securitised, or if non-standard, may affect the price at which it
may be sold.
Many countries have similar concepts or agencies that define
what are "standard" mortgages. Regulated lenders (such as
banks) may be subject to limits or higher risk weightings for non-
standard mortgages.
34
Capital and interest

The most common way to repay a loan is to make regular
payments of the capital (also called principal) and interest over a
set term. A mortgage is a form of annuity from the perspective of
the lender, and the calculation of the periodic payments is based
on the time value of money formulas. Certain details may be
specific to different locations: interest may be calculated on the
basis of a 360-day year; interest may be compounded daily,
yearly, or semi-annually; prepayment penalties may apply and
other factors. There may be legal restrictions on certain matters,
and consumer protection laws may specify or prohibit certain
practices.
Depending on the size of the loan and the prevailing
practice in the country, the term may be short (10 years) or long
(50 years plus). In Australia 25 to 30 years is the usual maximum
term although shorter periods, such as 15-year mortgage loans,
are common. Mortgage payments, which are typically made
monthly, contain a capital (repayment of the principal) and an
interest element. The amount of capital included in each
payment varies throughout the term of the mortgage. In the early
years the repayments are largely interest and a small part
capital. Towards the end of the mortgage the payments are
mostly capital and a smaller portion interest. In this way the
payment amount determined at outset is calculated to ensure the
loan is repaid at a specified date in the future. This gives
borrowers assurance that by maintaining repayment the loan will
be cleared at a specified date, if the interest rate does not
change.
Interest only
The main alternative to capital and interest mortgage is an
interest only mortgage, where the capital is not repaid
throughout the term.
With this arrangement regular contributions are made to a
separate investment plan designed to build up a lump sum to
repay the mortgage at maturity.
It is not uncommon for interest only mortgages to be arranged
without a repayment vehicle, with the borrower gambling that
the property market will rise sufficiently for the loan to be repaid
by trading down at retirement or when rent on the property and
inflation combine to surpass the interest rate.
35
No capital or interest
For older borrowers (typically in retirement), it may be possible
to arrange a mortgage where neither the capital nor interest is
repaid. The interest is rolled up with the capital, increasing the
debt each year.
These arrangements are variously called reverse mortgages,
lifetime mortgages or equity release mortgages, depending on
the country. The loans are typically not repaid until the
borrowers die, hence the age restriction.
Foreclosure and non-recourse lending

In most jurisdictions, a lender may foreclose the mortgaged
property if certain conditions apply - principally, non-payment of
the mortgage loan. Subject to local legal requirements, the
property may then be sold. Any amounts received from the sale
(net of costs) are applied to the original debt. In some
jurisdictions, mortgage loans are non-recourse loans: if the funds
recouped from sale of the mortgaged property are insufficient to
cover the outstanding debt, the lender may not have recourse to
the borrower after foreclosure.
In other jurisdictions, the borrower remains responsible for
any remaining debt. In virtually all jurisdictions, specific
procedures for foreclosure and sale of the mortgaged property
apply and may be tightly regulated by the relevant government.
In some jurisdictions, foreclosure and sale can occur quite
rapidly, while in others foreclosure may take many months or
even years. In many countries the ability of lenders to foreclose is
extremely limited, and mortgage market development has been
notably slower.
Where does the money come from for mortgage loans?

How money is created in Australia
We have all heard the saying money is the root of all evil and
probably thought that was a bit of an exaggeration. But when
we understand how money is created in the modern world we
can then understand the main cause of many major problems:
ever increasing taxation; pensions disappearing; inequitable
distribution of wealth; inflation; national debt; currency crises
and devaluations; recessions; depressions; and even the failure of
government in a democracy to govern in the interest of its
electors.
Money was invented to be a tool for facilitating trade but has
36
now become a tool used by the rich to govern the world.

In earlier days when someone wanted a home loan they
went cap-in-hand to the neighbourhood bank. If the bank had
extra funds laying around and considered you a good credit risk
they would lend you the money from their own funds. It doesn't
generally work like that anymore.
Now you talk to practically any lender and apply for a loan.
They do all the processing and verifications and finally you own
the house. Now you have a home loan and you make mortgage
payments. You might be making
payments to the company who
originated your loan, or your loan
might have been transferred to The company you make
your payments to very
another institution.
The company you make your rarely owns your loan.
payments to very rarely owns your They are the servicer of
loan. They are the servicer of your mortgage. They are
your mortgage. They are called called the servicer
the servicer because they are because they are simply
simply servicing your loan for the servicing your loan for
the institution that does
institution that does own it.
What happens behind the own it.
scenes is that your loan probably
got packaged into a pool with a
lot of other loans and sold off to an institution. The servicer of
your loan gets a monthly fee from the investor for processing
payments and taking care of your loan. This fee is usually only
0.375 percent or so, but that amount adds up. There are
companies that service over billions of dollars of home loans at
0.375 percent - on a billion dollars that is a very tidy income.
In fact, mortgage servicing is where lenders make the real
money. The entire system of originating mortgages, including
wholesale lenders, mortgage brokers and mortgage bankers is
designed so that servicers get loans into their portfolio - hopefully
at a break even level - but often at a loss. Mortgage servicing is
where they make their profit.
Once your loan has been packaged into a pool and sold to
an institution the lender gets additional funds so they can make
more loans (to service in their portfolio) and sell to those
institutions, so they can get more money, and so on...
This is the cycle that allows institutions to lend you money.
37
Low-doc loans: are they for you?

If you take out a 'low-doc' (low documentation) loan you won't
need to give your lender or mortgage broker as many documents
to prove your income, assets and liabilities. You still have to
apply in writing and sign your loan agreement, but you may not
be required to produce payslips, tax returns or other proof of
income that your lender would normally require. You are usually
simply asked to state your income - a process called self-
verification.
Low-doc loans can help if you would not qualify for a
standard loan, but there are usually some strings attached. It's
vital that you understand what you're getting into.
Special conditions for low-doc loans

In a low-doc loan special conditions may apply. You may have
to:
Pay a higher interest rate if you are not able to provide
documents about your financial position
Pay additional fees and charges, including risk fees
Pay for mortgage indemnity insurance
Contribute more of your own money towards the purchase
price
Offer additional security for the loan, for example, your car
Accept a loan for a shorter period, such as 12 months which
may have to be refinanced at the end of this period with
additional costs involved at that time.
Risks
Low-doc loans have been aggressively marketed in some cases
to people with a troubled credit history, casual workers or self-
employed people who may be in a weaker position when it
comes to dealing with the financial risks involved.
With many low-doc loans it is up to you to decide whether
you can afford the repayments. If you do not give the lender an
accurate picture of your finances the lender will base their
decision on whether to offer you finance on whether they can
recover the loan from selling your home or other security. Just
because they will give you a loan does not automatically mean
the lender thinks you can afford the repayments - you need to
decide for yourself.
Such loan products may suit you, but you need to weigh up
the extra costs involved. In some cases you may be able to get a
38
lower interest rate if you can give more documentation about

your financial history to the lender. Lower costs will usually
make you better off in the long run.
Remember too, that the mortgage insurance typically
required with such loans protects the lender, not you. If forced to
sell you may lose everything you invested in the property and
still owe money if the sale does not cover what you borrowed.
Some people may apply for a low-doc loan because they
have a lot of income they have not declared to the Australian
Taxation Office. If you are avoiding tax you risk getting caught,
which can involve heavy penalties.
The Australian Tax Office (ATO) has begun auditing a
number of people where income disclosed to lenders of low-doc
loans is substantially higher than that disclosed in their tax
returns.
The Tax Commissioner said that in the cases under
examination it is difficult to see how the loans could be serviced
by the incomes disclosed in tax returns. Indeed in some cases the
annual loan repayments themselves exceed reported taxable
incomes. In other cases, people with substantial loans had failed
to lodge tax returns.
"These are potentially serious breaches of the law. People
deliberately understating their income face penalties of up to 75
percent plus interest," the Tax Commissioner said.
Low-doc loans do not require paperwork to prove income.
The lending institution usually charges a higher rate of interest on
these loans. The ATO has been matching details from a selected
range of low doc loans with the borrowers' tax files.
"Not all raise concerns. However, in around 70 percent of
the 176 cases examined, there is reason for us to believe there
may have been an understatement of income or a failure to
lodge income tax returns."
Audit and lodgement enforcement action now underway will
determine whether our concerns are realised.
"If they are, we will undertake a comprehensive matching
program and shift substantial resources into dealing with the
issue," the Tax Commissioner said.
When one of my associates asked a finance broker for

information on a reverse mortgage for a $60,000 loan they
were offered $300,000 instead.
39
Reverse mortgages
A reverse mortgage is a loan available to seniors (60 and over),
and is used to release the home equity in the property as one
lump sum or multiple payments. The homeowner's obligation to
repay the loan is deferred until the owner dies, the home is sold,
or the owner leaves (i.e. into aged care).
In a typical mortgage the homeowner makes a monthly
amortised payment to the lender. After each payment the equity
increases within his or her property and typically after the end of
the term (e.g. 30 years) the mortgage is paid in full and the
property is released from the lender. In a reverse mortgage the
homeowner makes no payments and all interest is added to the
lien on the property. If the owner receives monthly payments,
then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage
is taken out it is possible to acquire a second (or third) reverse
mortgage over the increased equity in the home. But in certain
countries a reverse mortgage must be the first and only mortgage
on the property.
Reverse mortgages are aimed at homeowners aged 60 and
ever. You can use them to supplement your income with a
monthly payment to buy a new car or to pay for a holiday.
Essentially you borrow money against the value of your property,
but make no regular repayments. The loan is repaid when you
move, sell your home or after your death. In the meantime, of
course, it accumulates compounding interest.
Some recent research into reverse mortgages found that the
majority of brokers and salespeople encouraged borrowers to
take the maximum possible loan instead of the requested amount.
The more you borrow the faster the debt grows and the less you
or your estate will receive when the house is finally sold and did
not give consumers all the information they need to make an
informed decision.
Some unscrupulous mortgage brokers according to industry
sources offer very risky asset loans to people enquiring about a
reverse mortgage, which can put them in danger of losing their
home.
How do reverse mortgages work?

Reverse mortgages are secured against your home. The title stays
in your name and you are responsible for all ongoing costs such a
rates and maintenance.
40
The impact of fees and interest means the loan grows over
time. What is left after it is repaid depends on factors such as how
much your house increases in value, the interest rate and the
amount you borrowed.
The following are some of the features and traps to look out for:
The most important protection normally offered is the 'no
negative equity guarantee, What this means is that you can
never owe more than the sales proceeds of the property, even
if its sale price does not cover the debt. It is a vital element of
protection for people taking out a reverse mortgage.
How much you can borrow depends on your age and the
value of the property. At age 60 you can usually get up to 15
percent of the value, at 80 up to about 35 percent.
You can receive a lump sum, regular amounts (such as
monthly), a combination of both or use a flexible drawdown.
Not all lenders offer all options. Beware of the trap that fees
can apply to drawdowns and lenders may stop regular
payments if the value of your property diminishes. A further
trap is that you may have to pay expensive 'break' fees if you
repay the loan before the end of a fixed-rate period.
A range of fees can apply, including set up and annual fees.
You also have to pay for regular property valuations normally
every three to five years.
Traps in the fine print

Many reverse mortgage contracts contain clauses that limit your
rights. Consumer organisations are very concerned about wide
default clauses. With some contracts you can get into default for
relatively minor issues like overlooking some paperwork or not
punctually paying your rates. Once you are in default, the lender
has the right to ask you for immediate repayment of the loan and
can start enforcement action to sell your home.
All companies now offer a no negative equity guarantee, but
most contracts say they may not honour it if you are in default at
the time of the sale.
The Consumer Action Law Centre says almost all the

problem mortgages it took on had been set up by a broker,
and in many cases the broker had been involved in some
degree of dishonesty.
41
Reverse mortgage facts

A reverse mortgage is a long-term commitment you usually keep
for the rest of your life.
Originally reverse mortgages were sold directly by the
lender, but in the last few years mortgage brokers have started to
offer these products.
For many people their home is their most valuable asset. If
you take out a reverse mortgage you limit your options in the
future: you affect the funds available for future needs such as
expensive health care or a move into a retirement village.
Reverse mortgages can work to your advantage, but it is
crucial you are aware of all the pitfalls and have considered
them carefully. If you are contemplating a reverse mortgage
consider these points.
Is a reverse mortgage the best option? Consider alternatives.
Could you buy a smaller home instead or could your children
help out?
How much money do you need? Make an expenditure budget.
The debt will grow faster the more you borrow. Beware if the
broker or salesperson recommends applying for a larger loan
than you really need - will you be able to resist the temptation
to use it?
How much will the loan grow? Do calculations using a range
of loan amounts, interest rates and changes in house value and
take your life expectancy into account to consider possible
outcomes. Get independent financial advice if you are not
confident of doing this yourself.
Consider your possible future needs. What if you need long-
term aged care or want to move to a retirement village: would
you still have enough money left to do so?
If you are the sole owner of the home are there other
permanent residents such as your spouse or a relative? Can
they stay there if you die or need to move into aged care?
Contact Centrelink and make sure your pension is not
adversely affected.
Talk to your family and anyone provided for in your estate.
Loan features: is this the best reverse mortgage for you? Do
you want regular payments, flexible drawdowns or a lump
sum? Do you want the security of a fixed rate? Check fees and
Interest rates and compare products.
42
Make sure you check the reverse mortgage contract

What are the requirements of the loan? Usually your home needs
to be debt free, so you will need to repay any outstanding loans
first. You will also need funds to maintain the property, pay rates
and building insurance.
Can the lender require you to vacate the property under any
circumstances, for example if you are in default? Under what
conditions would you be in default and what happens in that
case?
Check the no negative equity guarantee carefully with your
legal adviser. Are there any conditions attached, such as not
being in default of the contract?
Make sure the lender and anyone you are dealing with, such
as a mortgage broker and a company managing the mortgage,
are all members of an approved dispute resolution scheme.
Higher standards of product information needed

Reverse mortgages are very complex and relatively new
products with which consumers have little experience.
Many believe these products should only be sold to well-
informed people who are aware of the pitfalls and have
considered them carefully.
This is where the professional who sells the product to the
borrower has an important role.
Most lenders will try to ensure you are aware of important
conditions before settlement: most require you to have expert
independent legal advice; some also require financial advice
and some may contact you directly to make sure you understand
the loan contract.
Comprehensive information is needed right from the first
meeting. You should be able to expect to be fully informed
before you formally apply for a loan.
Research for this book showed glaring gaps in the
information provided to consumers. The majority of mortgage
brokers and salespeople:
Failed to talk to the consumer about alternatives such as
buying a smaller home.
Recommended borrowing a larger sum than needed. Brokers
usually receive an upfront and/or ongoing commission on the
amount borrowed. This leads to a potential conflict of interest,
as it is in the brokers interest to sell a larger loan.
Most provided a graph or tools to calculate how much the loan
43
would grow, while some only gave one scenario or did not
explain assumptions.
Didn't talk about future needs such as long-term age care.
A majority mentioned the no negative equity guarantee, none
explained that there are situations in which it would not apply.
A large majority did not explain that there are situations when
the loan could be in default, thus voiding the guarantee.
Didn't mention requirements such as maintenance, rates and
building insurance.
One broker showed a serious gap in product knowledge by
recommending a reverse mortgage that is not available in the
situation where the lender requires all residents to be owners.
Unscrupulous finance brokers

A few years back a Sydney couple were having difficulty
keeping up their repayments on their $190,000 home loan and
went to a mortgage broker asking for a reverse mortgage. The
broker recommended they take out a larger loan to pay off their
original loan. He told them they would not have to make
monthly interest payments on the new loan.
This couple thought they had been offered a reverse
mortgage. In fact, it was a loan secured by their house that did
not require documentation proving their ability to repay it - this is
sometimes called asset lending. The difference from a reverse
mortgage is that you are required to repay the asset loan
(including accumulated interest) at some stage and not just when
you sell your home, die or move out. These loans are usually
structured in a way that provides you with enough funds to repay
existing debts.
However, with repayments built in and added to the loan
amount, the loan will eventually grow and you may not have the
money to pay it out when it is finally required. Brokers may
suggest people who take out one of these loans can again
refinance at this point, but that strategy can only work if the
value of the home has increased sufficiently. It is very high-risk,
After taking out the recommended loan and using money for
renovations and repayments this couple now owe $350,000 and
are in danger of losing their house.
Two mortgage brokers offered such a loan to one of my
acquaintances as an alternative to a reverse mortgage. My
acquaintance is on a Centrelink pension. One broker suggested
he could borrow up to 70 percent ($420,000) of the value of his
home and use the money for investing.
44
There is deep concern about these practices. Asset loans are

in no way similar to a reverse mortgage as they require
repayment and do not have a no negative equity guarantee.
They put borrowers in danger of eventually losing their home.
Recommending such a product to borrowers who are in financial
difficulty and cannot afford repayments can only be called
unscrupulous. Reverse mortgages can only work to your
advantage if you fully understand them, are aware of contract
naps and consider your specific circumstances and future needs.
My research showed there is a danger of coming across
mortgage brokers and salespeople who do not give you all the
information you need to make an informed decision.
Mortgage broker legislation that is currently being drafted
will mean mortgage brokers must have a licence and an external
dispute resolution scheme. I feel it should also include a test for
appropriate standards of advice on reverse mortgages. This is
crucial to stop the mis-selling of these products!
Bizarre sales practices

Choice magazine reported in its March 2007 edition that a
shadow shopper named Anthony called the Commonwealth Bank
(CBA) for information about reverse mortgages. He encountered
somewhat bizarre sales practices.
A pre-approval interview was conducted over the phone.
During this phone call the salesperson said they needed to open
an account for Anthony to get to the next screen on their
computer. They explained very few details about the product but
offered to answer specific questions and to send information.
Although the information never arrived, Anthony did receive
a transaction account statement and a call from a valuer. He told
the valuer he wasn't interested and asked for the account to be
closed. But a few weeks later he received another statement, this
time for a line of credit account.
According to Choice the CBA confirmed its staff did make
mistakes in handling the shadow shoppers enquiry and said it is
taking steps to reinforce correct procedures.
45
3.
W HAT DO FINANCE
BROKERS DO?
In most Australian states there is currently
no legal requirement for a broker to
have any particular training, skills
or qualifications
The Australian Banking system

The modern era of banking in Australia began in 1959 when the
Commonwealth Bank of Australias (CBA) central banking powers
were transferred to the Reserve Bank of Australia when the RBA
was created.
In this era, banking was tightly controlled, but safe. As the
post-war boom of the 1950s developed, the banks began chafing
under these restrictions. Finance companies were growing
quickly, untrammelled by central banking controls and able to
lend on anything from domestic appliances to cars, houses and
companies.
The banks formed finance companies or invested in them and
became players in this rapidly expanding market. The finance
companies began lending to the corporate cowboys of the era.
FCA, an offshoot of the Bank of Adelaide, financed Alan Bond's
first property speculation in 1960.
A whole fringe banking system began to emerge. The
licensed banks were still controlled, but finance companies,
merchant banks, foreign banks and (to a large degree) state
banks were not subject to RBA supervision.
There was a natural affinity between these fringe bankers
and the plethora of corporate cowboys and speculators who
grew up in the 1970s and 1980s. A speculator who is hoping to
make 100% on his deal is not too fussy about whether his
financier is lending to him at 10% or 20% and will cheerfully pay
a fee as well.
The speculators generated huge profits for the financiers
(including the banks) but sometimes the profits were only paper.
The interest and fees would be capitalised as part of the loan to
the speculator and sometimes the speculator would collapse and
the loan would never be repaid. It could take a decade for the
loss to be realised and by that time the banker who made the
original loan - and earned a commission and promotion on the
deal - may well have retired.
Banks and especially fringe banks were making increasingly
unsound loans, for two reasons. The first was high profits which
could be reported (but not always collected) from high risk
business. The second was competition to get or maintain market
share.
From the 1970s, the financial system began suffering serious
tremors. The Mineral Securities collapse of 1971 sparked the
most serious money panic in Australia since 1893. In 1974
47
3-What do finance brokers do?
Mainline and Cambridge Credit collapsed. In 1977 there were

panic runs on building societies in South Australia and
Queensland and two bank-owned finance companies had to be
rescued by their parent banks. In 1979 Associated Securities
collapsed and FCA got the Bank of Adelaide into so much trouble
it had to be taken over by ANZ.
The Deregulation Era of banking can be traced to the period
between 1983 and 1985 when the then Federal Treasurer Paul
Keating deregulated the system by floating the Australian dollar
in December 1983; granting 40 new foreign exchange licences
in June 1984; and granting 16 banking licences to 16 foreign
banks in February 1985.
This accelerated lending competition further. Banks
competed with by reducing the security they required and
lowering their rates with the inevitable result of unsound loans
being made to corporate cowboys.
After the cowboys collapsed the banks were left counting
their losses, which ran to tens of billions. A new wave of
managers took over and the banks rebalanced their balance
sheets by charging stiff rates to their good customers to make
good the losses on their bad customers.
In the 21st century Australia has an advanced banking system,

with various types of institution: large, Australia-wide banks,
smaller state-specific banks, a number of credit societies/credit
unions and a few other financial organisations, such as insurance
companies who have diversified into banking.
Banks' activities can be divided into retail banking, dealing
directly with individuals and small businesses; business banking,
providing services to mid-market business; corporate banking,
directed at large business entities; private banking, providing
wealth management services to High Net Worth Individuals and
families; and investment banking, relating to activities on the
financial markets.
Each bank will offer their own mix of accounts and facilities,
but typical facilities offered include:
Transaction Accounts for day-to-day transactions. Usually
zero or very low interest paid for credit balances.
Savings Accounts which can be at call (ie. no notice
required to withdraw funds), or a fixed notice period for
withdrawal or a term deposit (fixed interest rate, fixed term).
ATMs (automatic teller machines) - are located at most
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shopping centres. Usually free if you use a machine linked to

your bank's network, otherwise a fee can be charged.
EFTPOS (electronic funds transfer at point of sale) i.e. paying
for goods using your charge card. Most banks and retail outlets
offer this facility and the funds may be taken from your current,
savings or credit account. The larger retailers normally let you
draw extra cash out as well, with no charge.
Credit Cards Mastercard, Visa and American Express cards
are commonly available, with a variety of features, such as zero
annual fee, so many days interest-free, rewards points etc.
Internet Banking is now offered by most banks, enabling you
to check balances, transfer money between accounts, and pay
bills (BPAY system).
Fees and charges

It is common for there to be a monthly fee on transaction/cheque
accounts, with a certain number of free transactions per month.
There are many variations, though, such as zero monthly fee if a
certain balance is maintained.
You may incur charges if you withdraw cash from an ATM
outside of your bank's network and of course, you will normally
be charged for overdrafts or other transactions like bank
cheques.
In the late 1980s, when the Australian financial market was

deregulated numerous new financial players entered the
markets, a number of mergers occurred and competition was
intense, particularly for credit products. As a result, the lending
market has had to compete vigourously for market share and this
has led to the growth of alternative distribution networks.
In the last ten years the Australian mortgage broker industry
has sprung up and represents a cheaper method for lenders to
reach their target markets. Formerly, Australians would go to
their bank with whom they had had a relationship, but the banks
have closed a lot of their branches and personal banking is being
conducted electronically and through the Internet. In fact, it is
common now to conduct all personal banking without ever
coming into contact with a person. Further, consumers in
Australia have become time-poor which has encouraged this
form of banking.
The mortgage broking industry purports to offer a solution in
the form of a method of obtaining credit without face-to-face
49
contact, the promise of the best loan at the most advantageous

terms, and at little to no expense with a possible saving.
Borrowing statistics
Statistically, in 1986-1987 Australians borrowed $15billion in
housing finance from lenders who were most exclusively banks,
building societies and credit unions. In 2002-2003, only 15years
later, Australians borrowed ten times more, $151billion to buy,
refinance or build their homes.
The Australian Prudential Regulation Authority (APRA) has
estimated that each bank on average currently receives loan
applications from 740 brokers. The four major banks received 60
percent of all broker loan applications in the March 2002
quarter. Credit Unions have been slower to deal with mortgage
brokers having relationships with an average of 13 and having
dealt with them only for three to four years.
According to APRA, the use made by banks, credit unions
and building societies of broker services is to increase and this is
corroborated by the Australian Central Credit Union, Australian
National Credit Union and Credit Union Australia purchasing a
8.2 percent share in Mortgage Choice one of the nations largest
mortgage brokers. As will occur to most of you, this presents an
interesting issue in relation to conflict of interest.
Before the 2006 downturn industry analysts estimated that up to

50 new mortgage brokers entered the market each week and
that 2,000 broker firms operated Australia wide. Although
relatively few mortgage broking organisations dominate the
majority of the market, there is a long tail of small operators,
including sole traders.
In January 2003, it was estimated by APRA that 23 percent
of home loans were through brokers equating to $76billion of
home loans. In a report by the Consumer Credit Legal Centre
(NSW) in March 2003, which was commissioned by ASIC in
2002, it was recognised that the mortgage broking industry was
constituted of three broad types of intermediary. The three
categories were identified as:
1. Mortgage and finance brokers
2. Mortgage managers
3. Intermediaries who promote loan or debt reduction
schemes where the borrower refinances an existing
home loan.
50
There is also an additional fourth category where the broker

solicits funds from investors and makes these available to the
public as loans. These brokers have generated a number of
criminal prosecutions and this type of fund raising is now strictly
regulated by ASIC following amendments to the Managed
Investments Act 1998.
What role do finance brokers have?

Finance and mortgage brokers are 'go-betweens' who arrange
loans for people for a fee paid by the lender, based on the size of
the transaction.
A finance or mortgage broker is someone who negotiates
with lenders (e.g. banks, credit unions) to arrange loans for
customers, usually for a fee and/or commission. They act as the
go-between for lenders and customers and may deal with one
or multiple lenders. Brokers who specialise in arranging home
loans are called mortgage brokers.
Since the banks started closing many of their branches,
finance and mortgage brokers have changed the way people
arrange mortgages and finance. Many finance and mortgage
brokers operate their own business as franchisees. The mortgage
broker operating in your suburb from distinctive premises in a
high profile location is probably a person who bought themselves
a job after being made redundant from an entirely different
industry.
Finance brokers can be useful for a range of reasons,
including these: they can help you find out about different loan
products; they can provide information about what types of loans
exist, how to obtain a loan and suitable loans for your needs; they
can provide assistance in applying for a loan; and they can
indicate whether you may be able to get a loan. A broker may
also be able to save you time.
However, not all finance brokers can provide this
information. Be aware that not all finance brokers will act in
your best interests.
Finance brokers are paid for the work they do- generally by
the lender. Sometimes different lenders pay brokers different
amounts. This can result in brokers recommending loans that pay
them the most, not loans that best suit a borrower's needs.
Think carefully before going through a finance broker. It
may be cheaper to arrange a loan yourself.
51
Industry competitiveness
A large segment of the mortgage finance industry is commission
based. Potential clients can compare a lender's loan terms to
those of others through advertisements or internet quotes.
In the 1970s, mortgage brokers did not have access to
wholesale markets, unlike traditional bankers. Today, mortgage
brokers are more competitive with their access to wholesale
capital markets and pricing discounts. A mortgage broker has
lower overhead costs compared to large and expensive banking
operations because of their small structure.
They can lower rates instantly to compete for clients. On the
other hand, larger companies are less competitive since they
provide their sales representatives their fixed rate sheets. Loan
officers often cannot reduce their companies' profit margin and
may be higher or lower than the marketplace, depending on the
decision of managers. Thus, mortgage brokers have gained up to
to 70% of the marketplace.
Lender beware
Lenders should be aware that some brokers are prepared to
charge the lender a fee for service as well receive a fee from
the lender. This double dipping should not be necessary and in
some cases may even pose a conflict of interest and ethical
considerations.
The normal procedure is for brokers to be compensated
directly by the lender. Lenders should also ensure they do not
consent to a broker being able to debit from loan proceeds for
any further brokerage. Beware of brokers who are prepared to
charge as much as $5,000 to show lenders strategies on how to
reduce or refinance your mortgage. There are hundreds of these
brokers in the industry charging their clients a hefty fee for their
advice in addition to receiving their brokerage commission from
the lender.
Ethical brokers will show you how do so without any fees -
they rely only on the what they receive from lenders as
compensation. For instance 21st Century Finance, a broking
company set up to assist our clients, can arrange a free finance
review. When you use their services, you pay nothing, as all fees
are paid by the lender. A further benefit is they are educated
investors, unlike most finance brokers.
For more information log on to:
www.21stcenturyfinancereview.com.au/f6
52
Never, ever count on, or assume your mortgage has been

approved until you receive written confirmation in writing from
the actual lender. If you are using a broker, the broker will
probably not have authority for final approval.
If you do use a mortgage or finance broker you should not have

to pay the broker an up front fee. Any fee(s) you pay to the
broker should not be unreasonably high.
You may choose to enter into a written agreement / contract
with the broker which sets out what the broker will do for you
and how much it will cost. Check that the broker is not just
recommending the lender who pays them the highest commission
or provides the most kickbacks.
Obtaining a loan can be a difficult and confusing. Always
carefully read any documents your broker gives you and ask
questions if you have queries. You may want to get independent
legal advice.
Do not leave any parts of any contract or agreement
uncompleted for the broker to fill in. If possible, complete loan
documents yourself so you are sure the information given to the
lender is right. Otherwise, make sure that you carefully read all
loan documents completed for you.
Do not agree to 'doctor' any figures. If you provide
misleading information in applying for a loan, you will be guilty
of credit fraud and could face a criminal charge.
Remember, the average finance broker has no magic
powers. They generally cannot get you a better loan than you
can arrange for yourself. In deciding whether to give you a loan,
lenders will consider factors such as your ability to repay a loan
and your credit history, not how well a broker has presented a
loan.
What is the difference between a mortgage broker and a

lender?
A mortgage broker counsels you on the loans available from
different wholesalers, takes your application, and usually
processes the loan which involves putting together the complete
file of information about your transaction including the credit
report, appraisal, verification of your employment and assets, and
so on. When the file is complete, but sometimes sooner, the
lender underwrites the loan which means deciding whether or
not you are an acceptable risk.
53
What is the difference between a mortgage broker and a loan

officer?
A mortgage broker works as a conduit between the buyer and
the lender, the loan officer typically works directly for the
lender.
Typically, a mortgage broker will make more money per
loan than a loan officer, but a loan officer can utilise the referral
network available from the lending institution to sell more loans.
There are mortgage brokers and loan officers at all levels of
experience.
What do mortgage brokers do?

Mortgage brokers act as an intermediary who sources mortgage
loans on behalf of individuals or businesses. A good mortgage
broker should be able to help you increase your borrowing
power and get your home loan approved.
Traditionally, banks and other lending institutions have
distributed their own products. However as markets for
mortgages have become more competitive, the role of the
mortgage broker has become more popular. Today in most
developed mortgage markets mortgage brokers are the largest
distributors of mortgage products for lenders.
Typically the following tasks are undertaken by mortgage
brokers :
Marketing to attract clients
Assessment of the borrowers circumstances (mortgage fact
find forms interview). This may include assessment of credit
history (normally obtained via a credit report) and
affordability (verified by income documentation).
Assessing the market to find a mortgage product that fits the
clients needs. (Mortgage presentation/recommendations)
Applying for a lenders agreement in principle (pre-
approval)
Gathering all needed documents (payslips/payslips, bank
statements, etc.
Completing a lender application form.
Explaining the legal disclosures.
Submitting all material to the lender.
Never, in any circumstances, pay a broker an upfront fee

to arrange a loan. In some states, this is illegal. Even
where it is not, avoid brokers that charge you upfront.
54
Will I save money going directly to a mortgage lender?

Not necessarily. In fact, if you are a reasonably astute shopper,
you will probably do better dealing with a mortgage broker.
Mortgage brokers do not add any net cost to the lending process,
because they perform functions that would otherwise have to be
done by employees of the lender. Furthermore, because
mortgage brokers deal with multiple lenders in a typical case,
twenty-five to thirty, sometimes more they can shop for the
best terms available on any given day. In addition, they can find
the lenders who specialise in various market niches that many
other lenders avoid, such as loans to applicants with poor credit
ratings, loans to borrowers who do not intend to occupy the
property, loans with minimal or no down payment, and so on.
What should I do if a finance/mortgage broker approaches me?

If a finance broker contacts you to organise an appointment to
find out how they can save you money on your mortgage be
careful!
If you enter into a contract with a finance broker for broking
services after a broker has come to your front door, you are
protected by the door-to-door provision of the Fair Trading Act
1989 without penalty or cost to you.
A broker who comes to your front door and gives you a
contract about the services they will provide must give you a
detailed contract and allow a 10 day cooling-off period.
This means you can cancel the contract without penalty or
cost within 10 days of signing the contract. During this time no
money should change hands and services should not be
delivered. If you sign a contract with a broker who comes to
your door without an appointment you should receive two forms
one explaining the cooling-off period and one that can be
used to cancel the contract.
However, the door-to-door cooling off period will not apply if
you make an appointment with a finance broker before they
come to your home.
You do not have to use a finance or mortgage broker to
obtain a loan as you can deal with lenders directly. You may be
able to get the same loan without having to pay a broking fee.
However, finance brokers can be good value. They can do
the legwork for you and find a loan that suits your particular
needs with a competitive interest rate. This can save you time
and effort in shopping around.
55
If the finance/mortgage broker makes an appointment with

you before coming to your home, be careful as in this case you
are not covered by the door-to-door provisions of the Fair
Trading Act 1989. You are also not covered by the door-to-door
provisions if a broker telephones you to arrange for you to go to
their place of business.
Be wary of brokers that come to your home and refuse to
leave until you sign a contract. Some brokers are trained to use
pressure tactics to get you to sign. You should also not schedule
an appointment at your home when you are normally busy with
family duties or are tired. You may not be in the best mindset to
make smart consumer decisions and brokers can exploit this.
How much does a broker cost?

Brokerage fees vary depending on which finance broker you
use. There are three types:
1. Brokers who do not charge you a fee as the lender pays a
commission to the broker for signing you up to one of their
loan products. This is the most common type of broker.
2. Brokers who charge you a fee/commission and also receive a
commission from the lender.
3. Brokers who only charge you a fee and do not receive any
payment from the lender.
Most brokers are paid by commission, typically 0.6-0.7 percent
of the loan up front, and then a trail fee of approximately 0.2
percent for the duration of the loan.
Make sure you know the fees and/or commissions for the
broker and when you need to pay before you sign the contract.
Will a broker find me the best loan?

Not necessarily. Be aware that brokers can choose to
recommend a loan to you because it makes them the most
money, not because it is the best loan for you.
Shop around and do your own research to see what loans are
available and what features you would like in your loan, and let
your broker know so they can find the best loan for you.
Make sure you ask your broker about the commissions or
kickbacks they receive from lenders for signing you up to one of
their loan products, as they can vary from lender to lender.
It is strongly recommended that you do not pay any fees to a
broker before you sign up to a loan, even if the broker asks you
to.
56
Legislation
Mortgage broking as a profession in Australia is not uniformly
regulated. At the time of publication, with the exception of
Western Australia and the Australian Capital Territory there is no
requirement for the registration of brokers nor for positive
licensing. It is therefore impossible to know how may mortgage
brokers are operating or to track them around the country should
they decide to move from State to State.
Can a broker arrange a loan when I am not be able to get a loan

myself? No. Lenders have set criteria you must meet before they
will lend you money. If you are having trouble obtaining a loan
try to find out why. There are a several possible reasons such as:
you have been bankrupt before; you do not earn enough for the
amount you want to borrow; or you have a poor credit record.
Once you have found the reason why your loan application
is being rejected you can prepare a plan to fix the problem.
Do not sign anything without reading it carefully first

You should always seek independent legal advice on any
contract or agreement before you sign, so you know exactly
what you are in for.
If the broker comes to your home have them leave the
contract with you so you do not feel pressured to sign. If the
broker discourages this, think carefully about whether you want
to deal with a broker who pressures you to sign up on the spot.
Many potential borrowers have signed a document presented
by a broker (sometimes thinking it is a loan application) only to
discover later that they have signed a binding contract and a
substantial fee is payable whether or not they accept the loan
eventually arranged by the broker.
Hints for getting the most out of a broker

Ask the broker if they belong to an industry association and if
the association has a dispute resolution policy.
Ask which lenders the broker deals with and what
commissions they receive from each lender.
Ask for references and speak to family and friends about their
experiences.
If you are not sure whether you are dealing with a finance
broker ask! Some people may think they are dealing with the
lender when in fact they are speaking to a broker.
57
Shop around. Phone other finance brokers and check what

they charge and what services they offer.
Note that there is currently no legal requirement for a broker
to have any particular training, skills or qualifications.
Make sure any contract you have with a broker says they
will only be paid if they get a loan that suits your needs, not just
because they got you any loan.
Do not pay an upfront fee. Ideally you shouldnt pay the
broker, but if you do dont pay anything until you receive the
loan.
Make sure you have a written agreement with the broker
that covers the following:
any fee/commission to be paid by you and by when;
the type of loan being arranged;
the amount of the loan;
the length of the loan;
the current interest rate;
whether interest is variable or fixed and for how long; and
the features you want on the loan (for example redraw
facility, offset).
Some questions you should consider when

choosing a Mortgage Broker:
Do they charge for the service?
Are they paid the same commission no matter which
loan or lender the borrower chooses?
Do they explain all of the fees and charges associated
with the mortgage?
Are they independent or do they only deal with a certain
lender?
Are they qualified, experienced and have testimonials
from happy clients?
Do they explain the effective interest rate of the loan?
Do they justify their recommendations?
Do they carry professional indemnity insurance? (which
protects the borrower)
Do they have access to a wide range of lenders and
therefore loans?
Do they belong to a reputable industry association? (The
MIAA in Australia).
58
What if I have problems with my broker?

If you cannot settle the problem directly with your broker, you
should seek legal advice. Contact your local Law Society
Solicitor Referral Service, or Legal Aid (available only to people
who satisfy means test guidelines). You can also seek advice
and/or lodge a complaint with the Office of Fair Trading.
Plan before you buy

Look before you leap! Do the maths in advance to determine
how much house you can afford to buy; then buy less house than
you can afford. This strategy will ensure that you have adequate
cash flow to make extra mortgage payments and will provide
some cushion should you have to take a lower-paying job at
some point in the future. Also, make
sure that your mortgage does not ... home buyers often
impose a penalty for prepayment. This plan their finances
clause can put a damper on your based on the idea
efforts to get out of debt. that their mortgage
Next, you need to pay attention to payments will not
the financing terms. Whileadjustable- change. They
rate mortgages offer lower initial discover this is not
payments, they are used all too often to true when interest
enable buyers to get into homes they rates rise.
cannot actually afford. When interest
rates rise some homeowners are caught unprepared.
Similarly, home buyers often plan their finances based on the
idea that their mortgage payments will not change. They
discover this is not true when interest rates rise. If your plan is to
get out of debt as quickly as possible, a fixed-rate
mortgageprovides the predictability of a steady interest rate and
it can always be refinanced if rates fall.
Should I get a finance broker to arrange my loan?

In my book, What I didnt learn from my real estate agent but
wish I had, I had this to say about using a finance broker to
arrange a loan> The process of obtaining a loan will teach you
how you can do it yourself in the future, and you will be able to
establish your own relationships with key lenders for your future
finance needs. Most finance brokers are incompetent. No result,
no payment. Be careful, because most finance brokers will ask
you for an upfront fee. Problem being, that if they do not get you
the right deal, they still keep your money.
59
If you do engage the services of a broker, make sure that

you do not screw them on their fees. You want the best, and
they do not work for peanuts. If the broker provides you with the
result you want and guarantees their performance, they should
get paid a reasonable fee.
Most brokers offer only a limited range of loans. They get
paid a commission and some may receive other benefits from the
lender as well. Mortgage brokers are not financial advisers and
are not obliged to find you the best possible deal unless they
specifically agree to do so.
If you just use a broker you may miss out on some of the
cheapest loans in the market. Some of these loans are provided
by lenders that don't pay commissions and are therefore not
included on the panels of lenders from which brokers select their
loans.
Even a small difference in the interest rate can make a big
difference to the amount you pay. For example, take two loans -
one charging 6% in interest per year and the other charging
6.5%. The half a percent (0.5%) difference on a $150,000 home
loan over 25-years can cost you an extra $13,900 if a broker
sells you the more expensive loan.
Smart ways to use mortgage brokers

Once you know the kind of loan you want note down the interest
rate and fees you will probably have to pay. Then contact two or
three mortgage brokers over the phone. Tell them briefly about
what you want and see what they can offer.
They might also have some special deals. If so, get a written
promise that the terms and conditions are the same or better than
the lender will offer you direct. Some lenders may offer a similar
sounding product through brokers, but impose special conditions,
for example higher fees for paying out the loan early.
Internet brokers have their offers in writing and you can print
the pages you need. Phone brokers can also be quick and
convenient. Make a note of their offers, the name of the person
you spoke to and the date and time you spoke to them. This can
prove essential if there's any dispute later. Some brokers rebate
to you some of the commission lenders pay them which will save
you money.
If you decide a broker's offer suits you, check to see if they
belong to an independent complaints scheme just in case
anything goes wrong.
60
CANNEX
The CANNEX website (www.cannex.com.au) lets you search for
loans according to the type you need and find the cheapest one.
This site is free, independent and used by the industry
professionals because its research is widely considered to be
thorough and up to date. CANNEX also offers links, where
available, direct to the lender so you can read the fine print.
Tips when dealing with mortgage brokers

While most mortgage broking companies operate in a business
like way, standards of training and personal qualifications vary
widely across the industry. Almost anyone can set themselves up
as a mortgage broker. Some States insist on registration, but this
does not guarantee professionalism or fairness.
Large loans and refinancing

The more you borrow, the greater the commission for the broker.
Reputable brokers will act responsibly, but you must also be a
responsible borrower.
Make sure you can afford the loan. Ask the broker to explain
what you will be up for and double check with them that you
can realistically afford the loan you want. Be conservative and
make sure you will have enough money to live reasonably even
if interest rates go up a little.
Refinancing means paying out your old loan and taking out a
fresh one. If this is suggested make sure you will really be better
off. Refinancing may add extra fees payable to your old and new
lenders as well as stamp duty. Check first if your existing lender
will offer you an attractive deal to stay with them.
Be your own best advocate

Mortgage lenders must compete for your business. That means
they will negotiate. Don't assume that their published interest
rates are final. Collect information on available interest rates and
mortgage features from lenders in your area. Decide which
features meet your needs. Be prepared to ask for better terms - a
reduction of at least a quarter percent of the published interest
rate is reasonable. You will be in a stronger negotiating position if
your credit history is good.
61
Shop around for your mortgage loan

At the time of going to press, one mortgage broker was claiming
in its advertising that for a couple with a $425,000 loan over 30
years, the cost to them would be in excess of $1 million.
The same advertisement claimed the mortgage broker in
question could save the couple $200,000 and have their loan
paid off 6 years sooner with no increase in repayments.
How do I know if I can afford my proposed mortgage payment?

There are two ratios you should check: your debt to income
ratio, called DTI, which is calculated by dividing your total
monthly income (before taxes) by your monthly fixed expenses.
Many lenders prefer a ratio of 33/38 which means 33 percent
of your monthly income is dedicated to your housing costs and
after adding in your other monthly expenses, the debt should not
exceed 38 percent of your monthly income. PITI (principal,
interest, taxes, insurance) refers to your total monthly mortgage
payment calculated by adding the monthly principal, interest,
taxes and insurance for your loan.
The minimum deposit required to avoid taking out mortgage
insurance is 20 percent. If you can't come up with 20 per cent,
then I would recommend a minimum deposit of 5 percent plus
about $3,000 extra to cover the cost of legals, moving,
application fees, power, water and phone. The $7,000 first
homeowners grant can be part of your deposit, if you qualify for
it.
Assuming you have a 5 percent deposit you will pay up to
$13,000 in lender's mortgage insurance on a $500,000 unit.
Sometimes you pay this upfront or in some cases the financial
institution will add it to the mortgage. This will put your mortgage
at 97 to 98 percent of the total. The monthly repayments on such
a mortgage will be about $3,350.
If you can't afford that commitment then you may need to
downgrade to another property. If you bought a $350,000 unit
the lender's mortgage insurance would be $9,000 rather than
$13,000. You will still be borrowing 97 per cent, but the monthly
repayments will be $2,360 based on a variable 7.4 percent
interest rate a year, paying off principal and interest over 30
years.
Once you have saved the deposit you have to work out if
you can service a mortgage. Your capacity to pay is the most
important thing. Otherwise, you may be faced with a monthly
62
commitment that you can't meet.

When looking for a property, keep within your limits. If you
go beyond your budgeted amount your capacity to pay is under
threat. The responsibility for your home loan lies on both sides,
not just the lending institution which assesses your ability to
borrow. The borrower has to be responsible enough to say, 'I can
service the loan once I am in the market.'
You should be able to service your mortgage but still live in
the way to which you are accustomed.
With talk of [yet another] interest rate rise, you need to
ensure there is a buffer in your savings account to weather rate
increases. You also need a buffer for any possible change in
circumstances that may be beyond your control.
If you have any doubts, consider downsizing the dream and
buy a smaller place. If you are keen to get out of the rental
market, start small before taking the next steps towards a bigger
property.
Summary
A mortgage is an important tool for buying a house, as it allows
individuals become homeowners without making a large
proportional down payment. However, when you take on a
mortgage it is important to understand the structure of your
payments, whose components are dedicated not only to the
principal (the amount you borrowed), but also interest, taxes and
insurance. This structure determines how long it will take to pay
off the mortgage and in turn, how expensive it will ultimately be
to finance your home.
The mortgage companies should disclose right up front that
you will pay more than twice the purchase price of the home
before you actually own it.
The second reason is the peace-of-mind you gain from
owning your home. With the lower monthly cash outlay
requirement, the prospect of unemployment or underemployment
is no longer so daunting. You can now afford to take a job that
pays a whole lot less than your previous position without any
concerns about losing your home.
However, many people argue that paying off your mortgage
is a bad financial move. They claim that you will get a higher
return in the long run if you invest your money instead of making
extra mortgage payments. While there is some chance that you
will achieve such a feat, there's also a chance that you won't.
63
Given the choice between a guaranteed saving of the 6 percent

interest on their mortgage (compounded for 30 years), or the
possibility of achieving some other rate of return (which may be
higher or lower), conservative investors will take the safe bet.
Of course, the entire argument is moot when you truly look
at the facts of the situation. Most people buy a home so they have
a place in which to live. Even if it doubles or triples in value,
they aren't going to sell it, and if they do, it will take every cent
they earn to buy a comparable home in the same neighbour-
hood. Besides, since you can't live in a mutual fund, most home
shoppers don't make their purchase in an effort to beat the return
of the stock market.
Paying off your mortgage provides a return on your
investment that is much more reliable than anything the stock
market can offer. It also saves you tens (and sometimes hundreds)
of thousands of dollars. To top it all off, it provides the security of
having an affordable place to live in the event that your income
declines. With all of these benefits in mind, it is time to look at the
strategies that will help you pay off that mortgage.
If you are committed to not just paying off your home, but
becoming wealthy, then I recommend my first book, What I
didnt learn at school but wish I had. This book teaches how use
the equity in your home to invest and generate instant cash-flow
from share rental and how to build an investment portfolio.
To obtain a free eBook version of this book go to:
www.freedvdoffer.com.au/T196
64
4.
T HE BANKS
I never trust the banks because they
have lots of pressure on them.
The government puts pressures on them,
the newspaper puts pressures on them.
Everybody puts pressures on the banks.
Meriton founder, Harry Triguboff

Banks are happy to make loans available because of the interest

they earn from them, but how do they come to have so much
money to lend? The way the banks amass all that money to lend
is interesting, because they do it not only in Australia, but also in
countries all around the world. They are accused by many of
using that money to bribe and blackmail politicians, political
parties, bureaucrats, media, experts, and others so that indirectly
they are able to govern the world.
Money according to the Macquarie dictionary is "coins or
certificates (such as banknotes etc.) generally accepted in
payment of debts and transactions, or any article or substance
similarly used." In the early days of Sydney, rum was frequently
used as a form of money. In the modern world credit cards and
cheques are generally accepted in payment of debts and
transactions, so credit is a form of money.
In Australia, coins are made by the Commonwealth
Government at its Royal Mint in Canberra and banknotes are
printed in Melbourne by Note Printing Australia, a wholly owned
subsidiary of the Reserve Bank of Australia which in turn is
wholly owned by the Commonwealth Government. So it is fair
to say that coins and banknotes are manufactured by the
government.
Provided the quantities made result in a total money supply in
balance with the goods and services being generated throughout
the country, the manufacture of coins and banknotes will not
cause inflation nor a shortage of money.
Statistics like those prepared by the Reserve Bank show that
only about 5 percent of all money in Australia exists as coins and
banknotes. So where does the other 95 percent of money come
from?
Banks create money by creating credit

Credit that can be accessed by credit card, overdraft cheque or
bank loan represents nothing more than a bank's promise to pay.
Credit money exists only as numbers in bank computers. Banks
have been known to go broke occasionally even in Australia,
leaving their trusting customers in the lurch!
When someone borrows from a bank, perhaps taking out a
housing loan, the bank records in the borrower's account the
debt that must be repaid with interest and in return provides a
bank cheque to the borrower or direct to whomever the person is
purchasing the house from. The bank cheque is bank created
66
4-The banks
credit, not backed up by the bank's own money nor anyone

else's. The banks are permitted by governments to create credit
like this up to as much as 15 times the total amount of money
they hold in deposits.
Furthermore, deposits are considered to be not only
banknotes and coins, but also cheques and account balances
representing credit created previously, so banks are able to build
a mountain of credit based on earlier credit until it amounts to 95
percent of all money!
It is worth stressing that when a bank makes a loan, it never
loans any of the bank depositors' money. No depositor ever sees
a statement telling him that part of his deposit is unavailable
because it has been loaned to a borrower. Bank loans are of
bank created credit only.
Eventually the house seller will present the bank cheque for
payment, probably at another bank where it will be credited to
the seller's account. But even at this stage the created credit still
exists only as numbers that the banks' computers can swap
amongst themselves and on average that is where 95 percent of
it will stay for the life of the loan, because only about 5 percent
of all money is cash.
So banks can and do increase the money supply by creating
money out of nothing, as credit. By so doing their influence over
the total amount of money circulating in the community is many
times greater than that of the government manufacturing
banknotes and coins. And so it is that the privately owned banks
can cause and control inflation. Remember that next time you
hear some scaremonger predicting ruinous inflation caused by
the government printing money.
In time, the credit created by the loan is extinguished as the
loan is repaid, so at the end of the loan the temporarily created
credit will have disappeared, except for leaving the bank richer
by the amount of interest paid. Would now be a good time to
remember that the interest amount is often greater than the
original amount of the loan?
To expand its business, the banking industry normally seeks
to continually increase the overall level of debt and just loves big
spending business and government customers. But it is worth
noticing that banks can at any time decrease the supply of
money circulating in the community by refusing to issue new
loans as existing ones are repaid, thereby causing recessions and
depressions.
67
Bankers depression of the 1930s

Older Australians all know and remember the Great Depression
and the extremely hard times it brought about, but what of its
causes?
In 1930, Australia did not lack industrial capacity, fertile
farmland or skilled, industrious and willing workers, residing in
both the city and country. Already extensive systems of
reasonably efficient transport and communications were in
place.
War had not ravaged the cities or countryside, nor had
famine devastated the land and its population. There remained
plenty of development work to be done. The one thing that
industry and commerce lacked was a sufficient supply of money.
In the early 1930s, bankers, who were the only source of
new money or credit, deliberately refused loans to industry,
commerce and agriculture. However, payment on outstanding
loans was still demanded which led to a rapid decrease in the
circulation of real money. By a curious coincidence, the same
thing was happening in America and elsewhere.
This caused a complete standstill. Jobs could not be done,
goods and services could not be purchased. This placed Australia
in the Great Depression of the 1930s, and moreover placed
extensive numbers of mortgaged businesses, private dwellings
and farms into the hands of banks. The same happens on a
smaller scale every time we have a recession.
Australia suffered more in the 1930s than any other country,
with the exception of Canada and Germany. We had an
unemployment rate that reached 30 percent and was 20 percent
for a long period of time. National income fell by almost half.
Capital dried up completely. Commodity prices fell by two
thirds.
Bankers quickly created the money for war

Almost overnight, the same bankers who had no money for
housing, food and clothing, suddenly had millions to lend for
Army barracks, uniforms, rations and weaponry. This was a
remarkable reversal in policy by the bankers. They simply began
pumping millions upon millions of dollars back into the economy
when war was imminent. The Great Depression ended because
of the war!
Wars create huge debts to the bankers who are able to
expand the money supply and lend more money out. Big banks,
68
4-The banks
that have traditionally been owned exclusively by a few

collaborating families, can change the course of history and have
done so for much of this century.
Competing banks cooperate

Various mechanisms exist to enable individual banks to
cooperate with each other to make the banking industry work by
exchanging debts, payments, information, etc. One such is the
Australian Payments Clearing Association, a public company
owned by the banks, building societies and credit unions. It has
been in existence since February 1992 and has specific
accountability for key parts of the Australian payments system,
particularly payments clearing operations.
If you have wondered how the independent banks manage to
raise and lower their interest rates all at about the same time, the
answer lies with the Reserve Bank of Australia which is not a
government department but is wholly owned by the
Commonwealth. The Reserve Bank Board makes decisions
about interest rates independently of the political process that
is, it does not accept instruction from the Government of the day
on interest rates.
Numerous banking associations and institutes exist
throughout the world to cater for the mutual interests of bankers.
One is the Australian Bankers' Association, the national
organisation of licensed banks in Australia whose mission is "to
further the interests of Members . . ."
Internationally, Australia is a member of the International
Monetary Fund which was created to promote international
monetary co-operation. Its activities include surveillance,
lending, and debt relief for heavily indebted poor countries in
exchange for the ability to prescribe macro economic adjustment
and structural and social policy reforms in those poor countries.
So quite apart from family connections, religious loyalties
and secret societies, there exist many recognised bodies fostering
contact, co-operation, and perhaps collusion between
supposedly competing banks. Whether this ever results in a
conspiracy is left for the reader to decide.
Australia's own government established Commonwealth
Bank achieved some impressive successes while it was "the
peoples' bank", before being crippled by later government
decisions and eventually sold. At a time when private banks
were demanding 6 percent interest for loans, the Commonwealth
69
Bank financed Australia's First World War effort from 1914 to

1919 with a loan of $700,000,000 at an interest rate of a fraction
of 1 percent, thus saving Australians some $12 million in bank
charges.
In 1916 it made funds available in London to purchase 15
cargo steamers to support Australia's growing export trade. Until
1924 the benefits conferred upon the people of Australia by their
Bank flowed steadily. It financed jam and fruit pools to the extent
of $3 million, it found $8 million for Australian homes, and lent
$18.72 million to local government bodies, for construction of
roads, tramways, harbours, gasworks and electric power plants.
It paid $6.194 million to the Commonwealth Government
between December 1920 and June, 1923 - the profits of its Note
Issue Department. By 1924 it had made profits of $9 million from
its other businesses available for redemption of debt. The bank's
independently-minded Governor, Sir Denison Miller, used the
banks credit power after the First World War to save Australians
from the depression conditions being imposed in other countries.
The Commonwealth Bank became the first Australian bank to
open an agency in New York, established mainly for public loans
via the New York market. By 1931, amalgamations with other
banks made the Commonwealth Bank the largest savings
institution in Australia, capturing 60 percent of the nations
savings. The Commonwealth Bank was unable to save Australia
from the depression of the 1930s because it had been effectively
strangled in June 1924, when the Bruce-Page Government
brought in a Bill to amend the Commonwealth Bank Act by
taking the control of the Commonwealth Bank out of the hands of
its Governor and placing it in the hands of a directorate
consisting of the Governor of the Bank, the Secretary of the
Treasury, and six persons actively engaged in agriculture,
commerce, finance, and industry, to be appointed by the
Governor-General (which in practice meant the Bruce-Page
Government).
The effect of the Bill was to place the Bank absolutely under
the control of a body of men who might be bitterly opposed to
any competition with private banking.
Banks try to buy respectability

A minor scandal erupted in Australia during the year 1999 when
it was revealed that influential radio talkback presenter, John
Laws, had accepted payment of half a million dollars from the
70
4-The banks
Australian Bankers' Association for more favourable on-air

comments about the banks. The parties involved appeared to
regard the deal as a normal commercial arrangement.
Impossibility of paying off all debt

Some simple arithmetic will quickly convince you that if 95
percent of a nation's money exists as bank created credit owing
a bit over 5 percent interest, the remaining 5 percent of real
money will be insufficient to pay even the interest!
Consequently, interest is
Under Australia's present
continually compounded as a
monetary system, at any
debt. This is a mathematical
point in time, the
certainty. The whole economy
capitalised value of debt
then slaves away at the
and interest will always
impossible task of trying to repay
exceed the money supply.
the ever-increasing debt to the
The result: Profits for the
banking system. Lucky
banks, debts and taxes for
individual borrowers will some-
the people.
times pay off their debts to the
banks, using in the process so
much of the available money as to ensure that others never can.
Under Australia's present monetary system, at any point in
time, the capitalised value of debt and interest will always
exceed the money supply.
The result: Profits for the banks, debts and taxes for the
people. Whilst the banks profit by creating credit, what happens
to the borrowers?
Guernsey
A place that has escaped the clutches of the banks by issuing its
own interest-free money is the little island of Guernsey. By
controlling its own money supply from 1816 onwards, Guernsey
was able to avoid the century old trap of borrowing when it
didn't have to. The island has had a stable and prosperous
economy for over one hundred and fifty years. Guernsey's
income tax is only a flat 20 percent. It has no public debt, no
GST, no VAT, no inheritance tax, no capital gains tax, and almost
no inflation.
American President Abraham Lincoln printed 400 million dollars

worth of interest and debt free Greenbacks in 1863 to
successfully finance the Civil War, only after being asked to pay
71
24 percent to 36 percent interest by the banks. He was later

assassinated, allegedly by an agent of a famous family bank.
Banks and low-doc loans

Banks were once a restraining influence on household debt.
Local bank managers would send away would-be borrowers to
save for a bigger deposit or to build a better savings record. But
that was then. Now the deregulation of the financial system has
exposed banks to greater competition, especially from non-bank
lenders in the home loan market. Greater competition has
delivered borrowers significantly lower interest rates and a huge
range of loans to choose from.
A recent decision by the National Australia Bank to offer
low-documentation loans is a reminder of just how much banks
have changed. Australia's biggest bank says the move to low-doc
loans - which require only "limited earnings verification" -
reflects a growing number of requests from self-employed
customers. Lending practices unheard of a decade ago, such as
the big four banks offering loans to those with limited proof of
income, are now commonplace. One force driving change in
credit standards is the shifting character of the workforce,
particularly rising self-employment and casualisation.
This has created an expanding pool of potential borrowers
who don't have the regular pay history that banks have
traditionally relied on to help assess risk. This blend of social
change and market forces has made low-doc loans one of the
fastest growing areas of home lending. In the case of one
regional bank, low-doc loans are nearly 30 percent of its home
lending.
The Reserve Bank says the credit market is slowing and it is
concerned that lenders are trying to protect market share by
taking more risks. It says lending practices are "diverging some
way from the tried-and-tested methods of the past", and it has
singled out low-doc loans as one of the main culprits. In an
ominous caution, the Reserve says we won't know if lenders
have adequately assessed the risks until the economy sours.
Banks and other lenders have become used to the good times,
and are more and more dependent on them simply rolling on.
An economic slowdown and the inevitable rise in unemploy-
ment is bound to leave some highly geared borrowers severely
burned. But they won't bear the pain alone. The banks are likely
to end up with a troublesome collection of bad loans.
72
4-The banks
Punitive banking fees

Costello twiddles his thumb as the bank cartel gouges away
Weve all seen plenty of hypocrites in our time but Future Fund
chairman David Murray whinging about excessive fund
manager fees to The Weekend Australianis one of the more
brazen examples of chutzpah youd ever come across, Stephen
Mayne wrote in Crikey.com in August 2007.
Murray is the former chief executive of the Commonwealth
Bank who led the charge on punitive banking fees during his 13
year reign. Armed with a banking licence from the Federal
Government and a Treasurer who sat back and watched whilst a
ferocious cartel gouged away, Murray built himself a personal
fortune of more than $40 million.
This didnt come from taking CBA to the world or generating
export earnings, but rather from gouging millions of Australians
going about their daily lives.
For the five years that I owned Crikey, the Commonwealth
Bank clipped the ticket for an average 4.2% on every credit
card transaction we processed. All up, they helped themselves to
about $50,000.
When Crikey was sold, we tried to close the merchant
facility but discovered there was a $500 fee. Given there is also
a $500 establishment fee for setting up a new merchant facility,
we decided to hang in there and just cop the $12 monthly fee on
the basis that we might need it again one day.
Over the past 30 months, this has amounted to $360 in fees
even though the bank hasnt processed a single transaction. Lo
and behold, when the July 2007 statement arrived we discovered
the monthly fee had been tripled to $38.40 without so much as a
letter of explanation.
When you add all the brokerage that has been paid to
Commsec assembling a 410-strong stock share portfolio, plus the
mountain of fees and charges on other credit cards, overdrafts,
margin loans and the like, I reckon my activities have
contributed more than $100,000 in clear profit to the bank over
the past seven years.
The same thing has happened to hundreds of thousands of
other Australians- the $20 billion net profit posted by the Big Five
in 2006-07 had to come from somewhere.
Whilst big business has the clout, skills and time to negotiate
better deals with their bank, it is the punters and small operators
who get mercilessly screwed. Inertia explains much of it because
73
were so entangled with our bank through direct debit and the
like that its just not worth changing. Besides, in a cartel,
everyones as bad as each other.
Loan application fee / package fee: $600

Do you understand what the average fee of around $600 is for
when you apply for a mortgage? Did you know this fee in
Australia is far higher than what mortgage applicants pay in
countries such as the US and the UK?
With application fees, ATM fees and interest from a record
level of loans, banks are achieving record profits. Last year we
paid the banks $4 billion in fees many of us did not even notice.
If you have ever been late paying off your credit card,
overdrawn your account or bounced a debit payment, the
chances are you have paid a penalty fee.
But thousands of Australians are fed-up and are now fighting
back and they have the money to show for it.
Which bank?
In September 2007 the ANZ Bank was forced to reject claims it
could be at greater risk to credit problems than other big
Australian banks because less of its mortgage book is backed by
deposits.
The issue had gained traction because money for loans not
sourced from deposits is obtained on global credit markets,
where fallout from the subprime mortgage crisis has made
investors nervous about backing debt.
Figures provided by the Australian Prudential Regulatory
Authority show ANZ's total lending to households - including
owner-occupied mortgages, investment mortgages, credit cards
and other loans - is worth 3.5 times the value of the bank's
deposits.
This compares with 3.2 times for National Australia Bank,
three times for Westpac and 1.8 times for Commonwealth Bank.
ANZ's managing director of mortgages, Michael Rowland,
said the bank might expand its mortgage book by buying
distressed non-bank lenders, but with non-bank lenders suffering
under tighter credit the bank and its peers would probably gain
market share even without acquisitions.
The fund manager of Perpetual Trustees, John Sevior, said
banks could benefit handsomely as credit stresses sent some non-
banks to the wall. "In this environment, where there's any
74
4-The banks
uncertainty there's a swing back to quality, and obviously the

banks have a very strong market position and a sense of
security," he said.
The Future Fund

The Sydney Morning Herald published this intriguing final
paragraph on a story in August 2007 about the Future Fund:
The Federal Government has made a special request to the
ABS for investments of its Future Fund not to be revealed in the
current account figures until the middle of next year. It will
therefore not be possible to tell from the accounts what
proportion of offshore equities or bonds the Government's fund
has bought.
The Future Fund is already being obsessively secretive
about its activities as we still dont know exactly how much of its
$50 billion-plus in cash has been deployed and in what asset
classes.
Now it seems the Howard Government is being super
sensitive about disclosing its offshore investments, whilst worrying
about its impact on our already unsustainable current account
deficit, which hit $16 billion in the June quarter as foreign debt
reached a staggering $544 billion.
The whole story of the Future Fund has been one great big
accounting rort from day one, but it seems Peter Costello is
getting even more brazen in his dying days as Treasurer.
For starters, Costello overstated his budget surpluses by $29
billion over his first ten budgets by allowing unfunded public
sector superannuation to blow out from $69 billion to $98 billion.
He then finally confessed that this was unsustainable by
establishing the Future Fund, but the money was never actually
injected into the relevant superannuation bodies. Instead, the
super funds remain technically unfunded, which allows Cossie to
continue overstating his budget surpluses.
Then you have the outrageous double counting of claiming
that the Federal Government has no debt because it has
belatedly put some cash aside to cover unfunded super.
Whilst Mark Latham and Wayne Swan were rightly
pilloried during the 2004 election campaign by Cossie for
claiming the governments $600 one-off family payment wasnt
real and therefore didnt exist, the Treasurer is performing
contortions on a far greater scale over Federal debt yet Labor
continues to fail to point this out.
75
Remember when Cossie made the following claim on The

World Today in July 2007 as the markets were tumbling. Now it
won't affect the Commonwealth, because the Commonwealth
doesn't borrow. The Commonwealth's actually saving money,
and I think we could all agree now that it's very important that
it's been doing that. Imagine if the Commonwealth were in the
market borrowing at this time too.
So how does the Treasurer explain the $400 million Federal
bond issue in August 2007, which lifted total Commonwealth debt
to about $50 billion? The new debt expires in April 2012 and was
priced at 6.1579 percent. And its real too.
Predatory lending
Do we need to overhaul the Residential Tenancies Act to give
people more rights? Do we also need to look at the whole
lending market? There is a lot of very easy-to-borrow money
about and it is being lent to people whose circumstances would
normally mean they could not get a mortgage, which increases
the likelihood of repossessions. Tenants often don't find out until
the very last moment that their landlord has been defaulting,
even while they have been paying rent.
An Australian Bankers' Association spokeswoman denied its
members were the problem, saying 70 percent of repossession
orders came from non-conforming - non-bank - lenders offering
mortgages to riskier customers.
The finance industry has also raised concerns about the
increase in predatory lending, whereby companies target
people who do not have the ability to repay loans but have
equity in their homes - another factor in the repossession rate
rise.
House repossessions up after interest rate rises

There are new signs that recent interest rate rises have
accelerated the number of NSW properties being repossessed by
lenders. Supreme Court figures show there were just under 2300
writs of possession between January and July 2007 - nearly as
many as in the whole of 2005. The number of monthly
repossessions has been rising since January 2007 and peaked in
July 2007 - before the interest rate rise in August 2007, which
lifted rates to a decade high of 8.3 per cent.
The figures indicate the three previous rate rises, in May,
August and November 2007, caused a sharp increase in the
76
4-The banks
number of NSW borrowers unable to service their mortgage.

Suburbs in Sydney's west and south-west have been hardest
hit, with Blacktown recording 41 repossessions between January
and July, Guildford 32 and Merrylands 30. Even though writs of
possession figures count applications on both residential and
commercial properties, they indicate the number of family homes
being repossessed has risen significantly since the property
market peaked around Christmas 2003.
There were 1611 writs of possession registered in NSW in
2003 but there was more than double that number last year and
the total is likely to rise even further. Lenders seek mortgage
repossession orders to take possession of a property when
borrowers fail to make their monthly mortgage repayments.
The number of writs of possession recorded by the NSW
Supreme Court surged by 55 percent last year to 3642, but this
year's repossession figures trends suggests the number would
reach nearly 4000 in 2007.
Rising interest rates have delivered a double whammy to
western and south-western Sydney, simultaneously increasing
average monthly mortgage repayments while driving down
house prices. This has left working families struggling to meet
their mortgage repayments particularly vulnerable following the
August 2007 interest rate rise.
The number of Sydney families forced to sell their homes
over the past year because they are unable to service the
mortgage is probably far higher because many borrowers in
distress sell before the lender forecloses. There were a record
1400 auctions in the west and south-west of Sydney in the year to
March 31, 2007, nearly double the number in 2005.
Analysts say this is another indicator of the rise in the number
of families being forced to sell. House prices in Sydney's
northern, eastern and inner-west suburbs have risen strongly this
year but property markets in the west and south-west have been
stagnant.
The lenders behind the majority of house repossessions

The NSW Supreme Court has refused access to court records that
would expose the lenders behind the majority of house
repossessions.
The Australian Bankers Association and a NSW consumer
advocacy group, the Consumer Credit Legal Centre, had written
to the court seeking access to court files, attempting to clear up
77
the mystery of which lenders were launching the majority of

repossession actions. The ABA has argued that its members, who
are mostly major banks, were only responsible for 20 percent to
35 percent of home repossessions.
If accurate, this would mean non-bank lenders could be
responsible for up to 80 percent of home loan repossessions
despite only having a fraction of the total lending volume. Non-
bank lenders are responsible for about $172 billion in residential
mortgage-backed securities, with about $7 billion of those
classified as subprime.
The Sydney Morning Herald reported in August 2007, that
about $500 million worth of loans in this last category are viewed
as technically in default by ratings agency Standard & Poor's.
Repossessions are launched by the lender or its agent lodging
a writ for possession in the NSW Supreme Court. In 2006 there
were 5363 writs issued, a 10 percent increase on the previous
year. In a recent analysis of writs for possession over a 10-week
period, the Herald revealed the single largest organisation
involved in repossessions was the fund manager and trustee
service company Perpetual, with 50 actions.
Second was trustee service Permanent Custodians, with 28.
Writs for possession do not tell the full story. The ultimate
lenders responsible for these repossessions are hidden behind the
trustee services the lenders employ.
The court told the ABA its filings did not have some of the
information sought, such as the loan type and the amount. It also
said that about 18,000 court files would have to be reviewed,
raising concerns about privacy and the practicality of such a
review. The ABA said it was also told the practice of the Chief
Justice, Jim Spigelman, was to only approve research projects
under the auspices of a university or other independent institution
and "it would not be appropriate for the court to facilitate
research that could be used to advance a private or commercial
cause".
Tenants are being forced out of their homes at a dramatic rate,

some with just two hours' notice.
Renters are becoming the innocent victims of an
overcrowded rental market and the problem is expected to
worsen if interest rates rise. Tenant advocates blame the
deepening problem on landlords who default on mortgages and
78
4-The banks
lenders who take on high-risk customers. The Tenants Union of

NSW cited cases of landlords stealing repossession notices from
the mailboxes of tenants, allowing them to pay rent right up until
the sheriff's knock on the door.
The union is calling for a change in the law to give renters
more protection when the homes leased to them are repossessed.
Under the Residential Tenancies Act, while it is stated renters
should be given a reasonable amount of notice of repossession,
an order can stand even if no notice is given.
Cara Levinson, 28, and her partner Dee Saidi, 26, signed a
six-month lease in July 2007 on an apartment in Darlinghurst.
They felt secure in the knowledge
that their landlord lived above
them but two weeks later were ... the local tenants'
served with a sheriff's letter, which advice service reported
gave them 11 days to get out just four cases of
because the landlord had defaulted repossession in 2003.
on his mortgage payments. In 2006 there were 31
"I was flabbergasted - we had and many more in 2007.
paid above the odds because we
wanted to be in Darlinghurst and
near our families and then, suddenly, we were virtually out on
the street," Levinson said. "The rental market is already a
nightmare and we were having to go back into it again, terrified
the same thing could happen."
Official figures show that home repossession applications to
the Supreme Court of NSW have doubled in the past five years,
with more than 5,000 writs issued in 2006. While not all of those
writs were on rental properties, Grant Arbuthnot of the Tenants
Union said: "My experience is that a few years ago we would
have cases of this kind [of repossessions] three or four times a
year. "Now it is three or four times a month, and those are only
the ones that get reported to us - there are probably far more."
In inner-city Sydney the local tenants' advice service
reported just four cases of repossession in 2003. In 2006 there
were 31 and many more in 2007. Similar rises have been seen
across the city and the state.
"We need to overhaul the Residential Tenancies Act to give
people more rights but we also need to look at the whole lending
market," Arbuthnot said. "There is a lot of very easy-to-borrow
money about and it is being lent to people whose circumstances
would normally mean they could not get a mortgage, which
79
increases the likelihood of repossessions. Tenants often don't find

out until the very last moment that their landlord has been
defaulting, even while they have been paying rent."
In rote fashion, as in a previous story in this chapter, an
Australian Bankers' Association spokeswoman denied its
members were the problem, saying 70 percent of repossession
orders came from non-conforming - non-bank - lenders offering
mortgages to riskier customers.
Non-bank lenders up mortgage interest

In the second half of 2007 one in five new home borrowers
signed with a non-bank lender, double the proportion in the
1990s, leaving a greater number of people at risk of higher
interest rates because of the global credit crunch.
The rising cost of finance is hitting non-bank lenders the
hardest because they source more of their funds from
commercial funds markets than banks. RAMS and Bluestone
have already lifted their interest rates by more than the latest
increase in the official cash rate.
The proportion of loans going to non-bank lenders has fallen
slightly since the peak of the housing boom but remains well
above the level of the mid-1990s, which was one in 10.
In the late 1990s a discounting war broke out between new
non-bank lenders and the big banks as they fought for market
share. But this trend could now be reversed, as non-bank lenders
find it harder to get cheap loans off global finance markets.
Non-bank lenders have been funding out of the offshore
credit markets and took a lot of the mortgage business away from
the banks. Now they are the ones being squeezed. The major
banks had big enough deposits to hold out for about three to six
months before having to lift lending rates to borrowers.
The total of new home loans shrank 4.1 percent to 63,599 in
July 2007, even before another interest rate rise hit in early
August. Roughly 55,000 home borrowers were hit by a rate rise
within the first or second month of their loan because they failed
to fix the interest rate.
Fewer than 15 percent of new borrowers opted for a fixed
rate loan in July 2007 - the lowest proportion in more than a
year. This was down from 21 percent in November when the
Reserve Bank previously raised rates. First home buyers staged a
minor comeback in July, accounting for 17.4 percent of new
loans.
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4-The banks
Banking complaints
Australia's banks it seems, are doing a fine job of keeping their
shareholders happy but are not having as much success in
pleasing their customers.
In a recent year complaints against Australia's banks jumped
12.5 percent, after a 14 percent increase in the year before that,
according to the Australian Banking Industry Ombudsman
(ABIO).
The Ombudsman said that many older Australians would
value more of the personal touch in banking and said that banks
should explain new services and new technology more carefully
to consumers, especially older Australians. The main sources of
disputes were consumer credit and credit cards
Of the 7992 new cases received, 22.5 percent related to
housing finance. This product group was in fact the main
problem area investigated, representing 31.4% of all
investigations.
Most complaints investigated were about variable rate home
loan products, and the main problem described by consumers
was that the bank had breached the terms of the contract.
Are the banks' illegal penalty fees tantamount to theft?

Ever had the feeling that your bank is robbing you with all its
penalty fees? Your suspicion may not be as paranoid as it seems.
A study has found that some fees banks charge their
customers for breaches such as late payments and overspending
set account limits, are as much as 92 times the actual cost of
processing them. The study also shows, according to the Law
Council of Australia, that financial institutions charge up to 16
times the cost when processing a dishonoured cheque.
And this is where the law gets sticky for the banks: according
to legal and consumer groups, the hundreds of millions of dollars
financial institutions charge their customers in penalties each
year may be unlawful, because under law any fees and charges
must be a valid estimate of costs the bank has actually incurred.
By charging penalty fees ranging from $15 to $50 for each
default the banks may be acting unlawfully.
Not to mention immorally. It is hard to see how a bank can
justify charging a $50 penalty fee when a customer has
overdrawn an account by as little as $1.
The Law Council's Consumer Law Committee says such fees
imposed in varying amounts by banks including Westpac, the
81
National Australia Bank, ANZ and the Commonwealth are

"extravagant and unconscionable" compared with "the greatest
loss that could conceivably be proved" to have occurred from a
breach of contract.
"A contract cannot impose a fine or penalty," the Committee
says in a recent submission to the Senate's economics committee.
"The power to impose fines and penalties requires legislative
backing."
The Committee's view is supported by Choice and the
Consumer Action Law Centre. "There is a strong case that these
fees are unlawful and legally unenforceable, yet relevant
regulators have failed to take action on the issue," they say.
And despite growing numbers of home buyers struggling to
meet mortgage repayments and
credit card debt hitting record
levels, some banks have boosted
their fees in the past few years. "Australians are being
Choice and Consumer Action robbed by the banks and
say that since 2005, Westpac's it is no surprise that the
transaction account penalties banks are pocketing
increased by 25 to 33 percent and bumper profits," Senator
St George Credit Card penalties Fielding told the Senate.
jumped by 40 to 50 per cent.
In their submission to the
Senate, which is investigating a
bill that aims to ban penalty fees and replace them with fees
levied on a cost-recovery basis, they quoted disgruntled
consumers' accounts of being slugged with hefty charges for
minor financial indiscretions.
"My account (was) 84 cents overdrawn for which I was
charged a $30 overdrawn fee and 60 cents in interest," says one
example.
Under the bill, introduced by Family First Senator Steve
Fielding in June 2007, fees must be a "reasonable estimate of the
loss suffered by the supplier". The bill bans financial institutions
from charging fees where the customer is not to blame for a
dishonoured cheque or failed transaction. It gives the Australian
Securities and Investments Commission the power to monitor fees
and investigate customer complaints.
"Australians are being robbed by the banks and it is no
surprise that the banks are pocketing bumper profits," Senator
Fielding told the Senate. "It is time to stop the banks' ruthless
82
4-The banks
profit grab and time to stop banks fleecing vulnerable

Australians."
The St Vincent de Paul Society, in its submission, says penalty
fees are financially and morally unsustainable. Chief Executive
John Falzon says the society has had to provide emergency
financial help to low-income earners who have been slugged up
to $50 for overdrawing an account by as little as $1.
While courts have difficulty in imposing even small fines for
offences such as begging, "banks do not seem (to) suffer the same
legal and ethical difficulties punishing poverty. Australia should
not allow banks to punish the poor," Falzon says.
The latest figures released by the Reserve Bank showed that
banks had reaped $9.8 billion in fees in 2006, of which more
than $4 billion was from household deposits and credit cards.
More than $90 million, a jump of 21 percent between 2005
and 2006, was raised by banks mainly from credit card penalty
fees and over-limit fees. A Choice spokeswoman said this did not
include penalty fees on transaction accounts and that total
penalty fees amounted to hundreds of millions of dollars.
The Consumer Law Committee says that calculating the
actual cost to banks of consumer defaults is impossible because
financial services keep the information secret. It wants the ASIC
to have the power to review the costings and slash unreasonable
fees. The banks of course, are not taking the assault on their ill-
gotten lucre lying down. The Australian Bankers' Association
boss, David Bell, claimed that there is no evidence that banks
even charge illegal fees and that it is incorrect to label all fees as
penalties. Bell stated that:
For example, if I try to take more money out of my account
than I have in it, I am asking my bank to financially
accommodate me. If the bank does, we have an agreement.
Wouldn't it be reasonable to expect to pay a fee for this loan?
The small problem with the example specified by Bell is that
users dont actually ask their bank to overdraw their debit or
credit account. For example, if you have $40 left on your credit
card balance, and purchase an item for $41, the bank will allow
the transaction even though there isnt enough money in the
account to cover the debit. At the time of the transaction, the user
has no idea that they are overdrawing their account by $1. If
they were made aware, they would presumably not complete
the purchase or simply use another facility. Of course, the bank
does not tell the user this. Instead, the bank allows the transaction
83
and slaps a $30 to $50 overdrawn charge on the user.

If the banks had any semblance of ethics, or even a vague
consideration for the law, they would either:
1. Not allow the transaction to proceed, or
2. Allow the transaction to go ahead but only charge the
consumer a commercial rate interest on the money borrowed
(in this case, of around 2 cents). Instead, the bank secretly
processes the transaction and charges a fee which bears no
resemblance to their cost.
There are few enterprises in Australia that are allowed to
operate such a grossly criminal regime. The actions of banks, in
automatically debiting fees which are clearly not permitted
under the law of contract, are tantamount to theft. And the
victims of this massive swindle are every Australian with a bank
account or credit card.
84
5.
W HO CAN
YOU TRUST?
Can you trust your finance broker?
Mortgage broking is an unregulated

industry in most Australian states allowing
some people to come in, make as
much money as they can, as quickly as
they can, and leave.
The Consumer Action Law Centre says

almost all the problem mortgage cases
it took on had been set up by a broker
and in many cases the broker had been
involved in some degree of dishonesty.
Broker facts
Historically, the majority of brokers were ex-bankers over 50
years of age. However, this profile is now changing with the
emergence of younger specialists. Over 30 percent of brokers
who joined the industry in the last 12 months were under 40
years of age.
Brokers are becoming more technology literate, with 72
percent of respondents regularly using the Internet and using a
computer. Brokers over 50 years old tended to be significantly
less technology literate, relying more on fax and phone.
Only 20 percent of mortgage brokers advise on non-
conforming products, with the majority focused on mainstream
lending products.
Less than 15 percent of brokers said they would consider
expanding their businesses into broader advisory services, wealth
management products, or business products, mainly because of
the complexity involved in these product areas.
Broker business confidence

Brokers level of confidence varied by state, with those in
Western Australia and Queensland expecting significant growth
in the next 12 months, whereas those in New South Wales and
Victoria believed there would be industry shrinkage and
consolidation.
Nearly 20 percent of brokers in New South Wales and
Victoria were considering leaving the industry in the next 12
months.
91 percent of brokers identified the main threats to their
business as firstly, more extensive regulation and secondly, a
significant reduction in lender commissions.
48 percent of brokers expect to see lender commissions
being squeezed in the next 12 months.
85 percent of brokers believe that a target of 50 percent of
loans being originated through the broker channel is achievable.
Fraudster's greatest ally

The very structure of the mortgage industry can be, in effect, one
of a fraudster's greatest allies. Banks have outsourced mortgage
distribution to brokers, some of whom then outsource the
sourcing of customers by paying referral fees to solicitors,
accountants, financial planners and real estate agents. This
86
5-Who can you trust? Can you trust your finance broker?
outsourcing system is effectively opening the door to even more

fraud.
Mortgage broking is an unregulated industry in most states
allowing some people to come in, make as much money as they
can, as quickly as they can, and leave.
This has been true in any industry with high levels of
commission including motor vehicles and associated finance,
property, stock broking and insurance. Couple this with a
pumped up demand for properties, with rapid housing price
increases that have left people feeling desperate to buy a home
and you have a recipe for mortgage fraud to flourish.
According to some estimates, mortgage brokers currently
write 30 percent of all home loans in Australia. In the near future
brokers are expected to have more than 50 percent of the
market as banks continue to outsource the distribution of their
mortgages. While this makes mortgage distribution more efficient
for banks, the increase in broker business has brought with it an
increase in fraud. The trend is following the American market
where 65-70 percent of all loans are written through brokers.
Recently in the USA, US$60 billion of mortgages (3.5 percent of
all loans written) were fraudulent. If you translate the same
statistic to Australia, that would equate to 1800 fraudulent home
loans every month.
Australia's large cash economy also inadvertently makes this
market ripe for the picking for mortgage fraudsters. People who
work for cash in hand often tend to do two or three jobs outside
the tax system with no group certificates and are probably not
even declared as an employee. Many of these people would not
qualify for home loans.
Lenders however, are seeing applications from these people
that are fully supported by pay slips, letters of employment and
group certificates. An unscrupulous broker can charge such
people thousands of dollars to organise the fabrication of these
documents. Many of these brokers it appears, do not create the
documents themselves, they pay a third party to make the
forgeries.
Predatory mortgage lending and mortgage fraud

Mortgage fraud is when one or more individuals defraud a
financial institution by submitting false information wilfully. This is
normally to obtain a favourable outcome. Some mortgage
brokers have been involved in mortgage fraud.
87
Predatory mortgage lending is when a dishonest financial

institution wilfully misleads or deceives the consumer. Some
mortgage consultants, processors and executives of mortgage
companies have apparently been involved in predatory lending.
Some signs of predatory lending include: falsifying
income/asset and other documentation, not disclosing Yield
spread premium or other hidden fees before the
settlement/closing, failing to provide all appropriate
documentation in order for the borrower to clearly understand
the mortgage terms and lender policies, convincing borrowers to
refinance a loan without any true benefit, influencing a higher
Loan Amount and inflated appraisals (often in tandem with an
appraiser) and unjustly capitalising on a borrower's relative
ignorance about mortgage acquisition.
Another unethical practice involves inserting hidden clauses
in contracts in which a borrower will unknowingly promise to
pay the broker or lender to find him or her a mortgage whether
or not the mortgage is closed. Often a dishonest lender will
convince the consumer that he or she is signing an application
and nothing else. Often the consumer will not hear again from
the lender until after the time expires and then they are forced to
pay all costs. Potential borrowers may even be sued without
having legal defines.
Sophisticated attempts at mortgage fraud

Australia's brokers and lenders are finding themselves subject to
increasingly sophisticated attempts at mortgage fraud. The very
structure of the mortgage industry can be, in effect, one of a
fraudster's greatest allies.
The worrying thing is that mortgage broker fraud has become
so prevalent that cases of fraud uncovered from one broker did
not meet the criteria for the police to warrant further
investigation.
When you link easy access to false documents with a
mortgage broker who is prepared to cross the line, lenders can
face serious fraud problems.
Mortgage fraud is not a thing of the past, in fact it seems to be
on the increase. There is growing evidence that those behind
such scams will try every trick in the book to slip dodgy
documents past brokers and lenders and worse still some brokers
actively participate in such fraud.
88
In a landmark move Macquarie Bank recently revealed

details of actual fraudulent mortgage documents in a bid to
educate the industry on how susceptible it is to such tricks. To the
untrained eye many of the documents detected by loan assessors
at Macquarie as fraudulent look like normal pay slips, references
and taxation documents. But when assessors started comparing
documents, even parts of the same document, and cross
checking with phone calls to the applicant's employer, glaring
attempts at fraud were uncovered.
In some cases clients colluded with brokers, in others brokers
were able to create fraudulent applications without the
borrower's knowledge. In other cases, fraudsters from outside the
broker channel tried to slip dodgy applications past the
gatekeepers.
Even more frightening is that some of these fraudulent
applications can remain undetected for years and come back to
haunt borrowers and lenders years down the line.
In one recent case, investigators from Macquarie Bank
arrived at a broker's office early one morning to demand the
original files for loan applications he had submitted (as the bank
can do under its referrer agreement). Macquarie's head of third
party distribution, Mike Barrett, says the broker had submitted a
reasonable number of applications over the previous 12 months
but loan assessors had noticed that something was wrong.
A few checks uncovered fraudulent supporting documents in
a batch of applications from the broker - altered loan applica-
tions, forged payslips, letters of employment and PAYG
summaries were just the tip of the iceberg.
The investigators spoke to the customers involved and
confirmed the fraudulent activity. "But we didn't know when we
turned up that one of the major banks had been running a six-
week fraud investigation on the same broker; our arrival, in fact,
compromised their investigation," Barrett says.
By the time police seized files, computers and hard drives,
they also uncovered evidence of shredding.
Despite the fact that the evidence was clear, there were
limits on what the banks and the police could do to prevent the
same broker from submitting similar applications again.
Even more concerning is that under current laws there is
little to stop this broker, and others who try the same tricks, from
switching to another lender and starting all over again.
There is also no formal structure to allow lenders and the vast
89
majority of reputable mortgage brokers to formally communicate

with each other to check credentials and past histories of people
entering the industry. So the same broker was able to resume his
business. "In fact he was recently still running the same
advertisements in the newspaper that he used several months
ago."
Mortgages and the way they are distributed now affect up to
98 percent of the population. For many people a home loan is the
biggest financial decision of their lives and yet we have only
minimal regulation of mortgage brokers who distribute them.
Recently the Federal Government
effectively handballed regulation
of mortgages and credit to the
states (credit regulation legally ... it is often difficult to
being a state, rather than a federal, detect a fraudulent
domain). application. All it takes to
Many people believe that create such a loan
mortgage brokers should come application, for example,
under uniform national regulation, is an almost unnoticeable
in the same way as the wider change to a pay slip ..
banking and finance sector.
The problem for the industry is
that it is often difficult to detect a
fraudulent application. All it takes
to create such a loan application, for example, is an almost
unnoticeable change to a pay slip, a modified bank account
statement, or even perhaps a false reference letter from a fake
employer.
Some attempts have involved doctoring bank account
statements, or clumsily cutting and pasting signature blocks,
among a raft of other tricks. The faxing of a lot of documents has,
in some cases, made it difficult to separate honest applications
from forged documents.
Some brokers will even forge, or obtain, complete sets of
false documents unbeknown to their borrower. There have been
instances where a tax return was provided with an application to
support the applicant's income, but when on checking directly
with the customer a tax assessment from the Australian Tax
Office showed a difference of $50,000 in income. The broker
and the accountant who supplied the tax return simply responded
by saying, We were acting on details provided by the client and
therefore the validity of the numbers is the client's responsibility."
90
The behaviour of rogue and fraudster brokers who target the

poor, desperate and nave
Interest only loans to inappropriate client borrowers
Mrs M was an aged pensioner and her only income was the
pension as she struggled to meet her basic living requirements.
She was poorly educated, had difficulty reading and writing and
lived in the country. She had a debt to legal aid for divorce and
custody proceedings, which she wanted to repay. She owned her
home, which was valued at $40,000 and wanted to consolidate
her debts when she saw an advertisement by a finance broker in
a newspaper which stated "no credit checks" and "loans up to 90
percent of valuation".
She rang the broker and gave some details over the phone.
She then went to the brokers office with a friend, where the
broker told her he could get her a loan of $24,000 secured over
her home. He then gave her the loan document and the
mortgage.
Her friend suggested that she take them to a solicitor but the
broker said that if she wanted the loan she would have to sign
immediately, which she did. She asked how long the loan was
for but was not given an answer. It turned out that the loan was
for interest only for the first year and that the principal had to be
repaid in 12 months.
The interest rate was 13 percent, and the broker was to
receive a procuration fee of $1,500. Mrs M met the monthly
repayments but when the time came, was unable to pay the
capital of $24,000. She sought legal advice and was advised to
sell her home.
The Code enables the broker to charge a commission even when

the loan agreement is not completed
Ms O and her partner arranged for a broker to visit them at home
to discuss options for refinancing her home loan. The broker
advised Ms O that he would be able to find them a cheaper loan
and so they signed the agreement that day. They did not read it
before signing it and the broker did not explain it to them.
The broker subsequently contacted Ms O and sent her
documents to sign to enter into a new loan to refinance her home
loan. When she examined these documents she decided not to go
through with it as it was not cheaper and she did not believe she
would be able to meet the repayments. The broker is now
pursuing her for a $6,000 brokerage fee.
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Fraud
A recent report from the Consumer Credit Legal Centre noted that
the shift in responsibility for the preparation of the loan
application from persons such as bank employees to brokers has
seen a shift from applying proper risk assessment to lesser risk
management, due to the incentive by the broker to earn
commissions through having the loan approved.
Soft fraud is occurring where the broker manipulates or
camouflages the borrower clients circumstances such as by not
describing liabilities, reducing the number of dependants or
inflating the value of assets. Sophisticated fraud is where the
broker creates a fictitious person and then steals the money.
It is stated by the Consumer Credit Legal Centre that these
types of fraud account for 3.2 percent of frauds committed
against financial institutions. Professional indemnity insurers
have, the report says, refused to insure valuers in respect of
transactions with identified particular lenders with lax lending
practices.
Finance brokers, Consumer Credit Legal Centre NSW (Inc)

(CCLC) and the Australian Securities and Investments
Commission (ASIC)
A recent report on the mortgage broking industry, prepared by
the Consumer Credit Legal Centre NSW (Inc) (CCLC) and
released by the Australian Securities and Investments Commission
(ASIC), has found that while the consumer use of brokers has
expanded greatly there are still few barriers to entry in the
industry such as clear minimum competency or training
standards.
Up to one in two home loans are now sourced through
brokers, who can provide a valuable service to consumers faced
with an ever-increasing choice of credit options. People should
be able to approach brokers with confidence, in full knowledge
of the costs involved and with appropriate avenues to redress if
something goes wrong.
The CCLC report presents evidence that standards need to
improve in the mortgage broking sector in order to reduce the
risks to consumers.
The report also found that while consumers are increasingly
using brokers, consumers who use the mortgage broking industry
can face problems that include:
Poor advice, with the increased costs of the inappropriate
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loans that might result;

Inadequate disclosure of fees and commissions by some
brokers;
Inconsistent documentation from brokers;
Uncertainty about the nature and price of the service;
In a small number of cases, fraudulent activity such as
manipulating loan applications.
There is also a need for clarity as to whether brokers are acting
for consumers or are really agents for lenders.
The report has identified significant issues about the structure
and practices of the industry and raised possible options for
addressing these issues.
Finance brokers caught out

The Victorian Government obtained a court injunction to stop
two prohibited finance brokers preying on vulnerable consumers.
The injunction was obtained by Consumer Affairs Victoria
against Jehan Anurshirvani of Brunswick and Maxwell Carter of
Beaumaris, after discovering they were unregistered credit
providers acting as finance brokers and managing a loan and
finance broking business whilst prohibited.
Anurshirvani and Carter, who traded as National Loan Centre
in Queens Road, Melbourne, both had a criminal history
involving dishonesty and had never registered as credit
providers. They were also prohibited from acting as finance
brokers because they have been found guilty of fraud-related
charges in the last ten years.
The National Loan Centre advertised cheap loans, with
interest rates as low as 4 percent and required consumer to pay
deposits of up to 20 percent of the loan.
They also requested additional money to cover so-called
application and legal fees on the promise that their loan would
be available within two days of their deposit cheque being
cleared. The National Loan Centre was planning to expand their
practices and had recently placed employment advertisements
seeking 20 loan consultants.
Regulation of Mortgage Broking Industry required to protect

home buyers, says Macquarie Bank
Bill Moss, former head of Macquarie's Banking & Property Group
claims mortgage brokers should be regulated like other financial
service providers in order to protect home buyers.
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Moss said the Australian home lending market is

experiencing an increase in the incidence of fraud. "This is based
on factors including the US experience with mortgage brokers,
Australia's housing boom, and the lack of dedicated resources to
detect this type of fraud."
"The best industry estimate of mortgage fraud in Australia is
that it represents an alarming 13 percent of the value of all
financial institution losses. This is from the Consumer Credit Legal
Centre's Report to ASIC on the finance and mortgage broker
industry. With Australians borrowing $10 billion a month to buy
or refinance property, that represents a significant amount of
money."
Moss said lenders had traditionally expected a very small
fraudulent application rate. However, with rising house prices
and the largely unregulated mortgage broking industry becoming
more dominant, the potential for fraud was increasing.
"Banks are processing applications at a record rate of more
than 60,000 applications a month as a result of the housing boom.
The only way we can prevent the incidence of fraud is to make
sure that all lenders and their intermediaries - brokers, solicitors,
accountants, and financial planners - are regulated to the same
standard as the banks."
Moss said fraud aimed at financial services companies
created costs that were passed back to the consumer in higher
fees, interest rates and insurance premiums. Defrauding the
banks was a cost to the economy.
According to the Australian Institute of Criminology (AIC),
overall fraud is estimated to cost this country $5.88 billion per
year, or 30 percent of the total $19 billion annual cost of crime.
"Mortgage and finance brokers need to be educated, trained,
licensed and a member of an industry body," said Moss. "They
must have professional indemnity insurance and be subject to
significant sanction if they act unethically. They must fully
disclose the commissions they receive, and who they act for."
The potential for fraud in the mortgage industry has increased
because banks have outsourced their sales and distribution to
brokers over the past 10 years.
"In the end, this is a problem all banks will have to fix
together, along with the brokers themselves. The problem is too
big for regulators, police or lawmakers alone to tackle. We need
stronger regulations and the lending industry has to contribute."
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WA mortgage broker jailed for fraud

A former mortgage broker was jailed for four years after being
found guilty of misleading investors about the value of a Western
Australian property development in the 1990s.
Ken O'Brien became the first person to be convicted of
charges arising from the royal commission into the state's finance
broking scandal. O'Brien was found guilty of 28 fraud charges
after a seven-week District Court trial.
The court heard investors in the Vasse River Resort at
Busselton agreed to renew a loan for $2.4 million and contribute
a further $300,000 after being told the resort was worth $4
million. The investors sold the property last year for $1.4 million.
O'Brien will be eligible for parole after two years in jail.
Mortgage shoppers need to know how to protect themselves

A core problem in mortgage shopping is that the loan provider
knows far more than the borrower, so mortgage shoppers need to
know how to protect themselves. Here are some of the tricks of
the trade, followed by ways to protect yourself.
In addition to the protections cited below the reader can, in
every case add, "use an upfront mortgage broker." I have also
become sensitised to the fact that many of the tricks mentioned,
or very similar tricks, can be played by lenders.
Low-ball Offers: To draw customers some brokers and lenders
will advertise low-ball prices that they have no intention of
honouring. Once they get you in the door, they will play bait
and switch, or letem dangle.
Bait and switch is the game played by some appliance
merchants and others who advertise a low-ball price but when
you arrive at the store they happen to be out of the advertised
special and try to interest you in something else.
Letem dangle means keeping you on the hook in the hope that
market rates might drop enough to make the advertised special
profitable. Lenders play these games as well as brokers.
Protection: Don't respond to any ad that quotes a price 1/2 point
or more below the lowest price offered by anyone else.
Bait and Remember: Some mortgage brokers and lenders will
fail to mention certain fees until the borrower is in too deep to
bail out and then remember them.
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Protection: Require the broker or lender to provide a written list

of all fees to be paid by you, including known payments to third
parties such as credit reports and appraisal fees. It should not
include prepaid items, payments by the lender to the mortgage
broker, or charges by third parties unconnected to the lender
which are not accurately known until later.
Play the market: Usually there is a lag between the time a
borrower submits an application and the time when the loan
terms are locked. The loan provider will always explain to the
borrower that the terms quoted at time of application are subject
to change with the market. If market rates subsequently rise the
borrower will indeed see the rate on his loan rise. If market rates
decline on the other hand, some loan providers will leave the
rate on the loan unchanged unless the borrower challenges it.
Many people claim that this game is common, played by lenders
and brokers alike.
Protection: You must monitor the market during the period prior
to locking the loan and let the loan provider know you are doing
so.On a purchase transaction, mortgage brokers who have been
referred to you by your real estate sales agent can usually be
depended on because the sales agent's commission is dependent
on your deal getting done.
Rig the market rate against floaters: Borrowers prepared to take
the risk may elect to float the rate and points during the period
until the loan closes, betting that market rates will not rise. The
market rate, however, is what the loan provider says it is, and
some of them up the price as the closing date approaches.
Lenders do this as well as brokers.
Protection: If you float past the point where you can bail out and
shop elsewhere your negotiating power is weak - unless you had
the foresight to protect yourself in advance when your
negotiating power was strong. You should get the loan provider
to agree in advance that the price offered you when you lock
near closing will be the same as the shortest lock-period price
being quoted to potential new customers on the same day.
No-cost loans that aren't: Loans with high rates for which
lenders will pay points are sometimes advertised as "no-cost"
loans, which they are not. They are zero point loans, but there
may be substantial fees of other types.False advertising is not
limited to brokers.
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Protection: On a true no-cost loan, it should be the same as the

interest rate.
Interim refinance: Borrowers who want to refinance a mortgage
that has a sizeable prepayment penalty may fall prey to the
interim refinance ploy. The first refinance is for an increased loan
amount that includes the penalty but carries a high rate, while
the second, occurring several months later, lowers the rate. The
borrower does avoid having to pay the penalty in cash, but the
cost of the two deals wipes out most or all of the gains from
refinancing.
Protection: Just don't do it.
Contract chicanery: Borrowers who accept whatever they are
told may fall prey to contract chicanery: incorporating a
provision in the loan note favourable to the lender, without
mentioning it to the borrower. Lenders will usually pay an extra
point or so for a prepayment penalty, so the broker who includes
it in the contract without your knowledge can put the point in his
pocket rather than in yours, where it belongs. Loan officers
working for lenders might do this as well.
Protection: Read all documents carefully at every stage of the
process. Is there is a prepayment penalty?
You can't lend without regard for the borrower and their
circumstances
In a recent case, the Supreme Court of NSW delivered a victory
for Legal Aid NSW and Michael Robert Cook and his wife Karen
Ann Cook. The Cooks, of Currans Hill, NSW, have two young
daughters. They borrowed money to build a home. They started
with a healthy deposit and a loan from St George, but Michael
was diagnosed with non-Hodgkins lymphoma that became
malignant.
He lost his job and resorted to a series of loans to refinance
his loan of $110,000 in a desperate bid to keep the family home.
In October 2002, the Cooks took out a loan of $22,000 with
Cash King to make the repayments on another loan they had with
Liberty Financial for about $192,000.
When they defaulted on both loans, Cash King helped them
to refinance through Bleier Mortgage Corporation. Bleier
Mortgage Corporation is the in-house broker for R L Kremnizer &
Co, a firm of solicitors running a private mortgage practice. Court
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papers state the Cooks were charged thousands of dollars in fees.

Kremnizers arranged two loans, one from Permanent
Mortgages Pty Ltd for $195,000 and one from a private lender for
$45,000. Only the loan from Permanent was the subject of the
court case.
At some point the Cooks signed a declaration that their home
loan was "for business purposes" even though it was clear they
were refinancing their existing mortgage. Business purpose loans
are in some circumstances not covered by the consumer
protection provisions of the Uniform Consumer Credit Code.
Their repayments kept
climbing, the fees associated with Legal Aid NSW took the
the loans escalated and in the end, case to court, where the
the Cooks faced the loss of the mortgage and credit
home. Legal Aid NSW took the contract were found to
case to court, where the mortgage be "unjust".
and credit contract were found to
be "unjust".
Acting Justice David Patten said in his judgement the lender
"was aware, or would have been aware, had it made the most
perfunctory of enquiries, that the [Cooks] were not capable of
servicing the loan even at the lower rate of interest and could
only satisfy their obligations by selling the mortgaged property for
a sum sufficient to cover the principal and interest".
Despite this, the court did not set aside the mortgage. But the
fees paid by the couple were reduced (by a total of $13,627.50);
they were not to be charged a higher default rate and they were
relieved of paying the lender's default costs.
During the case the court heard expert opinion from Steve
Keen, an associate professor of economics and finance at the
University of Western Sydney. Keen told the court the loan was
evidence of a Ponzi loan, or a loan that can only be repaid if the
asset is sold - in this case, the family home.
John Moratelli, solicitor with Legal Aid NSW, says the case
has set a precedent that should dissuade other "lenders from using
the family home as security for loans which the borrowers have
no realistic hope of repaying".
"The decision also means that lenders will find it harder to
escape the provisions of the Uniform Consumer Credit Code just
because they get the borrower to sign a business purpose
declaration," he says. "You can't lend without regard for the
borrower and their circumstances."
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Deal was no scam, just too good to be true for former director of
a mortgage loan business.
Retirees were persuaded the plan was a winner.
Money for Living was a property purchasing firm run by Stephen
Mark O'Neill, his girlfriend Jolanta Olszewski and his brother
Gary O'Neill from smart premises at number 1 Queens Road,
overlooking Albert Park Lake, an inner Melbourne suburb. They
bought and sold residential property.
Directly below are the offices of Diakou Faigen Lawyers,
run by Jim Diakou and Daniel Faigen. They acted for Money for
Living's financiers, MKM Capital, which also has offices on the
same level. Stephen O'Neill had ambled into the Diakou Faigen
offices, handed his business card and some preliminary
marketing material to Faigen and asked if the lawyers were
interested in taking on clients referred from Money for Living.
It seemed a reasonable idea. The Queens Road building was
a hub of networking. It was not unusual for clients to be relayed
from one suite to the next. Diakou Faigen did some routine
background checks of Stephen O'Neill's corporate record. It was
not a detailed search, but it did turn up a reference to a Stephen
O'Neill who had been convicted of fraud and theft in 2001 and
jailed for three years. One of the Diakou Faigen staff members
asked O'Neill if it was him and, according to Faigen, O'Neill
"categorically denied it".
"He was asked, 'Is this you?' and he denied it," Faigen said.
Over the next few months Money for Living referred a
stream of clients to Diakou Faigen. All up the lawyers may have
handled up to two-thirds of Money for Living's 120 clients.
These were all elderly retirees who believed they were
getting financial security for life. They sold their fully paid homes,
most valued around $300,000, to Money for Living in return for a
lump sum of about $40,000-$50,000 plus a monthly payment for
life of $500 to $1000 and guaranteed tenancy in their home.
Money for Living would pay all their home insurance, council
rates, water and home maintenance bills. The clincher was the
monthly cash: anything extra comes in handy when you are on
the pension.
The O'Neills marketed the scheme hard advertisements
on easy listening radio stations favoured by the elderly and glossy
brochures that featured television and radio personality Paul
Cronin and the fearless sporting hero of an older generation,
Dawn Fraser.
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The ads promised to "make life easier for retirees". Retirees

could live beyond their financial means, enjoy everything from
holidays, new cars and trips to the pokies, by releasing the value
of their greatest asset their home.
Money for Living is now in the hands of administrators at
Ferrier Hodgson after it ran out of cash. Its principals are under
investigation by ASIC and Victoria's Consumer Affairs office.
Some of the retirees will now rank as creditors along with
tradesmen and insurance companies, local councils and the Tax
Office, who are all battling to salvage what they can from a
company whose only assets appear to be wait for it the
retirees' homes.
To top it off, Stephen O'Neill is indeed the same convicted
fraudster who in 2001 pleaded guilty to using forged documents
and theft when he was a director of a mortgage loan business in
the late 1990s.
Over four years to 1999, O'Neill drew cheques totalling
more than $2 million from the previous business' trust account
and used the funds for his own purposes. About $1 million was not
recovered. These convictions automatically barred O'Neill from
managing companies or serving as a director for five years. That
ban is still in place.
Faigen is adamant that "to all intents and purposes" Stephen
O'Neill ran Money for Living. "He put himself out to be the
manager of the company."
Diakou Faigen now accuses O'Neill of engaging in false and
misleading representation. The lawyers have launched action in
the Federal Court to try to unravel some of the property deals.
ASIC's inquiries are widening. Not only is it concerned at
allegations that Stephen O'Neill appeared to be managing the
company, it is examining whether Money for Living should have
held a licence to sell a financial product, and the possibility that
it was operating as an unregistered managed investment scheme.
ASIC is also considering what action it can take over the
properties.
There was nothing illegal about Money for Living's scheme,
but it was a lousy deal. Money for Living was not offering a
reverse mortgage. The retirees were selling their homes not
borrowing against them and they were getting only a fraction
of the property's agreed value through instalments. They were
surrendering any potential capital gain and instead of being the
owner of a fully paid asset, their financial livelihood depended
100
on the viability of whoever ended up owning the title to the

property.
Money for Living got its income by reselling the properties to
third parties for a fee of about $30,000 for each property. It is not
clear if any of the new owners are associated with the O'Neills,
but some were unusually enthusiastic buyers, snapping up more
than a dozen titles each. In all, about 80 of the 120 houses were
sold to third parties, who must pay the retirees their monthly
stipend of $1000.
Money for Living sold 14 of the properties to its own
company, MFL Property Holdings. And therein lay the risk: if
Money for Living were to fall over or the new titleholders could
not meet their financial commitments, the income stream for the
retirees would evaporate.
About 120 homeowners, from Hoppers Crossing to Hawthorn
East, Echuca to Traralgon, fell for the spiel. For many their hopes
of financial security are fading.
The administrators have assured the group of 40 whose
properties had not yet been sold that they will not be evicted, but
nor will they get their monthly payments. Whether they will ever
get their properties back is another question, one that is likely to
drag through the courts.
Des Connor, a welfare officer at Bay Side Regional Veterans
Centre, drives elderly people from homes to hospitals and listens
to their myriad problems about money. He also heard plenty of
Money for Living radio ads. "It was the vulnerable people they
got," he said. "A lot of these people have done it hard and gone
through the Depression, and they scrimp and save to buy their
house only to go through all this and have it taken off them by
these mongrels."
Connor begged officials to do something, but he says the only
one who took note was Jenny Lindell, the Labor member for
Carrum, who raised the matter in State Parliament in May 2007
ASIC and Consumer Affairs launched investigations.
In June 2006, a report appeared in a suburban newspaper
highlighting Stephen O'Neill's previous conviction for fraud and
theft and his connection with Money for Living. The lawyers at
Diakou Faigen were alarmed and so were Money for Living
staff. They raised their concerns directly with O'Neill.
"We would ask a question about the security of the company
and he would give us these magnificent answers," said a former
employee. "He'd say, 'It's all settled, everything's fine, don't
101
worry, it's all in hand. I'll have some great news for you on June
1'. Then it was June 30 "
Stephen O'Neill admitted to Faigen and Diakou that,
contrary to what he said a year ago, he did have a conviction.
He apologised and left the company in the hands of his girlfriend
and brother.
Diakou Faigen then urged its clients to put caveats on the
titles of their former homes to declare that even if they did not
own the properties they still had an interest in what happened to
them, and on threat of legal action the lawyers demanded and
got, the titles to the properties returned to their offices.
The caveats effectively barred the new owners and Money
for Living from ever selling the properties and that suffocated
Money for Living: it could not flip newly acquired properties onto
third parties and receive its $30,000 per property fee, so its cash
flow dried up. By September, all Money for Living's staff were
gone and Olszewski had quit the board. Director Gary O'Neill
asked George Georges and Peter McCluskey of Ferrier Hodgson
to take charge. The administrators found no cash in the bank
accounts and no way of paying the retirees their monthly
instalments.
Now legal challenges loom. The administrators want the
lawyers to return the property titles, the lawyers allege false and
misleading conduct by Money for Living, financiers that loaned
the new owners money to buy the houses claim they were never
told there were guaranteed lifetime tenancies.
Once the corporate regulators and administrators unravel the
tangle of titles and claims, there may well be people facing
serious questions about propriety.
We are independent brokers! Yes, but is it legal?

Anyone who has ever had contact with a finance broker has
probably seen this sentence: "We are an independent finance
broker and we have no direct or indirect interest in any other
transaction which could affect the services we provide you."
One law firm strongly claims that the word "independent"
should be deleted from this sentence.
The law firm noted that s923A of the Corporations Act
restricts the use of the words independent, impartial or unbiased,
and says that generally these words must never be used where
an intermediary receives a commission.
According to the law firm although that section of the
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Corporations Act only applies when a person is carrying on a

financial services business, the fact that this legislation targets
intermediaries remunerated by commission sends a very loud
and strong warning to the finance broking industry.
It can be strongly argued that it is improper and misleading
for a broker to claim to be independent, impartial or unbiased if a
broker is being paid commission by lenders. This is because the
payment of the commission is likely to affect the independence of
the broker. A further argument is that a broker cannot be seen to
be independent if the broker has only a limited panel of lenders.
Arguably, everyone has a limited panel because it is virtually
impossible to be on a panel of every lender.
Consumer Affairs Victoria received 745 enquiries and

complaints about mortgage and finance brokers over the
2006/07 financial year. These include unlawfully demanding
upfront fees, peddling dubious debt consolidation schemes
and failing to provide the loan within the agreed timeframe.
Steering people in the wrong direction

John Moratelli, a solicitor with Legal Aid NSW, says: "A lot of the
problems are caused by some brokers steering people in the
wrong direction.''
Some of the worst cases involve brokers churning people
from one loan to another at the borrower's expense.
Katherine Lane, a solicitor at the NSW Consumer Credit
Legal Centre refers to these lenders as equity strippers because
any equity a borrower might have built in their home can be
quickly eroded if the borrower is churned into a new loan that
comes with thousands of dollars of fees.
"Regulation for brokers improves the situation but doesn't fix
it,'' Lane says. "Being able to get brokers to improve their
behaviour is a huge leap but it isn't a complete solution
[because] we have predatory lenders. They don't have to pass
any sort of test to see whether they are fit to lend. But the impact
of these bad loans is horrendous.''
Phil Naylor, chief executive of the Mortgage Industry
Association of Australia, says his members already have to meet
strict criteria but the organisation does not license brokers -
something the state governments have called for, along with
probity checks and continuing education.
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"What the legislation will do is cover those people, who

operate on the fringes, in an unregulated way. Those people prey
on vulnerable consumers...,'' Naylor says.
David Tennant, chairman of the Australian Financial
Counselling and Credit Reform Association, says financial
deregulation has delivered benefits.
"But you have seen this growth in lenders that are not
prudentially supervised. They don't have a particular connection
with their customer base and they don't have [the banks'
obligation] to keep their books in order. Credit providers who
populate the fringes do so for the primary purpose of exploiting
the vulnerability and disadvantage of the customers. Low-doc
lending is particularly worrying.
"It represents an inherently less careful and often more
expensive form of credit and has become the fastest growing
form of new home loan facility being written in Australia,'' he
says.
Tennant, who is based at Canberra's Care Inc Financial
Counselling, says 68 percent of actions for possession of homes in
Canberra between 2002 and 2005 were taken by non-bank
lenders. In 2005, non-bank lenders were responsible for 73
percent of the actions initiated.
Steve Keen, an associate professor in economics and finance
at the University of Western Sydney, says private debt is by far
the most important economic issue for Australia. Our debt ratio is
more than three times larger than it was in the 1970s and
consumer debt levels are much higher than corporate debt.
"Mortgage debt is now the largest component of private debt
in Australia, having surpassed corporate debt in 2001,'' he says.
"Servicing this debt has become a major challenge. Interest
alone on mortgages now accounts for 39 percent of household
disposable income.''
Even when interest rates were sky-high in 1990, the
proportion of household disposable income needed to pay
interest was less than half that amount.
He says the Australian Prudential Regulation Authority covers
institutions that take deposits, such as banks. Australians have
long built equity in their homes by borrowing from the banks but
deregulation has changed that.
"Who,'' Lane wants to know, "is regulating those who strip
that equity away?''
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Western Australian investors lose $100 million through the

negligent, if not fraudulent, activity of finance brokers
Between 1992 and 1998 about 3,000 mostly elderly investors in
Western Australia lost about $100 million through the negligent, if
not fraudulent activity of finance brokers. In the course of
broking about 1,000 mortgages, finance brokers put together
groups of lenders to lend money to questionable borrowers.
In due course those borrowers defaulted and the lenders
found that the security for their loans fell well short of the amount
lent against that security. This position often occurred because of
false or inflated valuations and false statements made about the
ability of the borrower to repay the loans.
During this six-year period the industry was overseen by the
Finance Brokers Supervisory Board. In each of the 1,000
mortgages the mortgage was prepared by solicitors. In a long
running case, by IMF, a publicly listed company providing
funding of legal claims, IMF is funding an action by all of the
lenders against the Finance Brokers Supervisory Board claiming
damages of around $120 million for misfeasance in public office
and against the solicitors claiming negligence.
NSW Dept. Fair Trading takes action against shonky finance

broker
Cameron Speers (trading as CJC Book Keeping and CAS Book
Keeping) was a finance broker offering to arrange personal loans
for people who would otherwise not be able to access finance
through mainstream lenders because of unemployment or poor
credit histories.Speers demanded upfront feesprior to securing
anyfinance,in contravention of the Consumer Credit
Administration Act and the Fair Trading Act.
Speers misled his customers by telling them that the loans had
been approved but that the funds would not be released until
their fees had been paid.However, even after paying the fees,
no loans were ever obtained. Despite Fair Trading's intervention,
Speers refused to provide his customers with refunds or to
negotiate any settlements of their matters.
On 23 May 2007, in the Downing Centre Local Court, Speers
was sentenced to payfines and coststotalling $30,446.70.
Speers pleaded guilty to 30 charges relating to upfront fees,
finance broking without a written contract, misrepresenting the
benefits of a service and accepting payments when not intending
to provide a service.
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Matt and John's special mortgage deal

The Consumer Credit Legal Centre NSW reports the story of Matt
and John who had been living together for 2 years. Both had jobs
paying around $30,000 p.a. when they decided to buy a house.
Roger called them about a special mortgage deal. As they were
shopping for a loan anyway they made an appointment with
Roger at 6pm the next Friday.
Roger told them about the special mortgage deal. He
showed them graphs of how much they would save if they put all
their salary into the loan and only withdrew their living
expenses. Roger said that only he could arrange this deal. After
Roger spent several hours with them they agreed to sign some
forms to apply for the loan. Roger left at midnight.
Matt and John found a house to buy. Roger arranged for Matt
and John to sign the loan documents. Soon the purchase of their
home settled. A few days later Matt and John received a letter
and were horrified to find that Roger had added a "commission"
of $3500 to the settlement. Worse, the special deal Roger had
arranged was actually a line of credit loan with a higher
interest rate than an ordinary home loan. A year later Matt
realised that they were not careful enough with withdrawing
their expenses and as a result, the loan balance had reduced
very little.
This sad but true tale begs the question, who is the finance
broker acting for?
Orphan boy wins lottery prize, buys house through finance

broker and ....
A recent case in NSW, featured on prime time television,
involved a young man who was raised as an orphan, who for the
purpose of this story we will call John. John has struggled through
life doing lowly paid work with the dream of one day owning his
own house.
In his mid-twenties John was lucky enough to win a little over
$100,000 as a lottery prize. John now had enough money to pay
for a deposit on his dream house, but when he approached the
banks for a loan he was frustrated when the banks all told him
the same thing; Based on your current and spasmodic income,
you cannot afford to make the required repayments.
Not to be deterred after a tough life as an orphan boy, John
looked a little deeper at alternate ways of financing his dream
house. In due course a finance broker assured John that he could
106
arrange a suitable loan - for a fee of course. John could now feel
and grasp his dream of owning his own home.
The loan was arranged - John was so excited that he hardly
bothered about checking the details, he merely relied on the
words of advice and encouragement from his finance broker.
John was staggered by the extra costs involved when it came
to moving into the house. As well as stamp duty and legal fees
John had to buy basic furniture, a refrigerator, washing machine
and countless other incidentals. Life was a struggle, but John had
finally achieved his dream at a relatively young age of owning
his own house, thanks to his helpful finance broker.
Alas, Johns dream soon turned into the proverbial nightmare.
John found out that his mortgage
was not with a bank as he ... the finance broker was
thought, but with a company with being investigated by
different attitudes and ethics authorities for
compared to a mainstream bank. unconscionable, unethical
John struggled to meet his and immoral behaviour
obligations and often went while hiding from TV
hungry. crews.
After three rate rises in a short
time John realised the politician's promise of we will keep
interest rates at record lows was proven to be no more than a
political stunt. Even worse, the loan arranged by the finance
broker was transferred to another organisation with a steep rise
in loan repayments.
By this stage John was having great difficulty in contacting
his finance broker for advice on the predicament the broker had
got him into, despite his assurances at the time of signing John up.
At the time of writing John has had his house repossessed and
lost all of his lottery winnings. Meanwhile the finance broker was
being investigated by authorities for unconscionable, unethical
and immoral behaviour, while denying having done anything
wrong and hiding from TV crews.
Who is the finance broker acting for?

This is a complicated question. In a narrow sense the finance
broker is providing a service to the potential borrower. The
service being provided by the finance broker is arranging a loan.
Yet the finance broker is usually being paid by the lender to
introduce the loan so in another sense the finance broker is
acting as the agent of the lender.
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The best advice I can give is do not assume that a finance

broker is acting in your best interest and will get you the "best
deal". In some cases they may be motivated by the commission
paid by the lender rather than your best interests. Shop around
and make sure you ask about commissions and other kickbacks.
If you enter a broking agreement in NSW then information about
fees, commissions and other relevant information will be
included in it, so make a point of reading it properly before you
sign.
Mortgage brokers according to Choice Magazine

To find out more about the information mortgage brokers provide
borrowers, Choice Magazine recently shadow shopped a sample
of brokers and umbrella groups (aggregators). The survey was
carried out in three states NSW, Victoria and WA. Their 12
shadow shoppers had existing home loans; their brief was to
contact up to four brokers to check whether they could save
money by refinancing.
Shadow shopper findings included inconsistency, poor
commission disclosure, refinancing costs were not always
explained and consumer confidence varied.
How brokers scored. Information provided to consumers
varied widely, with scores ranging from 21% to 80%. Choice
thought a score of 60% was an indication that brokers gave
adequate consumer information. But 16 of the 42 surveys didnt
reach this mark.
Do brokers offer the best deals? According to Choice, even
top brokers lender lists (the lenders they arrange loans with)
exclude up to 70% of the best-value mortgages (for price and
features), as rated by financial services research company
Cannex.
Are brokers product sellers or advisers? Choice shadow
shoppers found two thirds of brokers say they provide
independent or impartial mortgage advice. But doubts remain,
especially when mortgage brokers dont have to give reasons for
recommendations in a statement of advice and when most are
paid by lenders based solely on the value of loans they arrange.
According to Choice, the brokers they shadow shopped were
not involved in the industrys worst practices. Serious problems in
other parts of the market highlight the urgent need to introduce
national regulations and outlaw some of the most disgraceful
practices.
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Exorbitant fees: Choice reported that some brokers charge

thousands of dollars for their services. They spoke to one
consumer who was charged $5,500 to arrange a mortgage, even
though he didnt go through with the loan. In 2007 the NSW
Consumer Credit Legal Centre reported a case of a broker
charging $14,000 for a $40,000 loan.
Fraud: Choice heard claims from consumer advocates, fair
trading authorities and industry about brokers stealing application
fees, using false ABNs, misrepresenting borrowers financial
positions to secure loans and fabricating group certificates and
tax returns. Choice advised its readers to ensure loan applications
are completed accurately and warned if you get finance based
on deliberately misleading information, you could be guilty of
fraud.
False declarations: According to Choice, some brokers
encourage borrowers to sign statements saying loans are for
business purposes when they are actually personal. Signing these
declarations means you lose your rights under the Uniform
Consumer Credit Code.
Pressurised sales: Choice wrote that some brokers use
dubious sales tactics, including home visits until late at night and
pressuring consumers to sign agreements.
"Right now anyone can put a sign up outside their house saying,
'finance broker'," says Carolyn Bond, co-chief executive officer
of the Consumer Action Law Centre. "Lenders and brokers should
be licensed ... conditions should include some level of training
and being a member of an approved industry dispute body like
the banking ombudsman." She says there should also be a
requirement for finance providers to take into account an
individual's personal circumstances when they are offered a
product.
Brokers could also disclose the full amount of their
commissions, the number of lenders on their books and their
reasons for recommending a certain loan product. Action on
national regulation has been delayed because credit is regulated
by state governments while other financial services (including
insurance, stockbroking and investment) are regulated federally.
The Mortgage and Finance Association of Australia, an
industry body representing brokers, is also pushing for regulation.
The association says its 11,500 members - some 75 percent of
Australia's mortgage brokers - are already required to follow
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certain conditions to ensure consumers get a fair deal.

Still, some warn that regulation won't provide all the
answers. "It wouldn't hurt but regulation of the financial planning
industry hasn't been a wholesale success, with things like the
collapse of Fincorp, which licensed planners have recommended
wholeheartedly," says Denis Orrock from InfoChoice.
"People are blaming brokers for loosening credit standards
and that's complete bollocks," he says. "The broker doesn't
approve a loan, that's approved by the banks or lenders."
If you are considering going to a broker, first ask yourself
whether you really need to. Bond says if you know enough to
choose the right broker you probably know enough to choose the
correct mortgage. "Make sure you know what you want, why
you want it and why you're looking at a certain product. Once
you have done all that homework you may as well just go out
and get a loan yourself."
Some of the cheapest loans, such as online products from
banks, may not be available through brokers. However, brokers
have other advantages, including saving time.
"More consumers need to say to the broker, 'Please
recommend the cheapest loan available and if you don't
recommend the cheapest loan, give me a really good reason
why not,"' Bond says. "Brokers don't like selling on price,
because if people buy on price there's not much of a role for
brokers."
Most brokers are paid by commission, typically 0.6-0.7
percent of the loan up front, and then a trail fee of
approximately 0.2 percent for the duration of the loan.
Orrock recommends seeing at least two brokers with industry
accreditation and comparing their advice. Check how long they
have been in business. If it is a short time they may be hungry for
commissions. "Ask them to disclose all commission and payments
they receive on any recommendation. Some of the larger chains
like Aussie pay their brokers a flat fee, no matter which lender it
is, that's something to keep in mind. Brokers should identify the
reason they've made a recommendation and they should disclose
all the fees associated with the loan including exit fees. Get the
broker to provide a written statement of advice outlining exactly
why they've made those recommendations."
If they won't, find another broker. And the borrower should
never pay the broker a fee.
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Brokers need fixing

Without industry regulation, consumers can be left in the dark.
According to Sydney Morning Herald writer Kelsey Munro: It's
rare you get a consensus from different interest groups but this the
(August 2007) parliamentary inquiry into the mortgage broking
industry turned up a surprise. Virtually everyone - consumer
groups, lenders, banks, insurers and the broker industry group -
agrees there should be national regulation of mortgage brokers.
That's because of cases such as that of Sample and Partners,
found guilty in May 2007 of misleading and deceptive conduct
by the Federal Court. The company, operating in NSW, Victoria
and Queensland, had its representatives cold-call people and
arrange to meet them in their homes.
Its agents made false representations from fake case studies,
telling people that switching to a Sample and Partners loan
would save them years off their mortgage.
They also made false representations that they searched the
whole mortgage market for an appropriate loan, when they only
had a small number of lenders on their panel. It's the sort of
behaviour that consumer groups have been warning about for
years.
Australian mortgage brokers frustrated by the lack of service

provided by lenders
According to a recent comprehensive survey of more than 1,000
brokers, or 10 percent of the Australian mortgage broker
community, mortgage brokers are frustrated by the lack of
service they are receiving from lenders, with lenders
outsourcing the inefficiencies in their mortgage processing
systems to the broker community.
The main battleground for consumer mind-share is in
providing superior service, rather than product selection or
variation. As the industry evolves, the balance of power will
continue to shift to players that can exceed customer
expectations. However, neither brokers nor lenders will be able
to provide better service to consumers until they address
inefficiencies in the current mortgage application process.
Mortgage brokers are frustrated by the process and the
length of time it takes to find out the status of loan applications or
to find out the answer to simple loan queries. Inefficiency in the
mortgage application process means that brokers have to submit
information multiple times across multiple channels for
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example, entering application details in an aggregator portal or

through the lenders website, while also having to fax
applications as back-up. Respondents to our survey believe that
lenders do not use the Internet as effectively as they could.
Other findings from the survey included:
Mortgage processes and service

There is significant inefficiency in the mortgage application
processes, with brokers having to submit information multiple
times though multiple channels for example, entering
application details in an aggregator portal, lenders website,
while also faxing information.
The average time to complete a broker facilitated loan
application in Australia is 50 percent longer than in the UK -
121 minutes, compared with 78 minutes in UK.
Brokers live or die by their ability to service their clients well.
Most brokers face a number of process and technical problems
which limit their ability to deliver the standard of service they
desire to provide.
Whilst 35 percent of brokers were aligned to aggregators (for
example Mortgage Choice, AFG, etc.), there are a large
number of independent business owners, who prefer to remain
non-aligned. Brokers who do decide to align with an
aggregator generally trade off sharing commissions with the
additional services provided by the platform provider.
Half of those brokers aligned to an aggregator also submit
some loans direct to a lender.
Most brokers choose mortgage products from a small number
of lenders. The majority would select from 3-5 lenders, even if
their aggregator platform listed more than 30 lenders.
85 percent of brokers complained that aggregators and lenders
did not provide adequate services to quickly and effectively
track the progress of a loan post application submission
Brokers would prefer to use more online tools than are
currently available.
A report on the finance and mortgage broker industry

In 2002, the Consumer Credit Legal Centre in NSW was
commissioned by ASIC to compile a report on the finance and
mortgage broker industry. The report was delivered in March
2003. The report gathered data from a survey of mortgage
brokers and from case studies.
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The survey revealed that 11 percent of brokers did not

compare credit products. 54 percent had a contract with their
client borrowers. Of this 54 percent, 73 percent advised that the
agreement addressed the amount of credit and type of loan being
sought and 51 percent specified the interest rate requested by the
borrower client.
The Code does not require that the broker provide the client
borrower with a statement why a particular loan product is
recommended, nor does it provide that advice in the form of a
statement of recommendation that must be given to the client
borrower. Brokers who may be paid commission from the lender
on a volume basis therefore may direct all client borrowers to the
one lender or may indeed, have only one lender on their panel.
Likewise, where no commission is paid by a lender and the
broker therefore must rely solely on the borrower client for
payment, it is unlikely that these lenders will get any business
from the broker.
Some brokers are paid both by the client and by the lender in
the form of an upfront commission and then a trailing
commission. The trailing commission is paid to the broker for as
long as the loan performs but is of limited percentage. There is
little incentive in the trailing commission for the broker to ensure
that the load is sustainable. The recommendations contained in
the Discussion Paper are primarily to correct the behaviour of
rogue and fraudster brokers who target the poor, desperate and
nave. By definition, the defrauded or gullible are unable to
commence proceedings to recover their losses either against the
brokers or the lenders. This is why an ADR scheme, whose
decisions are covered by professional indemnity insurers who in
turn are subject to the various legislation that governs their
products, is advanced as an option.
What is not discussed in the Department Paper is that such
insurance traditionally does not cover penalties and therefore,
the client borrower will as always have to rely on a claim for
compensation against the broker to derive the benefit of any
insurance monies. Such claims for compensation are usually out
of scope of the various ADR schemes. Hence, the same barriers
to the borrower client will exist as prior to the legislation, that is,
the inability to access resources to conduct litigation against the
broker and the need to prove breach of agency.
If this is correct the claims litigated against brokers will
remain as infrequent as they are now.
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The NSW government is proposing new legislation that will

protect borrowers who seek advice when looking for a home
loan. The proposed rules:
Mortgage brokers will have probity checks. They must be
members of an approved dispute resolution scheme.
They must have specific skills and improve those skills
continually as a condition of their licence.
Brokers will not be allowed to charge upfront fees or lodge
caveats over property to secure those fees.
Consumer redress will take into account losses where an
inappropriate product has been recommended.
Where a lender has an order to sell a borrower's home for
default of payment and the borrower is pursuing a claim
against a broker, the home won't be sold until they resolve
their claim against the broker.
Brokers will need to have indemnity insurance.
Brokers will have to disclose the cost of new loans and
services before broking an agreement.
The agreement must contain specific details of the client's
needs. There must be a reasonable basis for recommending a
product.
The U.S. subprime mortgage crisis

The U.S. subprime mortgage crisis has received major attention
in Australia and been blamed for a raft of problems. In the U.S. it
has reignited scrutiny of the mortgage industry and people who
broker home loans, with some critics arguing that hidden fees
and other dubious practices have contributed to the surge in
delinquencies.
The main problem is that, counter to common perception, in
the U.S. mortgage brokers do not represent the borrowers who
pay them for advice. Instead, they are more like independent
salespeople who are often paid as much by the lenders offering
loans as the borrowers.
Subprime mortgages are sold to home buyers with lower
credit scores. This corner of the home loan business has been hit
hard as borrowing costs climbed and the housing market cooled.
In January 2007, more than 14 percent of subprime mortgages in
the U.S. were at least 60 days delinquent, almost double the rate
a year earlier, according to real estate data specialist First
American Loan Performance.
As the housing market boomed, mortgage brokers' influence
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grew as they became involved in arranging the majority of home

loans. Now the broking business should bear some of the blame
for the ensuing crisis, say critics, including some who are brokers
themselves.
"We all have some culpability," said Steve Heideman, a
mortgage broker who heads an organisation dedicated to
improving disclosure in the business. "The problems and abuses
are happening because brokers see it as their right to make as
much money as they can on a loan."
There's a basic problem with mortgage brokers being paid by
lenders as well as borrowers and "very few" people know this
happens, he added. "It's a dirty little secret of this business," he
said. "It shows a lack of confidence on the part of a mortgage
broker to not tell the client what they're making on the back
side."
Official industry associations also admit to some of the
system's shortcomings. There are "isolated instances" in which
mortgage brokers steer borrowers to the lender that pays the
highest fees to the broker. Some say the problem of mortgage
brokers being paid by both borrowers and lenders makes them
indistinguishable from salespeople hired by banks to sell loans.
That means borrowers should beware when hiring a broker to
help them get a mortgage.
"Any loan provider - whether they're an independent broker
or a loan officer employed by a bank - is in sales mode and is
trying to get deals done," said Jack Guttentag, professor of
finance emeritus at the Wharton School of the University of
Pennsylvania.
"The basic problem is the way that mortgage brokers present
their services," added Guttentag. "They bill themselves as
independent operators but try to maximise their mark-up on the
deal."
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6.
P REDATORY
LENDING
The practice of a lender deceptively
convincing borrowers to agree to
unfair and abusive loan terms, or
systematically violating those terms in ways
that make it difficult for the
borrower to defend against.
Predatory lending
Many families are suffering today because of a growing
incidence of abusive practices in a segment of the mortgage
lending market. Predatory mortgage lending practices strip
borrowers of home equity and threaten families with foreclosure,
destabilising the very communities that are beginning to enjoy
the fruits of their hard-won economic success.
You need to understand the home buying process to be a
smart consumer. Every year misinformed home buyers, often
first-time purchasers or seniors, become victims of predatory
lending or loan fraud.
Predatory lending is a pejorative term used to describe practices

of some lenders. One less contentious definition of the term is the
practice of a lender deceptively convincing borrowers to agree
to unfair and abusive loan terms, or systematically violating those
terms in ways that make it difficult for the borrower to defend
against.
Other types of lending sometimes also referred to as predatory
include pay-day loans, credit cards or other forms of consumer
debt, and overdraft loans, when the interest rates are considered
unreasonably high.
Although predatory lenders are most likely to target the less
educated, racial minorities and the elderly, victims of predatory
lending are represented across all demographics.
Predatory lending often occurs on loans backed by some
kind of collateral, such as a car or house, so that the lender can
repossess or foreclose and profit by selling the repossessed or
foreclosed property.
Avoiding predatory lending

People are losing their homes and their investments because of
predatory lenders, appraisers, finance and mortgage brokers and
home improvement contractors who:
Sell properties for much more than they are worth using false
appraisals.
Encourage borrowers to lie about their income, expenses, or
cash available for down payments in order to get a loan.
Knowingly lend more money than a borrower can afford to
repay.
Charge high interest rates to borrowers based on their race or
national origin and not on their credit history.
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6-Predatory lending
Charge fees for unnecessary or non-existent products and

services.
Pressure borrowers to accept higher-risk loans such as balloon
loans, interest only payments, and steep pre-payment
penalties.
Target vulnerable borrowers to cash-out refinance offers when
they know borrowers are in need of cash due to medical,
unemployment or debt problems.
Strip homeowners' equity from their homes by convincing
them to refinance again and again when there is no benefit to
the borrower.
Use high-pressure sales tactics to sell home improvements and
then finance them at high interest rates.
What tactics do predatory lenders use?

A lender or investor tells you that they are your only chance of
getting a loan or owning a home. You should be able to take
your time to shop around and compare prices and houses.
The house you are buying costs a lot more than other homes in
the neighbourhood, but is not any bigger or better.
You are asked to sign a sales contract or loan documents that
are blank or that contain information which is not true.
The cost or loan terms at closing are not what you agreed to.
You are told that refinancing can solve your credit or money
problems.
You are told that you can only get a good deal on a home
improvement if you finance it with a particular lender.
Remember: If a deal to buy, repair or refinance a house sounds
too good to be true, it usually is!
Abusive or unfair lending practices

There are many lending practices which have been called
abusive and labelled with the term predatory lending. There is a
great deal of dispute between lenders and consumer groups as to
what exactly constitutes unfair or predatory practices, but the
following are sometimes cited.
Risk-based pricing. This is the practice of charging more (in the
form of higher interest rates and fees) for extending credit to
borrowers identified by the lender as posing a greater credit risk.
The lending industry argues that risk-based pricing is a legitimate
practice. Since a greater percentage of loans made to less
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creditworthy borrowers can be expected to go into default,

higher prices are necessary to obtain the same yield on the
portfolio as a whole. Some consumer groups argue that higher
prices paid by more vulnerable consumers cannot always be
justified by increased credit risk.
Single premium credit insurance. This is the purchase of
insurance which will pay off the loan in case the home-buyer
dies. It is more expensive than other forms of insurance because
it does not involve any medical check-ups, but customers almost
always are not shown their choices because usually the lender is
not licensed to sell other forms of insurance. In addition, this
insurance is usually financed into the loan which causes the loan
to be more expensive, but at the same time encourages people to
buy the insurance because they do not have to pay up front.
Failure to disclose loan price is negotiable. Many lenders will
negotiate the price structure of the loan with borrowers. In some
situations, borrowers can even negotiate an outright reduction in
the interest rate or other charges on the loan. Consumer
advocates argue that borrowers, especially but not only
unsophisticated borrowers, are not aware of their ability to
negotiate, and might even be under the mistaken impression that
the lender is placing the borrower's interests above its own. Thus,
many borrowers do not take advantage of their ability to
negotiate.
Short-term loans with disproportionally high fees, such as pay-
day loans, credit card late fees, checking account overdraft fees,
and Tax Refund Anticipation Loans, where the fee paid for
advancing the money for a short period of time works out to an
annual interest rate significantly in excess of the market rate for
high-risk loans. The originators of such loans dispute that the fees
are interest.
Underlying issues of predatory lending. There are many

underlying issues in the predatory lending debate:
Judicial practices: Some argue that much of the problem arises
from a tendency of the courts to favour lenders, and to shift the
burden of proof of compliance with the terms of the debt
instrument to the debtor. According to this argument, it should not
be the duty of the borrower to make sure their payments are
getting to the current note owner to make evidence that all
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6-Predatory lending
payments were made to the last known agent for collection,

sufficient to block or reverse repossession or foreclosure, and
eviction, and to cancel the debt if the current note owner cannot
prove he is the "holder in due course" by producing the actual
original debt instrument in court.
Risk-based pricing: The basic idea is that borrowers who are
thought of as more likely to default on their loans should pay
higher interest rates and finance charges to compensate lenders
for the increased risk. In essence high returns motivate lenders to
lend to a group they might not otherwise lend to - sub-prime or
risky borrowers. Advocates of this system believe that it would be
unfair, or a poor business strategy, to raise interest rates globally
to accommodate risky borrowers, thus penalising low-risk
borrowers who are unlikely to default. Opponents argue that the
practice tends to disproportionately create capital gains for the
affluent while oppressing working-class borrowers with modest
financial resources.
Some people consider risk-based pricing to be unfair in
principle. Lenders contend that interest rates are generally set
fairly considering the risk that the lender assumes, and that
competition between lenders will ensure availability of
appropriately priced loans to high-risk customers. Still others feel
that while the rates themselves may be justifiable with respect to
the risks, it is irresponsible for lenders to encourage or allow
borrowers with credit problems to take out high-priced loans. For
all of its pros and cons, risk-based pricing remains a universal
practice in bond markets and the insurance industry, and it is
implied in the stock market and in many other open-market
venues. It is only controversial in the case of consumer loans.
Competition: Some believe that risk-based pricing is fair but feel
that many loans charge prices far above the risk, using the risk as
an excuse to overcharge. These criticisms are not levied on all
products, but only on those specifically deemed predatory.
Proponents counter that competition among lenders should
prevent or reduce overcharging.
Financial education: Many observers feel that competition in the
markets served by what critics describe as predatory lenders is
not affected by price because the targeted consumers are
completely uneducated about the time value of money and the
concept of annual percentage rates, a different measure of price
than what many are used to.
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This is one reason why 21st Century Finance, the finance

specialists, have to be highly educated in regard to investing.
They are investors themselves in their own right, so they can
instil knowledge and educate clients about financial and
property investing and they run free finance seminars to better
educate their clients as financial educators. Their solution - to
prevent consumers being ripped off.
Caveat emptor: There is an underlying debate about whether a
lender should be allowed to charge whatever it wants for a
service, even if it seems to make no attempts at deceiving the
consumer about the price. At issue here is the belief that lending
is a commodity and that the lending community has an almost
fiduciary duty to advise the borrower that funds can be obtained
more cheaply. Also an issue are certain financial products which
appear to be profitable only due to adverse selection or a lack of
knowledge on the part of the customers relative to the lenders.
For example, some people allege that credit insurance would not
be profitable to lending companies if only those customers who
had the right fit for the product actually bought it (i.e., only
those customers who were not able to get the generally cheaper
term life insurance).
Seven signs of predatory lending - common abuses

Predatory mortgage lending involves a wide array of abusive
practices. Here are brief descriptions of some of the most
common.
1. Excessive fees. Points and fees are costs not directly reflected
in interest rates. Because these costs can be financed, they are
easy to disguise or downplay. On competitive loans, fees below
one percent of the loan amount are typical. On predatory loans
fees totalling more than percent of the loan amount are common.
2. Abusive prepayment penalties. Borrowers with higher interest
subprime loans have a strong incentive to refinance as soon as
their credit improves. However, up to 80 percent of all subprime
mortgages carry a prepayment penalty - a fee for paying off a
loan early. An abusive prepayment penalty typically is effective
more than three years and/or costs more than six months interest.
In the prime market only about 2 percent of home loans carry
prepayment penalties of any length.
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6-Predatory lending
3. Kickbacks to brokers (yield spread premiums). When brokers

deliver a loan with an inflated interest rate (i.e. higher than the
rate acceptable to the lender), the lender often pays a yield
spread premium - a kickback for making the loan more costly to
the borrower.
4. Loan flipping. A lender flips a borrower by refinancing a loan
to generate fee income without providing any net tangible
benefit to the borrower. Flipping can quickly drain borrower
equity and increase monthly payments, sometimes on homes that
had previously been owned free of debt.
5. Unnecessary products. Sometimes borrowers may pay more
than necessary because lenders sell and finance unnecessary
insurance or other products along with the loan.
6. Mandatory arbitration. Some loan contracts require
mandatory arbitration, meaning that the borrowers are not
allowed to seek legal remedies in a court if they find that their
home is threatened by loans with illegal or abusive terms.
Mandatory arbitration makes it much less likely that borrowers
will receive fair and appropriate remedies in cases of
wrongdoing.
7. Steering and targeting. Predatory lenders may steer borrowers
into subprime mortgages, even when the borrowers could qualify
for a mainstream loan. Vulnerable borrowers may be subjected
to aggressive sales tactics and sometimes outright fraud.
Mortgage broker accused of predatory lending

While researching this book an extraordinary example of
predatory and irresponsible lending in Victoria was reported by
the ABC's PM program. It is the story of a woman who was given
a home loan despite being an unemployed asylum seeker. A
financial counsellor says thousands of loans are being arranged
for people who cannot afford them and there should be a
crackdown on predatory lenders.
The Consumer Action Law Centre says a woman who wants
to be known only as Susan, signed for a home loan without
realising what was on the application. The application said she
was an Australian citizen, had a full-time job and had a
substantial sum of money in the bank, but Susan says none of that
is true.
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Susan says she arrived in Australia from Turkey in 2003

seeking asylum. Her lawyers say her current visa does not even
allow her to work. Speaking through an interpreter, she says the
loan was put in her name by her husband, who left her five
months later. "My ex-husband was dealing with them most of the
time," she said. "I only went there once and I signed the
documents that they asked me to sign."
Mortgage and Finance Association of Australia spokesman
Phil Naylor says he is concerned about the predatory behaviour
of a minority of brokers. "It's quite clear there has to be some
evening of the balance between these predatory lenders and
consumers," he said. "What we've suggested to the regulators is
that all credit providers in Australia, all lenders and all brokers
must be members of an ASIC-approved external dispute
resolution scheme."
As Susan awaits the decision of the Credit Ombudsman, her
lawyer Gerard Brody is seeking her release from the loan and
$50,000 compensation. "Susan paid around $10,000 deposit on
the property," he said. "She also paid around $7,000 in
repayments on the loan but also amazingly about $14,000 on
other fees and charges."
The debt weighs heavily on Susan. "It's very stressful - I owe
a lot of money to many people and I'm unable to pay them
back," she said.
ABA response to report on home loan lending

The Australian Bankers Association (ABA) has welcomed a report
which makes recommendations to fight against predatory lending
in Australia. The report Home Loan Lending followed an
Inquiry by the House of Representatives Standing Committee on
Economics, Finance and Public Administration into home loan
lending practices and the processes used to deal with people in
financial difficulty.
David Bell, Chief Executive of the ABA, said: Bank housing
lending defaults are at very low levels and that while changes
have occurred in the housing finance market, bank credit
standards remain sound. We are pleased that the Committee is
seeking ways to reduce the numbers of predatory lenders for the
protection of the Australian borrowers. The ABAs view is that
the Australian Bureau of Statistics should begin collecting and
publishing annual data on housing repossessions.
Based on ABA analysis of data and discussions with Supreme
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6-Predatory lending
Courts, it is reasonable to suggest that anywhere between 65

percent and 80 percent of applications do not relate to banks.
A recent report by the Consumer Action Law Centre of ACT

found that 68 percent of actions for possession over the four
years 2002 2005 were undertaken by non-bank lenders and
they were largely responsible for the substantial increase in the
number of actions initiated during 2005.
The Commonwealth Government should regulate credit
products and advice. This includes the regulation of mortgage
brokers and non-bank lenders.
The ABA is currently looking at all options for the best way to
regulate consumer credit going forward. These include:
maintaining the status quo, tightening requirements so that there
is genuine national uniformity of consumer credit legislation and
transferring regulation of consumer credit to the Commonwealth.
The ABA believes that mortgage brokers should be regulated

like other financial service providers to protect home buyers.
For three years, the ABA has been calling for the national
regulation of mortgage broking because proposed state based
regulation, under consideration since 2002, has failed to
materialise.
The ABA is open to proposals to regulate non-APRA regulated
housing lenders. A clear public policy objective will need to be
defined to advance this proposal. The policy objective might be
to ensure that all lenders have the same high lending standards
that banks and other reputable lenders in the market currently
exhibit.
The ABA is particularly interested to ensure that fringe credit
practices relating to home lending are addressed. The ABA along
with consumer groups and other financial industry bodies have
formed a new coalition to discuss mounting concerns about
predatory lending.
Home loan predators targeting vulnerable

Almost 40,000 homeowners have fallen victim to predatory
lending practices such as excessive and hidden fees and high
interest rates according to a recent Fujitsu Consulting report
commissioned by Wizard Home Loans. The report also found that
females were more likely to be targeted for predatory behaviour
- particularly from mortgage brokers.
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Wizard Home Loans chairman Mark Bouris has called for an

industry red list to inform borrowers which bank and non-bank
lenders are notorious for dodgy practices. "While it's not endemic
across the industry, 0.56 percent of all households, almost 40,000,
were found to be victims of predatory lending," says Bouris.
"It's also extremely concerning that the research identified
disadvantaged groups to be at a much higher risk of predatory
lending, reflecting the trend occurring in overseas markets. "A
'red-list' that names and shames predatory lenders will protect
borrowers from those who prey on people in a vulnerable
situation."
The study of 26,000 consumers looked into lenders and
brokers that persuaded borrowers to accept unfair or
inappropriate loan terms and conditions. According to the report,
those guilty of predatory lending convince borrowers to accept
excessively high set-up costs and fees, put pressure to sign
documentation and make false declarations on application forms
as well as taking out swift enforcement action on defaulters.
Bouris said the bulk of this behaviour came from mortgage
brokers, with more than two thirds of the victims (22,000) coming
from the disadvantaged with low incomes in outer urban and
country areas. Of these, 90 percent went through mortgage
brokers and 13,000 were women compared to 8,500 males.
"The research shows that 70,000 households who are under
the most severe mortgage stress in Australia were more likely to
be subjected to predation," Fujitsu consulting managing director
Martin North said.
Pay-day loans
Cheque cashers, finance companies and others are making small,
short term, high-rate loans that go by a variety of names: pay-day
loans, cash advance loans, check advance loans, post dated
cheque loans or deferred deposit cheque loans.
Usually, a borrower writes a personal cheque payable to the
lender for the amount he or she wishes to borrow, plus a fee. The
company gives the borrower the amount of the cheque minus the
fee. Fees charged for pay-day loans are usually a percentage of
the face value of the check, or a fee charged per amount
borrowed for every $50 or $100 loaned. And, if you extend or
roll-over the loan, say for another two weeks after you are
supposed to pay it back - you will pay the fees for each
extension.
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6-Predatory lending
A cash advance loan secured by a personal cheque, such as

a pay-day loan, is very expensive credit. Let's say you write a
personal check for $115 to borrow $100 for up to 14 days. The
cheque casher or pay-day lender agrees to hold the cheque until
your next pay day.
At that time, depending on the particular plan, the lender
deposits the cheque, you redeem the cheque by paying the $115
in cash or you roll-over the cheque by paying a fee to extend
the loan for another two weeks. In this example, the cost of the
initial loan is a $15 finance charge and 391 percent annual
percentage rate. If you roll-over the loan three times, the finance
charge would climb to $60 to borrow $100.
Payday lenders offer short-term cash loans between pay-
days. Payday lenders must operate within the same laws
governing other lenders. Payday loans are particularly appealing
to people ineligible for a loan from formal institutions.
Payday lenders lure customers with the promise of quick,
easy and convenient cash, but often there are hidden traps
including exceedingly high interest rates, sometimes up to 70
times more than credit cards.
Payday loans are marketed as quick and easy to obtain,
available 'on the spot', 'cash when you need it' or 'cash within
the hour'.
Payday lenders, unlike banks, building societies or credit
unions, do not put customers through proper credit checks. Often
all you need to get the loan is proof of residence and an income.
Concerns with pay-day lending

Small pay-day loans can quickly blow out to large amounts. The
interest fees charged are extremely high when compared to
other loans. There is currently no limit on interest rates. The
annual percentage of interest rates for pay-day loans can start at
250 percent and go higher than 1300 percent. Make sure you
understand how much interest you will be paying.
Some pay-day lenders require security that is often worth
more than the amount borrowed, for example, a bill of sale over
a car. Short-term credit provided for a total of no more than 62
days is subject to the Consumer Credit Code if one or both of the
following conditions apply:
1. The total fees and charges payable are more than 5 percent of
the amount of credit; and/or
2. The interest rate charged is more than 24 percent per annum.
126
As many pay-day lenders charge more than 5 percent in fees

and/or 24 percent in interest per annum they must comply with
the Code.
Pay-day loans - quick tips to remember

Pay-day loans have very high interest rates - up to
1300 percent per year.
Make sure you understand the contract.
Don't be intimidated by pay-day lenders.
Obtain a financial education by reading books, viewing
DVDs and attending seminars - and dont use pay-day
lenders.
Sheriffs feel strain of repossessions

The effects of unaffordable mortgages. Property owners struggle
with skyrocketing interest rates and mortgage.
According to an article in The Herald Sun in September
2007, home repossession numbers are so high that NSW sheriffs
are struggling to keep up with evictions. The Herald Sun
reported that the NSW Sheriff's Office has to carry out up to 40
evictions a day as families and property owners struggle with
skyrocketing interest rates and mortgage repayments, and
officers are starting to suffer stress and guilt from evicting people.
NSW Supreme Court figures show banks reclaimed 2,755
homes in 2007, with a record 399 properties repossessed in
August.
In July 2007, 411 writs of repossession were issued. The NSW
Attorney-General's Department uses sheriffs to enforce the writs
of possession. One sheriff, who spoke to The Sun-Herald on
condition of anonymity, said officers were suffering from extreme
stress and guilt.
"The number of evictions you read about is nowhere near the
amount we are carrying out," he said. "Our office had one day
where it was 40, just in one day. It's really scary how many
people are losing their homes and we bear the brunt of it. It's not
a very nice job to do at all, and it can really affect you. You are
talking about having to turf a family out on the street."
Any reasonable person would question how this state of
affairs could possibly come about when Australian working
families have never been better off according to then Prime
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6-Predatory lending
Minister John Howard.

Or can some of the blame be attributed to ever increasing
numbers of finance brokers offering mortgages which consumers
will not be able to afford?
21st Century Education tips for avoiding predatory lenders

Shop for a lender and compare costs. Be suspicious if anyone
tries to steer you to just one lender. Ideally you should deal with
a lender or finance broker that is willing to educate you in
regard to finance, not just try and sell you a loan. The more
financially educated you become, the less chance you run of
being or a victim of shonky, unethical practices.
Do not let anyone persuade you to make a false statement on
your loan application, such as overstating your income, the
source of your down payment, failing to disclose the nature and
amount of your debts, or even how long you have been
employed. When you apply for a mortgage loan every piece of
information that you submit must be accurate and complete.
Lying on a mortgage application is fraud and may result in
criminal penalties.
Do not let anyone convince you to borrow more money than
you know you can afford to repay. If you get behind on your
payments you risk losing your house and all of the money you put
into your property.
Never sign a blank document or a document containing
blanks. If information is inserted by someone else after you have
signed, you may still be bound to the terms of the contract. Insert
N/A (i.e., not applicable) or cross through any blanks.
Read everything carefully and ask questions. Do not sign
anything that you don't understand. Before signing, have your
contract and loan agreement reviewed by a lawyer skilled in
real estate law
Be suspicious when the cost of a home improvement goes up
if you don't accept the contractor's financing.
Be honest about your intention to occupy the house. Stating
that you plan to live there when, in fact, you do not (because you
intend to rent the house to someone else or fix it up and resell it)
may violate the law.
128
7.
AUSTRALIAN
ATTITUDES TO DEBT
In todays world interest rates and home
loan variations are a topic of everyday
conversations and feature almost daily
in TV news bulletins.
In Australia after the great depression in the 1930s our older

generation paid cash for their consumer purchases and were
adverse to debt.
The great depression of 1930-39 was a period of extreme
difficulty for a great many people. You have probably heard your
older relatives talking about their difficulties during this period.
The drastically declining national economy created an
atmosphere of fear and apprehension, in which the thought of
industrial action was abhorrent and the terror of unemployment
conspired to produce a subservient workforce.
The 1930s was to see riots upon the streets of Australian cities
where workers, armed with iron bars and spiked sticks and
branded as "communists" by some sections of the press, protested
against the action of government in removing beef from the
ration issue. Bailiffs, supported by police equipped with batons
and sledgehammers, forced families from slum homes into the
streets, while malnourished bare-footed children in rags, stood,
forlornly, with their parents in queues at soup kitchens and dole
centres.
Among the aggrieved were diggers from the First World War
and widows of ex-servicemen who were refused a pension from
the repatriation authority whose counterpart, the War Service
Homes Commission, was as ruthless as the banks in evicting
those unable to keep up their rent payments. The promise of a
land fit for heroes proved to be no more than idle rhetoric as
misery upon misery was heaped upon a great majority of the
working class.
Australian government responses to the Great Depression
were largely inadequate. However, it is necessary to identify
whether inadequacies were due to the lack of theory, means or
will. These influences, in varying degrees, effected many
relevant decisions and policies and so these approaches are
analysed individually. Prime Minister Scullins attempts to
implement an effective policy response to the problems of the
Great Depression were significantly impaired by a number of
factors. Lack of support from London, New York and Australian
Bankers, conflict with the Commonwealth Bank, large opposition
in the Senate and limited spending powers meant the Australian
Government did not have the statutory or political power to
adequately handle the Great Depression.
Although the Federal Government and the Commonwealth
Bank were the official monetary authorities, they had little direct
130
7-Australian Attitudes to Debt
influence on monetary policy. Monetary policy was controlled

by private banks and so monetary policy reflected their market
response to economic circumstances. Banks determined short-
term interest rates through their competition for deposits and
were key planners in the foreign exchange market during the
early years of depression. Furthermore, the Chairman of the
Commonwealth Bank was Sir Robert Gibson. Gibson was a man
of conservative financial opinions who, under existing legislation,
was answerable to no one except the Bank Board, which he
dominated. Therefore, the Government lacked the power to
dictate to the board.
From this background, these same people - our older
generation, and for many of us our parents or grandparents -
grew up with strong aversion to debt
But this old style thinking cost money in todays world where
new comfortable and easy to source borrowing is critical. In
todays world interest rates and home loan variations are a topic
of everyday conversations and feature almost daily in TV news
bulletins.
Highly sophisticated mortgage schemes and even more
sophisticated corporate financing and borrowing schemes are
provided by a diverse range of range of specialist fee-based
brokers, financial institutions and merchant banks.
Debt not a problem, on balance?

In the past 15 years or so we have seen unprecedented, almost
unbelievable, growth in the debts of Australia's households
according to Sydney Morning Herald economics writer, Ross
Gittings.
But have you ever thought of yourself as having a balance
sheet? Every business has one, of course, but so does every
household. It shows the assets a family owns on one side and the
amount it owes (its liabilities) on the other, with the difference
between the two representing the household's net worth or net
wealth.
A recent paper by two economists from the Reserve Bank,
Chris Ryan and Chris Thompson, tells the quite remarkable story
of the way the balance sheet of Australian households has
transformed since the early 1990s. At the heart of that
transformation is the explosion in household debt. Since 1992, the
disposable (that is, after-tax) income of Australian households has
131
grown at a rate averaging 6 percent a year, but the debt of those

households has grown at a rate of 14 percent a year.
As a result, households' total debt has gone from about 50
percent of their annual disposable income (which was low by
international standards) to about 160 percent (which is among the
highest in the world). What frightens people most about that oft-
quoted statistic is that it has gone over 100 per cent. The
questions to ask are why we borrowed all that money - more
than $1 trillion - and what we have got to show for it.
If we had ticked it all up on our credit cards that would be
something to worry about.
Though we owe more on our
The big reason for the
cards than ever, the average
growth in debt has been
balance per card is only $3000.
borrowing for housing.
The big reason for the growth in
Home loans account for 86
debt has been borrowing for
percent of total household
housing. Home loans account for
debt, with personal loans
86 percent of total household
and credit cards
debt, with personal loans and
accounting for the rest.
credit cards accounting for the
rest.
It is worth noting that about a third of that housing debt has
been borrowed for investment properties, not owner-occupied
housing. This is high by international standards and is explained
by our Australias generous tax breaks for negatively geared
rental properties. This means that what we have to show for that
debt is a lot of expensive houses and units.
We shouldn't be so surprised that our debt exceeds 100
percent of our income. Think about your first home loan, or your
latest. Did you borrow more than your annual income? Of course
you did. Many times more. Everyone does. So what? When you
think about it, it doesn't make a lot of sense to compare housing
debt with your income. If you suddenly had to pay off all your
debt, you would not do it out of your income, you would sell the
house. Not that it's likely to come to that.
What you have to pay out of your income is the interest on
your debt. Total household interest costs now account for 12
percent of income, up from an average of 7 percent in the 1990s.
Add a couple of percentage points on top for the repayment of
principal.
The sensible thing is to compare your debts with your assets.
While we were doing all that borrowing, which we did mainly
132
because interest rates were suddenly so low we were pushing up

the price and value of homes. The average house price went
from more than three times average annual disposable income to
more than six times.
Since the early '90s, the value of the total assets held by
households has grown by about 10 percent a year. So whereas
they used to be worth the equivalent of 500 percent of annual
household disposable income, now they're equivalent to 800 per
cent. As a consequence, the household gearing ratio - the ratio
of household debt to the value of household assets - has doubled
to 17 per cent, which is not especially high by international
standards.
Did you get that? All that humungous debt is equal to only 17
percent of the value of our assets. Note that housing accounts for
only about 60 percent of total household assets. Most of the rest is
financial assets, including shares and cash in the bank, but
mainly the value of people's savings through superannuation. The
value of our financial assets has grown strongly over the years,
partly because of the booming sharemarket up until the end of
2007.
If you subtract our debt from our assets you find our net worth
is equivalent to more than six times annual household disposable
income, up from more than four times in the early '90s.
Who owes all that debt? A third of households have no debt at
all, while two thirds of households have no owner-occupier
housing debt, either because they have paid off their mortgage or
because they rent. Even so, the share of households with an
owner-occupier mortgage has increased from 28 percent to 35
per cent, meaning the debt is spread over a larger base of
payers. The increase has been greatest among middle-aged
households, people trading up to a better house, and the
increased share of households with investment property debt is
also concentrated among the middle-aged. The bulk of property
debt has been taken on by higher income households, who have
low gearing ratios, low debt-servicing requirements and hold
significant financial assets.
"In short," Ryan and Thompson conclude, "the households
that have done the bulk of the borrowing appear to be well
placed to repay it. This is not to say that there aren't some
indebted households in vulnerable positions, but their number is
relatively low and they account for a relatively small share of
outstanding debt."
133
Debt in Australia
Since 1992, the disposable income of Australian households has
grown at a rate averaging 6 percent a year.
But the debt of those households has grown at a rate of 14
percent a year.
As a result, households' total debt has gone from about 50
percent of their annual disposable income (which was low by
international standards) to about 160 percent (which is among
the highest in the world).
Though we owe more on our cards than ever the average
balance per card is only $3000.
Home loans account for 86 percent of total household debt,
with personal loans and credit cards accounting for the rest.
About a third of that housing debt has been borrowed for
investment properties, not owner-occupied housing.
Total household interest costs now account for 12 percent of
income, up from an average of 7 percent in the 1990s. Add a
couple of percentage points on top for the repayment of
principal.
In the last 15 years, the average house price went from more
than three times average annual disposable income to more
than six times.
Since the early '90s, the value of the total assets held by
households has grown by about 10 percent a year. So whereas
they used to be worth the equivalent of 500 percent of annual
household disposable income, now they are equivalent to 800
per cent.
As a consequence, the household gearing ratio - the ratio of
household debt to the value of household assets - has merely
doubled to 17 percent, which is not especially high by
international standards.
Housing accounts for only about 60 percent of total household
assets.
If you subtract our debt from our assets, you find our net worth
is equivalent to more than six times annual household
disposable income, up from more than four times in the early
'90s.
A third of households have no debt at all, while two-thirds of
households have no owner-occupier housing debt, either
because they have paid off their mortgage or because they
rent.
The share of households with an owner-occupier mortgage
134
has increased from 28 percent to 35 per cent, meaning the

debt is spread over a larger base of payers.
The increase has been greatest among middle-aged
households (people trading up to a better house) and the
increased share of households with investment property debt is
also concentrated among the middle-aged.
The bulk of property debt has been taken on by higher income
households, who have low gearing ratios, low debt servicing
requirements and hold significant financial assets.
Debt, savings, bank and user-pays retirement

At a time when Australians are holding record levels of personal
debt new research finds there's been a significant shift over the
last two decades in our attitudes to saving money.
Social Researcher, Hugh Mackay's in depth study of
Australians and money also reveals that banks rage is back with
a vengeance and that there is a new user pays attitude to
retirement and the pension. According to a Mackay, in a recent
interview with Eleanor Hall on ABC Radio, The World Today,
Saving is now out of fashion. The idea that saving is a virtue of
itself, that we should save, seems now to be yesterday's idea.
We have become so pre-occupied with the concept of
lifestyle, with creating a lifestyle that part of the process is we
have decided we can't ever quite afford to wait for the lifestyle
we want. We want it now. Instant gratification is the name of the
game, so how do you do that? You borrow and spend.
And even now when people talk about the need to invest for
the future they are just as likely to talk about borrowing to invest
and investment as a form of savings, so the whole culture has
shifted in the space of really 15 or 20 years which is quite
breathtakingly quick from the idea that we needed to save up for
things to the idea that that's a waste of time, that that is tedious,
that all this credit is available so we should use it and get what
we want now, and as part of the process by the way, credit
seems to have a quite different meaning from debt.
It's as though people don't really think of themselves as
borrowing. They don't think of themselves as being in debt, they
think of themselves as using credit.
Hall: It's interesting that you say it's a change over two decades.
I'm surprised that the very high interest rates of the early 1990s
didn't scare people away from debt. Did that surprise you?
135
Mackay: Yes. And of course at that time there was a lot more
nervousness about it than there is now. As time goes by, and this
is true in all aspects of life, as time goes by and we live
according to a new system, a new regime, we just get more and
more used to it, and it doesn't bother us - even things that we
thought might have a bit of moral tinge about them, ceased to
have that tinge as we just adapt.
Hall: And Australians are carrying record levels of personal debt
at the moment, and as we were just saying, a lot of it's credit
cards, but there's also some sophistication it seems that debt is
almost seen as a way of saving. How does that work?
Mackay: It is almost as though now there's a third way in
financial management as in politics, that we used to think of
money and debt, now we think of money and debt and credit, as
though it's a different category of thing that we can access, and
of course what we once dreamed of happening in Australia now
has happened, namely, the banks aggressively marketing credit,
almost coming out into the street and saying would you like to
use some of this credit.
So gradually that just wears down the old attitudes and we
begin to live with the idea that the distinction between money
and credit is a blurry distinction. When people have a limit on
their credit card, for example, they seem to think of that as being
roughly having that much money.
Hall: Well you have mentioned that people are happily taking
up the credit that the banks are offering but let's look at what you
have found out about Australians attitudes toward banks.
Mackay: It's bad news. Not that it's a shock. I mean it's been
bad news for a long time but I think it's probably fair to say that
four or five years ago it was better. At that stage people seemed
to be adapting to the idea that banks are not the warm, cosy
social institutions we once thought that were going to give
money boxes to our children and encourage us all to save, but
that they were hard edged commercial institutions out to make a
profit.
We adjusted to that through the 90s but it seems to me there's
a new level of hostility that's come about from the feeling that
banks have actually lost interest in their customers, and this is a
bit of a break through feeling as though banks are more
interested in their shareholders than their customers; not taking
their customers seriously, which has led to a great irony which is
136
that people who are using ATMs, using credit cards, Eftpos,
telephone banking, online banking and loving all that stuff, I
mean actually appreciating that this is very sophisticated, very
convenient technology and nevertheless resenting the banks for
not having fully consulted or even guided them in the direction of
these things, but bullied them, pushed them, so the banks have
come out of this, having introduced really good new technology,
and in many ways higher levels of customer service yet being
aggressively condemned by those same customers for the way
they did it.
Hall: And one of the other interesting things there is not so much
that the rage is back but that it actually declined in the late
1990s. Does that suggest that perhaps the Bankers Association
strategy of buying the support of radio personalities like John
Laws, did actually work?
Mackay: Well it may have contributed, Eleanor. I mean I think
that would be a factor but the main factor was that we were
adapting to a certain way of thinking about banks but then the
banks behaviour started to change again. They became much
more aggressive about pursuing their own bottom line, closing
branches, discouraging particularly people with low balances
from maintaining savings accounts - I mean there were real
world events which created this hostility.
Hall: Now the other significant attitude change in your research
is a new user pays approach to retirement. Now what do you
mean by that?
Mackay: I think, as part of the general mood shift on the subject
of money and credit and financial responsibility, we've seen -
again it's a process of adaptation - we're gradually getting used
to the idea that the user pays, that what you want you pay for -
by the way there's a bit of a corollary which is that if you're
going to give something you expect to be paid for that too, which
is one of the nasty aspects of user pays and its effect on
voluntarism for example, but the user pays mentality has
certainly now invaded the area of retirement, pensions,
superannuation aided by the compulsory superannuation
legislation of course which we really had to have because we're
such appalling savers now that we have to be compelled to put
some money away.
But there's a very widespread belief in the community -
you'd almost say now it's a conviction in the community that the
137
pension will not be available at the generous levels that it's

available at even now, and that we're going to have to fund our
own retirement if we want to have some kind of superannuation
pension benefits it's going to be up to us, not up to governments in
the future.
Hall: Which could be very difficult if none of us are saving any
money.
Mackay: Well it's a particular problem for the baby boom
generation who are the notorious instant gratifiers and who led
the way in these records levels of personal debt - the oldest of
them are only five years away from retirement and they're in for
a nasty shock.
Peer disparity in attitudes towards mortgage lenders and

awareness of interest rates
A recent Australian Mortgage Industry report highlights
significant disparity in attitudes towards mortgage lenders and
awareness of interest rates among different peer groups,
according to a survey of 1,000 consumers, conducted as part of
the Fujitsu/JPMorgan Australian Mortgage Industry Report.
The survey found that Baby Boomers (61 percent) and
Generation X (41 percent) prefer to use a mortgage broker,
compared to a significantly lower number of Seniors (22 percent)
and Generation Y respondents (12 percent). Conversely, 56
percent of Seniors and 21 percent of Generation Y respondents
said they would prefer to use a bank for their home loan needs.
Generation X respondents were the most acutely aware of
mortgage interest rates with 88 percent claiming they could
quote the interest rate on their mortgage while only 22 percent
could quote the interest rate on their credit card.
Baby Boomers were also considerably more aware of their
mortgage interest rate with 55 percent of respondents claiming
they could quote the interest rate on their mortgage, compared to
28 percent who could quote the interest rate on their credit card.
On the other hand only 32 percent of Seniors and 24 percent of
Generation Y respondents were aware of the interest rate on
their home loans.
When it came to mortgage preferences Generation X
showed the highest predilection towards fixed rate loans, with
more than 51 percent claiming they would consider a long-term
fixed rate refinance compared to 31 percent of Baby Boomers,
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13 percent of Generation Y and one percent of Seniors.

Martin North, Managing Consulting Director, Fujitsu
Australia and New Zealand said, Lenders must understand the
fundamental differences between peer groups, in terms of what
they want and need from their lender, and target them with
tailored products accordingly. Those that dont, run the risk of
being generic, and therefore irrelevant, to the diverse needs of
their customer base.
The survey also found that a higher proportion of older
Australians (Seniors and Baby Boomers) have an investment
portfolio (71 percent and 68 percent respectively), although this
is not necessarily property related. In the case of Seniors only 41
percent had investment properties compared to 67 percent of
Baby Boomers.
Owner occupied mortgages were most prevalent amongst
the Generation X group (55 percent) while investment mortgages
were significantly more popular in the Baby Boomer group (59
percent). Unsecured lending was most common in the younger
peer groups, with 36 percent of Generations Y and 22 percent of
Generation X with unsecured car loans.
North said, With new superannuation rules having a
potentially significant impact on the supply and demand ratio for
property, financial advisors should be encouraging Seniors to
invest further in property.
Note: Seniors over 60 years old, Baby Boomers between 45-60 years
old, Generation X between 30-45 years old, Generation Y between 18-
30 years old.
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8.
FINANCE TIPS
YOU W ONT LEARN
FROM YOUR
FINANCE BROKER
Finance tips you wont learn from your finance broker

Everyone wants to buy a home and for many people the most
convenient way to do this in todays rush, rush world, is by
applying for a mortgage loan. The mortgage business was
booming until the US subprime crisis hit Australia in 2008. There
are hundreds, if not thousands, of brokers trying to lure you in. As
a result, you have to be careful. You have to watch out for
crooked mortgage companies.
As you will have read earlier in this book, these companies
are out there, so dont fool yourself into thinking otherwise. These
companies dont care if you lose your home, your savings, or
even if you go bankrupt. Companies like these especially like to
prey on the first-time home buyer. So, be forewarned! These
companies are looking out for themselves, not you. When you
start your hunt for a mortgage make sure you dont fall into their
traps, no matter how seductive their deals may sound.
Here are a few tips to help you determine whether the
company you are dealing with is legitimate:
Beware if the lender doesnt give you a proper estimate of
what the final cost will be.
An honest lender will give this to you without a problem, as
there is nothing to hide. Beware any company that wont give
you information up front, such as interest rate and other fees.
Beware if the lender says it is all right for you to lie about
any information, especially about your income, to increase your
chances of approval.
Any sort of lying on any loan form is classified as fraud and is
a criminal act. If a broker is encouraging you to do such a thing,
use your common sense. If the broker gives you the leeway to do
it, then they will probably have no problem committing
fraudulent acts upon you.
Beware of interest rates that are amazingly low or
incredibly high. Low interest rates can be very tempting,
especially when they beat everyone else by two or three
percent. You may think that this will save you money, but in the
long run it will probably only cost you more, since most loans
with significantly lower interest rates tend to increase
dramatically throughout the lifetime of the loan. People with a
less than perfect credit rating usually fall victim to high interest
rates that range anywhere between two and three percent
higher than everyone else. There are many places online you
can use to check interest rates against your credit that can give
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8-Finance tips you wont learn from your finance broker
you an accurate estimate of how much you should be paying.

Make sure you are doing your homework.
Proceed with caution if you feel pressured into applying for
a mortgage loan that you dont understand or cant financially
afford.
If you do feel unsure of anything with the loan ask your
broker to explain it to you in detail, or go to someone else who
you know can trust. If you are being pressured to go with a
certain company for a loan, proceed with caution. Never take a
loan because you feel like you are being forced into it.
When searching for a mortgage, make sure the contract
does not differ from the original contract. Companies that ask for
more signers, credit insurance, or prepayment penalty fees are
probably looking for ways to make money off you and dont have
your best interest in mind. In this case, you should take your
business elsewhere.
There are many things you should look for when mortgage
loan hunting, so you are not caught in a trap by a corrupt
company. If you are ever in doubt dont use the company, as
there are many more to choose from that will be happy to take
your business. Not to mention these other companies should be
able to offer you assistance with anything you are unsure of.
Do you want to make a million? Believe me, you can if

you are able to recognise the limitless opportunities and
potentials around you and will apply these rules and work
hard. For todays alert, ambitious and able young men, all
that glitters truly can be gold.
J. Paul Getty
Understand the basics

Financial services often appear over complicated, but it is not
hard for you to understand the basics for all financial services
that you buy. Otherwise, you could get a nasty surprise if
something goes wrong.
Before you sign on the dotted line make sure you understand the
basics of:
What you have promised to do (e.g. make regular payments).
What the company has promised to do (e.g. provide a loan, or
cover a loss).
Whether there are any exceptions or qualifications to these
promises (e.g. an insurer may not have to pay your car
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insurance claim if you had been drinking when the accident

occurred).
What you should do if something goes wrong.
Don't be afraid or embarrassed to ask questions. Sometimes it

can be awkward, but a good broker or salesperson should give
you enough time and information so you can understand the
product. You can also ask to take the documents away so that
you have time to read them and get advice.
Don't be pressured into signing something that you don't

understand. You could regret it later.
Hold onto your paperwork and keep good records

Anything to do with money often involves lots of paperwork -
account statements, contracts, policy documents, terms and
conditions and more. If you don't keep good records, you are
probably not claiming all your allowable income tax deductions
and credits. Set up a system now and use it all year. It's much
easier than scrambling to find everything at tax time, only to miss
items that might have saved you money.
If you are tempted to throw all this paperwork in the bin -
stop! Even if you don't read it all straight away, get into the habit
of keeping the important paperwork in a special file that is easily
accessible. It will come in handy if you have a question or
problem about your financial affairs.
You should also get into the habit of keeping notes from any
important telephone calls you have with your finance institution.
Again, they might help if you have a complaint. Your notes don't
need to be fancy, but it is important to record basic information
such as the name of the person you spoke to, the date and time,
and an outline of what was said. Keep this with all your other
paperwork.
Buying a house
A house is by far the largest purchase most individuals will ever
make in their life, so it should warrant an equivalent amount of
thought and planning. As the old axiom goes, the three most
important things about buying a house are: location, location,
location. It is better to buy a smaller house in a better
neighbourhood than to buy a larger house in a less desirable
neighbourhood.
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Similar to buying a car, you need to first figure out your

needs, both immediate and long term. Are you planning a large
family or do you already have children? Do you spend a lot of
time indoors, do you entertain frequently, do you look forward to
enjoying a large backyard with landscaping and gardening?
How long a commute do you want to have to work and how
close are amenities like groceries, movie theatres and shopping
malls?
You also need to decide what features of a house are
important. Are you looking for a certain number of rooms, do you
need a separate play area for children and do you need a large
and spacious kitchen. Remember in your considerations that this
may not be the only house you will ever own, so you need to find
a compromise between your current means and future needs.
Once you have identified the ideal house, you need to match
that with your budget and the types of locations that fit what
you're looking for. Depending on your budget, you may have to
make compromises in location, size or features, and you will also
have to determine whether the perfect house is even available
on the market.
Many homeowners prefer to have a house built new so that
they can customise it the way they want, although this normally
comes at a premium and can often incur additional taxes that
wouldn't apply to a used house.
You also have flexibility in how you finance a house. Similar
to other loans, shopping around for the best mortgage rate may
be tedious but can save you thousands or tens of thousands over
the long term.
The best strategy is to shop around with banks first to get the
best rate and terms and help you feel comfortable with your
budget and price range, then arrange a guaranteed pre-approval
to not only make the house shopping process simpler, but to also
streamline the financing that will come after you have chosen
your home.
There are different kinds of mortgages which may suit your
needs differently. For traditional mortgages, your options
normally fall into one of two categories: fixed or variable rates.
Fixed rate mortgages may offer more long-term stability and less
risk, however, the rates are normally a few percent higher than
the bank's prime rate.
By comparison, variable rates are lower, but they follow the
bank's rate which fluctuates day in and day out, meaning you
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may pay less for a time while risking that the rates will later
climb up.
This is a calculated risk on where the future interest market
rate will go, so it may be worthwhile to do research and gauge
where the financial experts feel the interest rates are trending.
Your decision can also be affected by the term of the mortgage.
Longer terms, like five, ten or twenty-five years will be better
insulated against risk by going with a fixed term at a higher rate,
whereas one, two or three year mortgages may benefit from a
variable rate without as much that the market will suddenly shift
interest rates during that shorter period of time.
Depending on your assets and financial well-being, you may
have other options available to you, such as flexible secure
equity lines of credit which allow you to buy your house using
the equivalent to a line of credit.
The advantage is the more you pay of the principal, the less
interest you pay every month and it allows you to immediately
reuse the equity that you have paid off. For example, if you
borrowed $100,000 using this approach and then pay off
$10,000, you would have that $10,000 to reuse on other
purchases or renovations if needed.
Regardless of the financing method, another important
strategy for reducing the overall cost of your house is to save up
and apply a larger down payment up front. This not only allows
you to borrow less from the bank, thus incurring less interest
charges, but will often also get better interest rates and fewer
supplemental charges, since the bank will consider your
mortgage less of a risk. This applies to almost any kind of
borrowing: the more risk the bank has to take on, the larger the
premium that they will pass on to you.
Bells and whistles can make your home loan expensive

According to Annette Sampson in the Sydney Morning Herald,
October 6, 2007, figures from the broker Mortgage Choice show
26 percent of home loans approved in August 2007 were fixed-
rate products, up from 23 percent in July. While that is still below
the 30 percent average over the past 12 months, the broker says
there is clear evidence more borrowers are hedging their bets
either by fixing in anticipation of further interest rate rises or
having a bet each way by splitting their loan between fixed and
variable rates.
At about 8 per cent, three-year fixed rates are below the
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banks' average standard variable rate of 8.3 percent Sampson

wrote. Of course, hardly anyone is paying the standard variable
rate, as most borrowers are able to negotiate discounts, bringing
the actual interest rate paid closer to 7.7 per cent. But for
borrowers prepared to shop around, it's possible to lock into a
fixed rate at about the same cost as you'd pay on a variable rate
loan or, in some cases, even a bit less.
If the budget is tight, and you are worried about future rate
rises, that's not a bad deal, especially given the likelihood that if
international credit markets remain tight, more lenders will be
lifting variable rates regardless of what the Reserve Bank does.
I know what you are going to say. Fixed-rate loans don't
have the flexibility or features that variable loans have. There
are still often penalties if you want to pay them out early and
they don't always come with extras such as redraw facilities and
offset accounts.
But competition has forced lenders to smarten up their fixed
loans and many products now offer features such as the ability to
make additional repayments. Some even come with offset
accounts. Fixed rates aren't for everyone but, as a growing
number of borrowers are finding, they shouldn't be dismissed out
of hand.
A recent report on home loans by researcher Cannex also
points out that, while it's nice to have the bells and whistles, there
Is no point paying for them if you are not going to use them.
Cannex says the current upheaval in financial markets
should serve as a wake-up call for both existing and intending
home loan borrowers to have a closer look at their loans.
Knowing exactly what you're paying for is a good first step in
working out whether you're getting the right deal for your
requirements.
Given that most borrowers regard the interest rate as the
most important feature of their loan, Cannex found it disturbing
that a recent CPA Australia survey found one in four borrowers
didn't even know the interest rate they were paying at the time
they took out their loan. These sorts of borrowers are manna from
heaven for the banks. They're the borrowers most likely to
persevere with an expensive loan without ever considering
refinancing.
The CPA survey also found most borrowers had no idea they
were paying extra for features on their loans. Of those surveyed,
86 percent claimed to have features such as redraw, and more
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than half said they weren't being charged extra. But, after
looking at data from the major banks, Cannex found borrowers
are paying 0.67 percent more on average if they have an offset
facility and 0.68 percent more if they have a line of credit.
Cannex calculates that's an extra $34,000 over the term of a
25-year $250,000 loan.
The lenders will tell you these features more than pay for
themselves if used properly. By depositing spare funds in an offset
account, or directly into your loan with a redraw facility, you
reduce the interest paid on the loan.
But the key is self-discipline. The CPA survey found almost
two-thirds of respondents admitted to using their redraw, offset, or
home equity-style facility to fund personal expenses rather than
paying off their loan faster. Putting personal expenses on a 25-
year home loan can be an extremely expensive way of paying
for that new car or plasma TV over the long term.
It has been all too easy to be seduced by flexibility and
features while competition has been high and rates low. Often
borrowers have been sold all-singing-all-dancing loans as part of
banking packages where you get a discounted interest rate but
pay an annual fee of about $300.
If you are a big user of the lenders' products and take
advantage of the range of discounts offered via the package, it
can be a great deal. But if you're just using the package to pay
less than the standard variable rate, you may be better off with a
cheaper basic home loan without the fees.
As the fallout from the US subprime market plays out in
global credit markets, Australian borrowers are likely to see
further movements in both fixed and variable rates. But
competition is not going to stop. If anything, it will intensify as the
big banks go all out to win back borrowers by promoting their
solid reputations and deposit base, and the non-bank lenders try
to stop them.
A 21st century education

If you are anything like me, you didn't learn anything about
managing your personal finances at school. In fact, there
probably was not even an opportunity to take any such class in
either high school or later tertiary education. If school is partly
about training us for a job, shouldn't we learn what to do with the
money we earn from a job? Especially in a country where credit
card debt is astronomical and where most people are well short
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of the wealth that would enable them to live a 'comfortable

lifestyle'. I think it is time to wise up to some of the challenges of
money management. Here are some simple tips that can help get
your financial life (back) on the right track.
Keys to financial success

Although making resolutions to improve your financial situation is
a good thing to do at any time of year, many people find it easier
at the beginning of a new year. Regardless of when you begin,
the basics remain the same. Here are seven suggestions for
getting ahead financially.
1. Get paid what you are worth and spend less than you earn. It
sounds simplistic, but many people struggle with this first basic
rule. Make sure you know what your job is worth in the
marketplace by conducting an evaluation of your skills,
productivity, job tasks, contribution to the company and the
going rate, both inside and outside the company, for what you
do. Being underpaid even a thousand dollars a year can have a
significant cumulative effect over the course of your working life.
No matter how much or how little you're paid, you'll never
get ahead if you spend more than you earn.
Often it is easier to spend less than it is to earn more and a
little cost-cutting effort in a number of areas can result in big
savings. It doesn't always have to involve making big sacrifices.
2. Set a budget. Stick to it and live by it. Use a computer

program or just a paper and pencil. Whatever works. For many
people, budgeting is their least favourite subject: How can you
know where your money is going if you don't budget? How can
you set spending and saving goals if you don't know where your
money is going? You need a budget whether you make thousands
or hundreds of thousands of dollars a year.
3. Pay off credit card debt. Credit card debt is the number one
obstacle to getting ahead financially. Those little pieces of plastic
are so easy to use and it is so easy to forget that it is real money
we are dealing with when we whip them out to pay for a
purchase, large or small. Despite our good resolves to pay the
balance off quickly, the reality is that we often don't and end up
paying far more for things than we would have paid if we had
used cash.
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4. Contribute to a retirement plan. If you are in full time

employment, your employer should have in a superannuation
plan that you may be able to make extra contributions to.
5. Have a savings plan. You have heard it before: Pay yourself
first! If you wait until you have met all your other financial
obligations before seeing what's left over for saving, chances are
you will never have a healthy savings account or investments.
Resolve to set aside a minimum of 5 - 10 percent of your salary
for savings before you start paying your bills. Better yet, have
money automatically deducted from your pay and deposited into
a separate account.
6. Invest. If you are contributing to a retirement plan and a
savings account and you can still manage to put some money
into other investments, all the better.
7. Set concrete goals. Know when you want to buy a new home,
when you want to retire, and how much you are expecting each
to cost you.
Some painfully obvious but rarely followed finance tips

Allow for the fact that interest rates may go up. Its all very
well borrowers saying I can just about afford the payments
without taking into account that, unless its a fixed rate
agreement, interest rates may go up. That is how so many
people have been caught out. Taking your finances to the limit
without allowing for possible increases in the interest rate is
courting disaster. Make an allowance for breathing space in
such an event.
Allow for the fact that your income may go down. I am not
suggesting that one should predict the unpredictable but it is
not sensible to assume everything will be rosy when you are
aware of factors that may affect family income. Borrowers
who end up in court have often failed to factor in the effect
that a baby, a long-standing illness or a shaky relationship with
a co-owner can have on their plans. The self-employed are
also particularly vulnerable when income is not received on a
regular basis. Remember, mortgage payments are supposed to
be paid on a regular basis, notwithstanding.
Pay your bills on time. Avoid needless late fees and know how
much money you actually have.
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Get yourself a financial mentor - someone with success in

dealing with and being successful with their own personal
finances.
Avoid debt to the extent possible. Pay off your credit card
debt. Credit card debt is usually the debt with the most interest.
So pay it off first. Better yet, don't accumulate it in the first
place. Don't use your credit card for cash advances. It will
harm your credit score and the interest rates are outrageous.
Pay all credit card balances in full each month. You may as
well be throwing cash into the fireplace.
Have an emergency fund. Have at least three months' income
(some say six) in a high-yield savings account that can be
easily accessed.
Career and education. Get educated. Work on the four skills
of a 21st century education: The ability to think creatively
and solve problems, the ability to communicate more
effectively, the ability to market an idea or concept to bring it
to reality, the ability to negotiate. If you go work on these four
skills I guarantee your income will improve substantially
because they are all skills in being able to add more value and
increase your income.
Your career is your most valuable asset. Manage it with a
higher priority than you would with any other investment.
Remember that without this asset, you couldn't survive.
Save enough. You should try to save enough to cover at least
one-third of your kids' total college costs.
Ask for a raise. Consider asking for a raise, especially if you
have been at the company for more than a year.
Get a professional certificate. Some professions offer a
certificate that, if earned, will generally provide you with a
higher salary.
Protect yourself from identity theft.
Beware of scams. There are a lot of scams that deal with
credit. Debt suspension offers, paying fees in advance, buying
credit protection, and rebuilding credit usually sound too good
to be true. There is a reason for this - they are too good to be
true.
Buy a used car. The most expensive kilometres on a car are
the first 10,000. Let someone else drive those for you. Buying
150
used can save a lot of money considering how little value the
car has actually lost.
Be patient. Don't buy that new gadget today. Wait a month or
two and the price will certainly go down.
Buy airline tickets as far in advance as possible. The cheapest
flights are the ones bought at least two months in advance. For
holiday travel especially, buy as soon as you can.
Never buy the extended warranty. Often times, your new
product already comes with a 90-day or 1-year warranty
(when most "faulty" things will break, anyway). There's a
reason everyone wants to sell you an extended warranty: they
are hugely profitable (for the business, not for you).
Make your own meals. Eating out gets to be expensive if you
do it too often.
Get a better mobile phone plan. If you have had the same
mobile phone plan for a couple of years, chances are there is
something better out there. Look around or call your current
provider and ask for a better deal.
Beware banking fees. A lot of banks will charge you checking
fees or minimum account balance fees. Find a bank that does
not.
Keep track of your spending. At least for a month, keep a
journal of everything you purchase. At the end of the month,
review your spending priorities and make adjustments.
Refinance your mortgage if you can cut at least one point.
The costs of refinancing are considerable, so it should only be
done if you can trim your interest rate by at least 1 percent. To
find out how much you can save, you can obtain a free
finance review at: www.21stcenturyfinancereview.com.au/f6
Investigate different types of mortgages. There are dozens of
mortgage options out there. Find the one that suits you best.
Deal directly with the seller. Avoiding agents' fees is a good
thing. If you do decide to hire an agent, do your homework
and get one who will be on the same page as you. You should
be the one calling the shots.
Negotiate the selling price. Home prices are almost always
negotiable. Never offer the asking price, but rather a few
percentage points below it.
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Insure yourself against financial ruin. There should be no

higher financial priority in your life than health insurance.
Without it, if your health takes a turn for the worst, hospital
bills could easily bankrupt you and your family.
Shares are a good long-term investment strategy. If you are
still young when the market turns down, you will have plenty
of years left ahead of you to make it up. Or protect your shares
with insurance - see my book, What I didnt learn at school but
wish I had for details
Invest in property for long-term capital growth.
Develop a second or third income by building a new business.
For some tips on building a new business, see my book, What I
didnt learn from Google but wish I had. For further details
visit:
www.21stcenturyInternetsummit.com
Be aware of any tax deductions you may be entitled to.

Take a deep breath. Even if you are only able to follow the
some of these tips, you will have already succeeded in making
a huge positive difference in your financial life.
Money isn't everything. Health, family, and happiness are
important, too, so learn to master money so you control it and
it doesnt control you.
Finally, become financially educated. Invest in books, courses
and a Homestudy program. Get yourself a mentor to assist
with your financial education. See the rear of the book for
details on how to obtain a free educational DVD on investing.
Financial profiles
Most people fall into three general financial profiles. They either
spend above their means, spend just what they have, or they
spend less than their means. There have been studies done which
show that 90 percent of the world's wealth is held by 10 percent
of the population and that even if this wealth were redistributed
equally, it would be back in the hands of the 10 percent within
seven years. This illustrates that most people would find it difficult
to change their normal spending habits, but in fact this is the most
important thing to guarantee personal financial health.
What this comes down to is learning what profile you fit in
and then learning how to change those spending, budgeting, and
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saving habits to meet your goals.

Although many of these strategies will require discipline, the
long term goals are clear: once you decide on a path, make the
commitment to stick to it and you will find within a few months,
you will begin adjusting your lifestyle to your new financial
habits, which will in turn, reinforce these new practices.
Remember, nothing comes for free - long-term financial goals
require short-term sacrifices, the trick is to find the right
compromise that allows you to meet those long-term goals while
still enjoying life to the fullest in the short term.
If you often spend more than your needs, your best first step is
to focus on a budget, looking for areas that are unnecessary and
can be trimmed and be prepared to have the discipline to stick to
your new budget. If you often spend to your means your best
starting point is look for opportunities to build up your savings,
which helps to reduce the risk and impact of unexpected
expenses and allows you to begin saving for the future.
If you often spend below your means you are in a good
position to save to the future and should focus on savings that are
structured to provide for better return on retirement, although,
don't forget to still enjoy life in the interim as many people that
spend below their needs end up with a full bank account and
regrets on missed opportunities and experiences.
Budgeting
Budgeting is a critical process which forces you to look at what
you are spending, where you are spending it and thus be able to
make informed decision on where changes can be made to meet
your financial goals. Using software to track your finances and
assets, you will get the added benefit of being able to tie it into
budget planning. Chart out all your accounts and determine what
online services your bank offers, as this will make it simpler
automatically download your regular spending transactions and
bill payments to be integrated with your spending and budget
tracking.
Try to switch your purchase habits to not make purchases
with cash - cash spending cannot be tracked easily with budget
software - paying with a bank card or credit card will help keep
an accurate record of where your money is going. This one habit
will not only allow you to track and trend your purchases, but
also provides invaluable visibility to your purchases. For
example, you may discover you spend three times as much on
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groceries, or twice as much eating out at restaurants than you

thought.
After you adopt this method, track your finances for several
months and then revisit your budget - look at what you are taking
in and what you are spending and compare it to your financial
goals. Look for areas where your spending can be reduced and
adjust your budget accordingly. At its simplest level, budgeting is
easy - you look at what you make, you look at what you are
spending and you look at how much is left over to be put away
for the future - if the numbers don't match, it gives you a clearer
process to shuffle your income accordingly. For example, some
savings you may find are spending less on entertaining, reducing
the cost of ownership of a car with a bad maintenance record, or
shifting your eating habits to home cooking instead of takeout.
154
9.
ADVANCED FINANCE
STRATEGIES
How to build and structure a
multi-million dollar property portfolio
CASH FLOW LOANS

How to turn negative geared property into
positive geared virtually overnight
How to build and structure a multi-million dollar property

portfolio
Did you realise the size of your income has little to do with your
ability to build a property portfolio? And did you realise that 80%
of success in property investment can be attributed to
psychology? Many property investors have bigger property
portfolios than other investors with larger incomes. The
requirement for a large income for property investment success is
a popular myth.
The other 20% of success in property investment can
attributed to specialist financial knowledge which I will cover in
this chapter.
A Pyramid for Investment Success
Transaction
Net Worth
Negotiation
Property Due Diligence
Asset and Tax Advice
Finance
Investment Plan
Knowledge
156
9-Advanced Finance Strategies
How to grow your property portfolio no money down utilising

your current assets
One excellent reason for investing in real estate is because so
many people have made money out of real estate and I expect
many more people to make even more money in the years to
come. It is an easily accessible market that has many favourable
advantages.
If you are using real estate, make sure that you do your
homework properly. Like any investment area, there are both
sensible and risky ways of investing in real estate. Depending on
your experience, determination and skill, you can just as easily
lose money as make money in real estate.
Millionaires from real estate

The intelligent use of real estate can enable ordinary Australians
to become millionaires in about 10 years or less. Despite the
concept of property belonging to the rich, most Australian
property investors earn below the average wage (which is
currently around $50,000). So property is clearly not just for the
super wealthy; it is for anyone who wishes to increase their net
worth in a steady, appreciating environment.
Bear in mind that if you wish to be one of the wealthy people
in the future you should probably be using property to your
advantage. As property prices and interest rates keep rising, less
and less people are able to afford their dream home. It is
expected by the year 2010 that only 40 percent of Australians
will own their dream home. This is down from 73 percent in
1980. Thus there is a definite trend of many people side-stepping
real estate. This means that these people are going to be renters
for their entire lives.
Personally, I like to buy property with no money down
because I do not like to tie up cash in property if I can avoid it. I
have learnt how to buy property virtually no money down.
Many years ago I purchased several properties in Brisbane
(Queensland, Australia); $600,000 worth of property which I
purchased at around $40,000 below bank valuation and my only
cash outlay was around $2,400. That means an instant profit of
$40,000 and I do not have to pay for these properties for over a
year. In a year those properties were worth close to $800,000
with an outlay of virtually nothing.
In the meantime the cash saved by not outlaying a 10 percent
deposit on these properties is tied up generating returns from
157
stock-renting strategies, rather than putting the 10 percent

deposit into a trust account with a realtor with zero returns. You
can see how investing is not a bad hobby, especially when you
get to a point where you do not need the money. It is fun and you
can do a lot of things with it.
A lot of statisticians say that on average across the board,
property has doubled on average every 7 to 10 years in the last
150 years in Australia. Not all property though. Some people
have properties that double in value in 5 years, while some
properties may take 20 years to double in value; it obviously
depends on the location and quality of the property and the price
you pay for it.
For instance, John and Sally are earning $50,000 a year and
they want to replace their income. I am going to suggest that just
by buying two investment properties they could achieve this. Let
us look at how they can buy two investment properties to allow
them to retire. $50,000 a year is approximately $35,000 a year
after tax. So would you be committed to buying two properties in
the next decade if you could retire from them?
In year one of the plan we are going to buy one property. The
properties I tend to buy are often around $300,000 that we will
use for this strategy. The second year we do not buy any property
and in the third year we buy our second property. You do not
have to buy 100 properties and become a property guru to make
this work. In 10 years time these properties could be worth
$600,000 each. That is 10 years after you buy them, especially if
you are buying them with good criteria and they are good
quality properties. A tip - always make your plans conservative
as it could take 10 years or longer.
I generally buy properties in capital cities because these
properties will continue to grow. I have some properties outside
capital cities that have made phenomenal returns but I prefer
capital cities; you have to decide your own criteria.
The strategy is not going to work in a small country town
because the property will not double in 10 years or even 100
years and could even go the other way. Imagine Broken Hill, a
run down mining town in outback Australia; property does not
double every 10 years in Broken Hill. You can buy a property for
as little as $1,300 in Broken Hill. People are leaving because of
the downturn in work and your property will just sit there.
If the property doubles in 10 years (ideally 7 years, but 10 to
be conservative), this is $300,000 in extra money we have made
158
over 10 years on each property, a total gain of $600,000. You

probably purchased these properties with a 10 percent deposit
(unless you have learnt to buy with virtually no money down)
and borrowed the difference. Now your properties are worth
$600,000 each and you have earned $600,000 from capital
growth.
John and Sally need $35,000 a year net to replace their
current incomes. They are probably thinking that if they buy the
property they will have to work harder. If they buy and sell to
make a profit, they generally have to pay capital gains tax. In
this strategy we are going to buy a good property and ideally
keep it forever. It is worth $600,000. They need $35,000 net cash
to replace their income. Where can John and Sally obtain that
money from?
What about a line of credit (LOC)?

A line of credit allows us to draw equity/cash out of property by
setting up a bank account from which to draw this down. John
and Sally can draw out $35,000 in the first year. Is there any law
saying they cannot spend that money?
The banks do not care where John and Sally spend the money
as long as they meet their commitments. In year 2 John and Sally
can do the same thing and draw out another $35,000 and draw
another $35,000 in year 3.
Are they spending money they worked hard for or are they
spending money they made out of thin air while they slept? John
and Sally do not want take any more money out of that property
even though they could. Remember, John and Sally have waited
10 years before the commenced drawing this money down.
In years 4, 5 and 6 they could take say $35,000 out of the
second property. The money is just sitting there so why not use it?
If they do not use it when they die someone else will get it, so
they might as well use the money they have made.
Six years later the first property is worth more than $600,000,
being in a capital city, a good growth area, it may be worth
$900,000 to $1 million. That is if it has doubled in 10 years to
$600,000, six years later it could be in excess of $900,000.
We will use that as an example. That gives John and Sally
another $300,000 which is sitting there available to be used. John
and Sally have not finished using the first $300,000 and they now
have another $300,000 and the property keeps increasing in
value whether they like it or not.
159
Now if John and Sally are not careful, they could get into a
cycle of making more money than they spend, which can mean
they have more money than they need for retirement.
Do John and Sally have to pay income tax on the $35,000 per
year that they are drawing out? The answer (in Australia) is no,
because it is not income. John and Sally are spending thin air and
there is no tax on thin air as yet! That money is legally tax-free.
The Australian Taxation Office (ATO) will let them do that
because it is borrowings; also if you do not invest and buy
properties to house Australians the government will have to.
Do you have to pay back this debt or do you simply have to
meet the interest payments? The answer is you never actually
have to pay this debt back unless you choose. This is what
insurance companies are for; they take your money to insure
your debt. When you die, your debt and your life insurance will
pay out the properties. If you want to pay this debt you can, as
critics may say this is a debt-ridden strategy.
However let us consider what a real debt strategy is. Most
people work hard to try to pay off their property. Is that really
smart? No, because they have been taught to work hard for
money and they have to get out of this way of thinking, out of this
mindset. The banks do not work hard for money.
Have you noticed that the banks own the biggest buildings in
the cities? Do you think the banks are working hard to pay off
these buildings? The banks know that they are increasing in
value. Do you think that the banks are not pulling that money out
and using it?
McDonald's makes more from its real estate than its
hamburgers because they use that real estate as equity to
reinvest. A lot of wealthy people understand this and that is why
they are wealthy.
Gerry Harvey for instance of major Australian appliance
retailer Harvey Norman fame creates a lot of his wealth from the
properties he develops for his franchised Harvey Norman stores.
If we wanted to pay off the debt with this strategy and live off
the rent, we could now sell the second property and use this
money to pay off the first property, thus wiping out our debt
without having to work hard to pay the debt.
This is another example of working smart versus working hard
- a different way of looking at money.
160
A 10-year plan
Year Property value
1 Buy $300,00 property
2 You do not buy any property
3 Buy a second $300,000 property
Property value in 10 years time,

assuming the properties double in value
Extra equity in 10 years
Property 1 $600,000 $300,000
Year 1 Draw out $35,000 in line of
credit TAX FREE to replace John
and Sallys income of $50,000
less tax gross ($35,000 net)
Year 2 Draw out $35,000
Property 2 $600,000 $300,000

Year 4 Draw out $35,000 in line of
credit from property 2
Year 7 Property 1 is now worth $900k
plus approximately: this equals
another $300,000 in
additional equity
Draw out $35,000
Year 10 Property 2 is now worth
$900k plus approximately:
this equals another
$300,000 in additional equity
Cycle continues
Note: Year 1 commences from 10-years after purchase of first property
in this example. However John and Sally could start drawing down
equity sooner if needed.
161
I have illustrated this as a concept only. Obviously in reality

there are obstacles that may have to be overcome, such as
qualifying for finance, getting good valuations and being
comfortable spending equity (thin air) rather than just leaving it to
go to waste and dying with it unspent.
Or what if the property market goes flat? Then you may have
to adjust your plan to a 15-year plan rather than 10 years, or 5
years as it has been in recent times.
Is this still preferable to no plan or the pension plan? I would
say, most definitely! However if you understand the concept you
are 80 percent there.
One question I asked my millionaire mentor when I first
learned how he did this was, How do I pay the interest bill in the
line of credits, as it will be increasing the more I draw on the
$35,000 year after year?
He told me that I needed to be creative and overcome any
challenges that I might encounter.
For instance he said, rents tend to double every 7 to 9 years
and this is additional income that could be used.
Could you draw some extra equity to cover some of the
interest shortfall if need be? Could you still qualify for tax
deductions to help fund the shortfall?
For instance could you generate some income from the
renting strategy to cover some of the interest bill without the
need to work to ensure you enjoy your retirement?
The answer was obviously yes, as long as I was willing to
think outside the box and compare it to my other alternatives of
working hard and not really enjoying the fruits of ones wealth.
Fast track property strategies to make you money while you

sleep.
What if you could buy property with virtually no money down,
ensure your property increases in value and have tenants who
will pay rent on time, all the time, treat the property as if it their
own, be willing to pay more rent and sign 3-5 year leases?
And what if you could obtain returns in property equivalent to
100 percent return in shares while legally minimising tax as well
as finding motivated vendors, massively reduce stamp duty and
learn more about the secrets of property investors?
162
If property income is $10,000

and expenses are $10,000
this is geared neutrally.
163
Property versus buying stocks

on the Stock Market
Example
Property Stock Market
Purchase $1 million property portfolio $100k deposit stock
Generally a 10% deposit portfolio
i.e. $100,000 would be required
90% loan is possible to gain greater To equal the return of our

leverage with property than stocks property portfolio would
require a 100% gain on our
stocks
Assuming 10% capital growth in Assuming same 10%

1 year then $1.1 million would be capital growth as property
the new value of property portfolio
= $100,000 equity gain = $10,000

on $100,000 outlay (10% deposit)
= 100% net ROI = 10% ROI only

(return on investment)
Property in this example is 10 times more profitable when

measured as return on outlay. This is due to it being common to
borrow 80-90 percent or even 100 percent on property, whereas
it is not common to do so with stocks due to the higher risk. Few
financial planners are honest enough to highlight this, mainly due
to them earning commissions on selling managed funds which
are predominately invested in the stock market.
I personally invest in both properties and stocks. However, I
realise that it is easier and takes less time, involvement and skill
to obtain up to a 10 percent gain per annum on a quality
investment property portfolio in contrast to requiring a 100
percent gain in stocks to achieve the same return on investment
(R.O.I.). It is true you can margin loan up to 70 percent on stocks,
however this carries substantial risk in comparison to borrowing
for property and is not standard practice.
Property organising principles

I have included my key organising principles that I have
generally used to build a large property portfolio. I was able to
build a property portfolio of over $10 million in less than 5 years
and $20 million in 10 years using many of these principles, many
of them using no money down.
164
Treat it as a business, therefore a business must add value

and make a profit
A successful business must treat its clients like VIPs. The
clients in residential properties are your tenants and should be
treated like VIPs.
A successful business must have a Unique Selling Proposition
(USP). If you own one out of fifty similar properties in a CBD
apartment block, is your business unique? I would suggest not.
Commercial property is treated as a business. What if we
adopted commercial property principles to residential property?
Increase rent and automatically increase value of property, i.e.
easier to buy with no money down and potential tax benefits.
Three Types of Investors
1 2 3
Full doc Lo and no doc Sophisticated
investors investors investors
Income Income Income
Equity Equity Equity
Level of Knowledge
What do banks and lenders look for when assessing property

investors for finance for an investment property?
There are three basic options when applying for a property loan
and we can identify three distinct stages in building a property
portfolio that most investors will go through.
The first stage involves using a full doc lender. A full doc
loan is where the lender requires complete financial details and
sites copies of taxation returns and wage slips. The size of an
investors income is important to full doc lenders who in some
cases may lend up to 106% of the property value. In most cases
full doc lending will be only apply for the first few properties for
investors.
Lo doc or no doc lending is the second stage, where an
investors income plays an important part but investors will be
required to come up with some equity or collateral as a deposit.
165
There are Lo doc products which allow investors to borrow

up to 80% with no (LMI) mortgage insurance, the lender pays it
for you on the borrowers behalf.
Lo doc lending is used when a borrower is unable to show
financial statements to prove they can service the loan and when
the borrower does in fact have sufficient earnings to qualify for
the loan. The borrower is required to sign a declaration for the
lender disclosing their annual income, though the borrower does
not need to present any financial statements. Up to 80% of the
LVR can be borrowed by lo doc lenders.
No doc lending is used when a borrower is unable to show
financial statements to prove they can service the loan and does
not wish to disclose any income to the lender.
The borrower is required to sign a declaration for the lender
declaring they can afford the loan and that it will not place
them in any financial hardship. No assets or liabilities need to be
disclosed and up to 70% of the LVR can be borrowed by no doc
lenders.
Inside the Box and Outside the Box Lending
No Doc lending Lo Doc lending

(non conforming lenders) (non conforming lenders)
Full documentation
Clear history
Consistent stable income
Full-time employment
Credit impaired Vendor finance

lending Solicitor funding
The third stage is sophisticated lending which is effectively an

asset lend where the lender will lend around 70% of valuation.
The lender is no longer concerned with the investors ability to
service debt.
My companies have access to a No doc product which
166
allows investors to borrow up to 80% with no (LMI) mortgage

insurance, the lender pays it for you on the borrowers behalf.
Sophisticated, experienced investors with a strong record
may not have to provide any documentation to a lender.
SLICE
The acronym SLICE for security, location, income, character and
equity can be used to classify five different requirements
important to lenders when assessing property borrowers.
Security - Different security classes such as residential or
commercial property determine different Loan to Value Ratios
(LVR) and interest rates. Banks will accept different types of
securities including residential housing, townhouses, units,
serviced apartments, rural properties and commercial properties
(specialised and non-specialised).
Location - Postcode restrictions will determine the LVR in some
cases. Residential metropolitan property is a strong preference
with target properties around the median price range, within 5 to
35 km of the CBD but not in the CBD.
Income - Lenders will assess pay as you go (PAYG) investors by
different means to self-employed investors. For PAYG investors
the lender usually wants to sight 3 pay slips and 2 years tax
returns. For self-employed investors lenders will want to sight
their ABN, Company Structure, records of 2 years income and a
Balance Sheet to assess their assets and liabilities.
Character - Lenders will check to ascertain if the borrower has a
clear credit history, the number of credit applications made in
the last year (more than 8 may create problems) and for changes
in their residential address.
Everyday, thousands of businesses make decisions based on an
individual's credit history. For a cost of $27.00 including GST
you can request a copy of your credit file from a company
named Veda Advantage www.mycreditfile.com.au - toensure
your information is accurate and up to dateto avoidunwanted
surprises when you next apply for credit.
Equity - How much money will you put towards your investment
property? If your lender provides an 80% LVR, you the investor
will have a 20%LVR. You can borrow more than 80% LVR with
Lenders Mortgage Insurance (LMI). In some cases you may be
able to borrow up to 100%LVR or more.
167
Successful property Novice

investors investors
Earn income Earn income
Buy Investments Pay tax
Pay tax Spend
Save and spend Buy Investments
It is interesting to compare the lending ability of investors offering

blue-chip shares as collateral and the lending ability of property
investors.
Most banks will only loan a
maximum of 70% of the value of blue-
chip shares, even if they are shares in
their own bank. Conversely investors
can often borrow 105% of the value
of a property, even in unpopular Experienced investors
suburbs. The message from banks is can always see
they consider property to be a safer opportunities for
and more liquid investment than property but realise
shares. the danger is with the
Experienced investors can always investor. The market is
see opportunities for property but merely a vehicle for
realise the danger is with the investor. the exchange of
The market is merely a vehicle for the wealth, or moving
exchange of wealth, or moving wealth from the
wealth from the uneducated to the uneducated to the
educated. educated.
One of the easiest ways to create
wealth through property investment is
to model the behaviour of successful
investors. Observe closely how they
behave in their business dealings and
the way they manage their assets.
Most successful investors will use a company or trust structure to
legally minimise their taxation and to protect their assets. They
also buy investments with their pre-tax income dollars.
168
Negative Gearing
Around 86% of investors have only one investment property
which is usually negatively geared and they are limited by their
cash-flow. At the time of publication most investment properties
were providing a return of around 4-5% based on the purchase
price of the property while the cost of funds (the loan) costs were
around 8.5% - 9%. This obviously leaves a shortfall for the
investor which they need to meet from their other income,
usually a wage or salary from their job.
Investors can use a strategy called negative gearing to fund
these shortfalls. Lets assume you decide to invest $135 per week
for your retirement. If you banked $135 a week @ 5% interest for
12 years = $115,834.
However if you were to purchase a residential investment
property for $280,000 (with no deposit).
$280,000 @ 5% per annum growth = $510,172
(compounded).
If both cost you $135 per week, which investment is better?
How is this achievable?
Property tax benefits

Property purchase value $280,000 Set up costs $15,000
Current income $50,000 Tax $10,350
Rent @ $280 per week $14,560
New total income $64,560
Deductions -$35,900
New taxable income $28,660
New tax payable $3,930
Total tax savings $6,420
Savings per week $123
Note that these figures have been rounded to illustrate the concept.
Investors should bear in mind when they buy a new or existing

property that the actual value of the building will decrease every
year (the land value is where real increases occur), but this can
be offset with a depreciation allowance of 2.5%. Purchasers of
new buildings can also claim depreciation the fixtures and
fittings. These depreciation allowances are in fact decreasing the
purchase price of the property.
169
Property tax benefits from negative gearing

Deductions Weekly Costs
Depreciation $8,000 Finance $458
Interest $23,800 Rates/maintenance $80
Property costs $4,100
Totals $35,900 $538
Total Expenses $538 - Rental $280 - Tax saved $123 = You are
actually paying just $135 per week to own this property. This
could be done with dual incomes for just $80 per week, per
person.
Instead of making up this shortfall on a weekly basis and claiming
the money back from the ATO at the end of the year in their tax
return, property investors can use the PAYG payment variation
form (available from the ATO) to claim this tax deduction on a
weekly basis.
If you currently have an investment property and you want to

increase results, how can you increase those results as an
investor?
You can increase your level of awareness by gaining
specialised knowledge of the property market. Without this
specialised awareness of the property market you will obviously
have some fear associated with property investing. Without this
awareness you will not have a full understanding of the property
market. Without this awareness people make excuses for not
investing. Today is not a good time to invest in the property
market. If only I had got in five years ago!
When investors have results without awareness, this will
manifest itself in fear, which is a common occurrence.
As one of my mentors often reminds me, Investors can make
excuses or you can make money, but you cannot do both at the
same time.
The majority of potential investors have an inner sense of
urgency to get on with creating and implementing some
investment strategies but lack the awareness to do something.
They understand and know where they are, they understand
where they want to be and they have a sense of urgency but
they need specific knowledge and information to take them to
the next level.
170
When will the property bubble burst?

There is often a perception that it is the wrong time to enter the
property market. Isnt it interesting though that this perception
keeps repeating in cycles?
Excuses used for not investing in the Australian Residential
Property Market for the last 40 years include:
In the early to mid 1960s we had just emerged from a major
credit squeeze and finance dried up
In the late 1960s we had a nickel share boom and property
was proclaimed an inferior investment
In the 1970s we had a recession
In the late 1970s we had rising inflation and the OPEC oil
crisis
In 1983 there was a recession with high interest rates and
peaking inflation
In the mid 1980s commentators were saying that residential
property prices were too high.
In 1985 the Australian Government introduced Capital Gains
Tax (CGT). Commentators explained how this was going to be
the end of property investing as we knew it
In 1987 there was fear of a 1930s style depression after the
stock market crashed
In the late 1980s we heard our children will never be able to
enter the market and prices will never go any higher, dont
invest in property. Mortgage rates went to around 20%.
In the period 1989 to 1990 interest rates and inflation were too
high and led to the infamous recession we had to have
In 1991 we had record high unemployment of 11.3%. Market
sentiment was Property will never rise in value again.
In 1993-94 Australias foreign debt and current account deficit
prevented and deterred many people from investing in
property
In the 1990s the world economic slowdown and the Asian
currency crisis were great excuses for not entering the market
In the middle 1990s many felt property prices would not stop
rising because of high inflation
In the early 2000s September 11 and an oversupply of
investment properties was a neat excuse not to invest in
property
In 2008 the sub-prime crisis in the US, a change of
government in Australia, rising inflation and rising mortgage
rates, the market has plateaued and too many emotional
171
buyers at auctions are convenient excuses for not investing.

Remember, you can make excuses or you can make money, but
you cannot do both at the same time.
Sydney median house prices 1901 to 2006
Source: Residex
An example of legal tax minimisation for real

estate investors is the medical professional and
property investor with earnings of $495,000 who
paid $8,000 in taxation in a recent year.
172
The Australian Property Cycle
Upturn Boom
Slump
Top of the boom

Rising real estate values
Rising
Easier money interest rates
Rising overseas Falling

reserves share prices
Commodity Commodity
prices rising prices falling
Rising share FaIling over-

prices seas reserves
Falling interest rates Tighter money
Falling real estate values

Depth of depression
173
How is property performing?

House prices in Melbourne surged a record 25% in 2007.
A report published in The Age in February 2008 revealed that
Melbourne's median house price grew faster than in any other
Australian city in 2007, jumping by almost $100,000 to $463,488
and is closing in on the prices in Sydney and Perth.
Shrugging off successive rises in interest rates, Melbourne
apartment values also soared, with the median price rising by
almost 15% to $335,088.
Renters were not spared either, with the Bureau of Statistics
reporting that Melbourne rents jumped 5.4%, the biggest annual
rise since 1991.
The price surge had been skewed by the strong performance
of expensive suburbs such as Malvern, Toorak, Armadale and
Brighton, which had annualised growth of almost 50%.
Apart from Melbourne, the other strongly performing markets
in 2007 were: Brisbane - up 20.1%, Adelaide - up 20%, Canberra
- up 14.6%. Sydney's median house price increased by only
4.8%, but it remained the most expensive in Australia at
$553,357.
Chart comparing housing prices to CPI (consumer price index) over a 20-
year period; source Australia Parliamentary Library
174
Chart showing metropolitan Melbourne housing

prices over 4 year period
Source REIV.
Property investment is a proven long-term investment strategy.

Statistics show that in Australia over the last 100-years property
prices have doubled on average every ten years. Unlike shares
which can have their value reduced to zero if the company
becomes bankrupt, a property can never suffer bankruptcy and
have its value wiped out.
Value of $25,000 Invested in a $150,000

Residential Investment Property Over 25 Years
The above graph demonstrates that an investment of $25,000 to

acquire a specific residential investment property valued at
$150,000 will grow over 25 years to $815,000, and after a year
175
of holding the property your equity would have increased

$12,000 from $25,000 to $37,000 but the real power of
compound growth (growth on top of growth) is demonstrated in
the future where your equity would increase $55,000 from
$625,000 in year 24 to $680,000 in year 25.
The cost of procrastination is a lot more than you can ever
imagine because if you never start investing you will miss out on
the benefit of being able to turn $25,000 into nearly $680,000
over 25 years.
Obstacles to Financial Independence

The Rich The Poor
Know they must invest Avoid for fear of investing
Buy things that make them $$$ Buy things that cost them $$$
Use good (tax-deductible) debt Have bad debt
Minimise their tax Pay full tax
Get advice from experts Get advice from uninformed
and specialists family and friends
Work smarter Work harder
Use opportunities and time Lose opportunities and time
Take action Procrastinate
You should avoid taking investment advice from uninformed

family, neighbours and friends. If your neighbours have
investment advice to offer, why are they living next door to
you? one of my mentors likes to remind potential investors.
Many of your family and friends will also subconsciously try to
hold you back as a potential investor as they fear being left
behind. They also fear change and the possibility of you moving
away from them.
By associating with other successful investors you have the
opportunity to learn from them and benefit from their success.
Why not join or start-up a networking group of like-minded
people instead?
Does your accountant own any investment properties? One
accountant we know has more than 40 properties so obviously
has demonstrated expertise in the taxation aspects of property
investment. As a property investor, why would you use an
accountant who is not a property investor? Accountants who lack
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property expertise will not be able to help you! If your

accountant is not a property investor, ask around (how many
investment properties do you own?) until you find one who is,
preferably one who owns more property than you.
An interesting aside for most people is that if they add-up the
combined income of their five closest friends and then divide by
five, that figure will be very close to their own income.
If you need access to accountants who are also investors, log
on to
www.21stcenturyaccounting.com.au
for a free consultation.
Should I buy my own home first or buy investment properties?

People who are renting the property they live in tend to buy
more properties quicker because they do not have an
owner/occupied property eating into their ability to service debt.
Some investors manage to buy one property per year by using
the capital growth on their properties and obtaining a line-of-
credit (LOC) on their other properties.
Good Debt vs Bad Debt

How to structure your investment property portfolio.
Owner occupied Investment properties

Bad debt Good debt
Good Debt vs Bad Debt

What is good debt and bad debt? Good Debt is defined as a tax
deductible debt, such as a Line of Credit (LOC) used to trade
shares, an investment property loan, or personal loan to trade
shares, margin loans etc. Your relationship with debt will largely
determine the level of success you will be able to achieve as a
property investor. The wealthy have a positive relationship with
debt and distinguish between good and bad debt.
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Good debt is defined as tax deductible debt used to

purchase or leverage assets that appreciate in real value.
Examples include a line of credit (LOC) to trade shares, margin
lending and interest only loans used to purchase investment
properties.
Bad debt is all other debt which does not provide any tax
benefits, such as home loans for owner occupied housing, credit
cards or store cards used for shopping, personal loans used for
recreational use and car loans used for personal transport. Bad
debt is predominately used to purchase assets and consumables
that depreciate in real value.
Optimise Your Structure

How to structure your property investment portfolio
Owner occupied Investment properties

(bad debt) (good debt)
LOC LOC LOC LOC
Cross-securitised lending
Our recommendation is that property investors should not cross-
securitise their loans. Cross-securitisation of loans is where one
loan is securitised by two or more properties. Many of our clients
believe that all their loans are individually secured or are stand-
alone loans. This may not be the case.
You will need to read the small print of your loan terms and
conditions. There are usually a few clauses for concern common
to most lenders such as the combine accounts and the combine
securities clauses. As a borrower it is imperative you understand
the meaning of these clauses.
Debt vs cash-flow
Money can make money. Debt can actually be cash-flow as
evidenced by negative gearing and further debt is commonly
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used to service existing debt. Investors can create equity by using

a LOC over other assets such as properties. Investors also have
the option of increasing debt to increase equity.
Debt = Equity = Cash Flow = Life style!
The educated investor vs the average person

What is the difference? The average person focuses on cash-flow.
The educated investor focuses on building equity.
Your aim as an investor is to maximise the amount of money
that you control (good debt).
21st Century Cash-Flow Manager Loans

The 21st Century Cash-Flow Manager Loan is a two-split loan
facility. Facility one is the core account and facility two is an
equity account. Based on your credit limit, repayments can be
structured at a lower amount to suit your cash-flow needs over a
designated period.
Increase when the limit on the equity account is reached at
the end of that period, repayments will revert to standard and
you will need to meet the total repayments.
In this example we will consider a $450,000

Investment Property.
Current Property Value: $450,000
Deposit $90,000 (20% LVR)
Facility One (core account) $360,000 (80% LVR)
Facility Two (equity account) LOC $360,000 (80% LVR)
You can capitalise from 80% LVR to

90% LVR over a designated time
period until you reach your maximum
LVR of 90%
In this example we will use the Cash-Flow Manager to

turn a negatively geared investment property into cash-
flow neutral.
The assumptions we make are that this investment property has a
rental yield of 4.5% per annum and a cost of funding of 9.5% per
annum, leaving a negative gearing amount of 5% per annum.
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21st Century Cash-Flow Manager Loans
Facility One Investment property

(core account) monthly rental income
$360,000 $1,300 per month
Facility Two
Total monthly payment (equity account)
$2,800 per month
$45,000 LOC
My manager account Payment of $1,500 per
month towards
mortgage
In a nutshell the basis of a cash-flow loan is that the first one to

five years is the hardest time in property investing as the property
is often negatively geared, costing you monthly income.
What if this could be solved?
That is what a 21st Century Cash-Flow loan does!
21st Century Cash-Flow Manager Loan

In this example the investor capitalised the $1,500 per
month using the Cash-Flow Manager Loan.
Interest paid Interest Total LVR after

by client capitalised fixed applicable capitalised
Year variable schedule interest rate interest
Settlement 80%
End year 1 4.25% 5.3% 9.55% 83.9%
End year 2 4.25% 5.3% 9.55% 86.5%
End year 3 4.25% 5.3% 9.55% 88.25%
End year 4 4.25% 5.3% 9.55% 89.3%
Instead of paying say 9.95% interest, you pay only 4.25% of this
over the first 4 years. This means you have positive cash-flow
from day one. This is how you can turn a negatively geared
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portfolio into positive gearing within the next 30 to 60 days.

The balance of 5% interest is capitalised: i.e. added to the
loan and paid off later with rising rental income. The rental
income pays it off later, saving you hard earned money. The key
is to use this strategy on quality property that will rise in value.
You can also use this type of loan on your own home. Log on
to www.21stcenturyfinance.com.au for further details.
Some other ways to make property cash flow positive.

One definition of positive cash flow is, when the income is
greater than the expenses.
Capital appreciation or positive cash flow: which is better?

It depends on what you do with the profits. With capital
appreciation, you can only use that money by either refinancing
or selling the property. If you wish to replace your wage with a
regular amount of money coming in, then positive cash flow is
best. Cash flow positive properties are not dependant upon rising
values of real estate to make their value felt. The value comes in
the steady and constant rent returns.
Time: Wait for natural inflation to raise the rents until you show a
profit. Wages increase over time, as do rents. If you have the
income to hold the negative geared asset then rental returns will
eventually grow enough to cover your expenses. It may just take
a little while.
Refinance to interest only repayments: This could make a

difference, as the repayments may be smaller than the rental
income and thereby achieving positive cash flow. If you are
worried about interest rate rises in future, then perhaps you could
also investigate fixing the interest rate for a term. Always consult
your financial advisor or financier to check all your options.
Pay in a large deposit: Borrowing less makes the loan smaller

and thereby any loan repayments smaller. On my very first
property, I got a 6 months grace of cheap 'honeymoon' interest
rates. I invested every spare dollar I had during that time to
reduce the loan amount so that when the honeymoon rate
expired and I went onto variable interest rates, I had paid a
substantial amount off the loan already and was ahead in my
loan repayments.
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Have a long 30-year principle and interest loan: The repayments

will be smaller than on a 20-year loan. I have two 20-year loans
at present. The repayments are higher than on my 30-year ones. I
will be getting those two loans extended to 30-years in the near
future as it does affect my cash flow.
Buy two properties instead of one: When the values double with
time, sell one property and pay out the loan on the other.
Compound the idea and buy lots more, selling some and paying
out the ones left. I do not have a never, never sell strategy. I like
to sell one when it has achieved good Capital growth. I pay out
the loan on it and another, then go shopping and buy another
couple. I do a lot of calculations on my own financial situation, to
weigh the pros and cons of selling and buying some more.
Add an extra bedroom and increase the rental return: Actually,

a better word is find another bedroom. I enjoy finding older
houses with a formal dining room. This room quite often is easily
suited to converting into an extra bedroom. All you have to add is
a wall and a door. A three-bedroom house commands a far better
rent than just a two-bedroom one. You may even find the value
of your house will increase if it has an extra bedroom.
Carry out a cosmetic makeover: You can carry out a cosmetic

makeover without spending a packet of money and increase the
rental return. This is one of my favourite areas and it does add
value to your property as well as attracting a higher rent return.
The effect of a good scrub-down and paint of a property can be
dramatic.
Getting an old toilet replaced with a new one is not
expensive and tenants will thank you for it. Just putting new
handles on kitchen cupboards can dress the kitchen up a bit. Buy
lace-look continuous curtaining for the windows. It is not very
expensive and looks great. The theme here is not to spend heaps
of money, but enough to attract a tenant who will be happy to
pay a higher rent.
Niche markets: Turn the property into furnished, student

accommodation and bring in more rental yield. This is a
potentially huge market, so if you have a property nearby to a
university and there is public transport available, you may be
able to pursue this niche market. Always check with your local
council to make sure of any bylaws.
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Subdivision and Joint Ventures: Subdivide a large block, keeping

your house on one side and sell off the spare block to pay down
the debt on your house. Tenants mostly hate mowing an overly
large block. Some subdivisions are not too expensive to do.
Enquire with local councils of the fees. If you are short of cash to
fund anything like this, there may be people around interested in
investing in the subdivision area with you and claiming some of
the profit upon the sale of the new block. These are called joint
ventures.
Strata Title a block of units: Strata title a block of units, and sell a
few off to pay down the debt on the one's you have left. Again,
you need to check with the local council, to see if it is possible.
There are niche market investors who specialise in buying blocks
of units and strata titling them for a profit.
Pet owners: Put in a fence and get tenants with a dog. They will
often pay a higher rent for the privilege. Some people will do
anything to be able to keep their pets with them and the added
security against burglary is a good thing. Make sure your rent
lease specifies any damage to property by the pet, is the
responsibility of the tenant. Tenants with pets do tend to stay put
in a rental property and hardly ever move out, so you have no
vacancy rate problems there either.
Quantity Surveyor: Always get a quantity surveyors report done

on any property to claim any depreciation through taxation. The
government wants you to provide accommodation and will
reward you via your tax return. There is a whole stack of tax
deductions associated with rental properties and you are entitled
to claim them. Consult with a tax accountant, (preferably one
who has rental properties of their own), to find what they all are.
Time: How long would I give a negatively geared property to get

itself into a positive situation?
One investor gives it 3 to 5 years and if it is not looking better
by then, they will cut it loose and sell it off. This is only their
current strategy as they claim they are fast-tracking their way to
wealth. Be aware of what the current sales market is doing when
you assess the negative gearing situation. You don't want to sell a
property off cheaply if there is likely to be a sharp rise in
property values in another 12 months time. After you sell, can
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you get back into the market with a better buy? You may not
want to hold something that is going to be negatively geared for
the next 15 years or more, and no capital growth for ten years
either. There are exceptions. A waterfront house on Sydney
Harbour may be well worth hanging on to, despite negative
gearing.
Remember: Not all properties will achieve positive cash flow by

themselves in a reasonable amount of time. (3 to 5 years for
many investors) and not all properties will achieve fantastic
capital growth in a reasonable amount of time (7 to 10 years).
Capital appreciation is relatively easy, positive cash flow can be
trickier.
Taking advantage of capital growth

It is the use of negative gearing that is making property
investment affordable for many Australians. If not for negative
gearing most people would find property investing unaffordable.
As a property investor it is not essential to be a negative gearing
expert (that is why you use a finance specialist) but it is important
to understand the concept.
Negative gearing is when an investment runs at a loss, e.g.
the income from an investment (whether from shares or an
investment property) is less than the outgoings, i.e. bank interest
and associated costs such as council rates and property
management. It is this running at a loss that often frightens the
novice investor. The secret to real wealth is the ability to limit
your loss to a small and manageable amount. This will allow you
to take advantage of any capital growth in your investment.
Property - a less volatile investment

This strategy works for both the share market and the property
market. However, the share market requires a very active
involvement unless you are prepared to put your finances in the
hands of funds manager and pay their associated fees. Property
on the other hand is less volatile with the added benefit of
income from rent to help pay for the investment making
borrowing to invest more attractive.
It stands to reason that if a negative geared property is one
where losses exceed income then a positively geared property is
a situation where income exceeds losses. The ultimate aim for
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smart investors is to have a situation where all their investment

properties are positively geared. In today's market it is almost
impossible to purchase even one positively geared property
unless you have the resources to add a large amount of cash to
the deal.
However by employing a shrew selection technique and by
taking advantage of the growth cycle of the property market it is
possible to see your negative geared properties turn into positive
geared properties over time. This is achieved through negative
gearing and the associated tax benefits that allows investors to
purchase real estate at minimal cost to themselves.
Tax deductions and successful property investment

Tax deductions are the key to a successful investment property
portfolio. It is the tax deductions that help to make your
investment affordable during the early years of your investment.
The difference between the expenses related to your investment
property and the income (from rent) received is a tax deduction
provided that you run at a loss.
You are also eligible for a tax deduction for depreciation of
your investment properties fixtures and fittings such as carpets,
light fittings etc. There are deductions for buildings costs as well
as maintenance and property management. New properties offer
the advantage of full tax deductions whereas you are limited
with the amount of deductions on older properties.
As the calculation of taxation deductions on depreciable
items is a specialised field we recommend using the services of a
Quantity Surveyor to maximise your deductions. It is also very
important to use an accountant that specialises in investment
properties to take full advantage of the information supplied by
the Quantity Surveyor.
Tax deductions - an overview

Below is an overview of these deductions. You require the
services of a Quantity Surveyor and experienced property
accountant to calculate the maximum deductions allowable.
Many thousands of dollars can be lost if these professional
services are ignored.
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Deductions on purchasing costs

(Tax deductible over 5 years)
Valuation Fees
Stamp duty on Mortgage
Bank Application Fees
Mortgage Insurance
Consultancy Fees
Depreciation costs
Building Costs (2.5% p.a. over 40 years)
Fixtures and fittings
Furniture
Inspection Costs
Other acceptable costs (as per tax schedule)
Negative gearing and the Australian economy

Negative gearing was established in the early 1980's to
encourage income earners to purchase investment property that
could be used to help fund their retirement and to enhance the
availability of rental property. As homeownership becomes even
more unaffordable the encouragement of Australian wage
earners to fund rental housing is becoming even more important.
Negative gearing does not only help fund the building of rental
housing but also gives support to Australia's economy.
Many industries within the economy rely on building and
development. Not just people employed directly, but also
factories etc. who make the products used by builders and
developers.
Another advantage to governments is the relief of pressure to
supply and maintain housing for people who are not in a position
to purchase their own home, thereby saving millions of dollars in
funding plus huge administration and infrastructure costs.
Tax incentives for the property investor

To encourage the private sector to invest in property for rental,
governments have made available extremely viable tax
incentives for the investor. It is through these available tax
incentives that investors are able to purchase property at very
little cost to themselves and in many cases at virtually no cost to
themselves. Simply put: the taxman and the rental income pays
for your investment property!
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Another way to buy property, no money down

Did you know that if you do not have a deposit for property, you
may potentially qualify for a zero/20 loan?
This means that a partner (lender) will loan you the 20%
deposit and loan you the 80%, meaning you can buy with no
money down.
Plus they will not even charge you any interest on the 20%
deposit they loan you.
What is the catch you ask? They will not charge interest,
however they will ask for 40% of any capital growth when you
decide to sell the property.
Log on to
21stcenturyfinance.com.au
for access to this facility.
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10.
S UCCESS STORIES
OF F INANCIAL
ENTREPRENEURS
Well save you - Aussie John

Any Australian who has taken out a home loan in the last 15
years, perhaps owes a debt of gratitude to John Symond AM.
Symond is the founder and managing director of the Aussie
Group, which comprises Aussie Home Loans and Aussie
Mortgage Market, which has made him one of the richest men in
Australia with his fortune being estimated to be $365 million in
2004.
From humble beginnings and after tremendous setbacks while
he challenged the banks and their almost closed shop for the
provision of home mortgages, he has used his remarkable
business acumen to change the Australian home loan industry
forever. He is a strong believer in the need to give back to the
community and is renowned for his charitable works.
Symond was born and raised in Sydney, Australia, though he
did spend a period of his youth living in Brisbane. He was one of
seven children and the son of fruit shop owners. He regularly
helped at his parents shop after school and this is where he
developed his good sense of business and strong work ethics,
which he would later put to use with the founding of his own
business.
Symond attended eleven different schools during his
childhood, from which he graduated in 1965. After leaving
school, Symond studied law and specialised in property and
finance, which enabled him to start a consultancy company that
entered into a joint venture with a subsidiary of the State Bank of
South Australia.
By the late 1980s he was financially secure and happily
married with two children, though in a twist of fate he and his
business went broke with the collapse of the South Australia bank
in 1992, which subsequently led to the breakdown of his
marriage. However, he turned the disaster into an opportunity
and began working on realising his dream of creating a home
loan company.
Supported by a $10,000 loan from a relative, Symond founded
Aussie Home Loans in February 1992. The company was unique
in its approach to home loans, offering 24 hours a day service
and loans far cheaper than those offered by banks.
In 1994 his company introduced the securitisation of home
loans, allowing the company to offer loans upwards of 3 per cent
cheaper than its competitors. The company rapidly grew as
consumers became aware of its products and banks were forced
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10-Success Stories of Financial Entrepreneurs
to copy Symond's methods as their market share rapidly

diminished.
The company under Symond's guidance re-invented itself as a
mortgage broker in 2002, selling both its own products as well as
the banks and also successfully introduced its own low rate credit
card shortly thereafter. As of 2007, Aussie Home Loans had a
loans portfolio of more than AUD$20 billion.
John Symond's mansion in Point Piper is regarded as the most
expensive private residence in Australia with the block costing
$10 million and an estimated building cost of $70 million.
In recognition of his services to the Mortgage industry,
Symond was conferred the honour of Australian Member (AM) in
2002 and was also inducted into the Australian Banking and
Finance Magazines Hall of Fame in May 2004, the first non-
banker to join the prestigious group of members.
Wizard Mark Bouris

Wizard Home Loans was sold to GE Money (part of General
Electric) in 2004 for $500 million. The company was founded by
Mark Bouris in 1996 and it now claims to be Australia's leading
non-bank lender with a network of almost 200 branches.
Wizard branches are small local businesses run by local
people with local knowledge. Bouris says as local entrepreneurs
with skin in the game, Wizard branches build and nurture
relationships with their customers for the life of the loan. Wizard
began operating as a franchise model in late March 2007 for all
new branches.
Bouris came from humble beginnings and credits his parents
with instilling in him the discipline and values that would propel
him from the working-class Sydney suburb of Punchbowl to the
boardroom of one of the world's largest companies.
ABC television featured Bouris on its Australian Story program
in August 2006. Bouris became instantly recognisable after
fronting a number of marketing campaigns for the company,
including television commercials.
Before the arrival of non-bank lenders like Wizard, banks had
a monopoly on home finance, interest rates were high and there
was limited availability of competitive products. Wizard changed
that by constantly challenging the complacency of Australian
banks and took on the banks and gave home owners more
negotiating power.
According to Wizard challenging old expectations with new
190
innovations and intense competition is good for Australian

borrowers. They claim their success can be attributed to listening
to what customers want and responding - price was, and
remains, critical to Australian and New Zealand borrowers -
while developing and nurturing relationships with customers and
working with them as their individual circumstances change.
Bouris started his working life as an accountant, working his
way up to become a partner in the early 1980s. Bored with
accounting, he became a consultant for a corporate lawyer.
Wizard started out with five staff in 1996, after Bouris
convinced a number of finance brokers to get together, setting up
an owner-operator branch model.
Wizard executive Brad Seymour, one of the company's first
staff members, said that other business names were considered.
But Eureka or Great Southern Mortgages just didn't have the
traction of Wizard.
"Mark's strength is that his staff hang off his every word,"
Seymour says.
"He was also very conscious about the brand; he wanted to do
in Australia what Virgin was doing in the UK."
Bouris was keen to tap into the burgeoning market for non-
bank lenders, as people like John Symond at Aussie Home Loans
began to challenge the fat interest rates that banks were
charging home buyers.
"This industry was shaken up many years ago by people like
myself and Aussie, and the introduction of all the other originators
in the market," Bouris says.
Media reports indicate the lead up to the sale of Wizard took

around 12 months of due diligence by GE before their purchase
of the company for $500 million after it was founded with a "few
million" dollars.
GE had 160 people pore over the business, at one stage
sending a list of more than 1000 questions. They even sent a team
of people to inspect one of the company's buildings in New
Zealand, to ensure there was no asbestos in the roof.
"I've been through four lots of due diligence. The Packers,
Deutsche Asset Management, ABN Amro and GE. And GE was
the toughest," Bouris says.
Bouris was smiling though after he pocketed the best part of
$100 million from the deal and kept his job in the process.
Bouris, a rugby league fanatic - he watches at least six games
191
a weekend - met Channel 9 boss and good buddy David

Gyngell, through league. Gyngell introduced him to the Packer
family and it was the Packer's $25 million investment in 1999
which delivered Wizard a much-needed capital injection
investment expertise on the board.
Rugby league made Wizard one of the best-known brands in
Australia as the brand became synonymous with the annual State
of Origin series.
Bouris often refers to his roots when talking about business
life. Asked if he was intimidated by doing business with the
Packers, he says: "I come from Punchbowl. No one intimidates
me."
People who have worked with Bouris describe him as
energetic, fiercely proud, demanding and sometimes harsh in his
treatment of staff. He has three mobile phones, and has been
known to ring staff from five in the morning.
"Relationships have been massively important," he says. "You
just can't underestimate them."
Bouris describes the late Kerry Packer as one of the most
influential people in his life. "Kerry was a legend. No matter
what people say, he was legend. And James has tremendous
vision.
"They didn't just put money in. They invested more than that.
You could go and see Kerry if you had a problem, or you just
wanted to discuss something. His door was always open."
Bouris admits that the Packers placed conditions on their
initial investment into Wizard. Apart from regular board
meetings, they insisted on the appointment of a chief executive
and the creation of a strategy team to look at buying ABN Amro's
funding business, AMS, because they thought it was important to
control the funding side of the mortgage business as well as retail
distribution.
It took three years before Deutsche Asset Management came
on board with a $60 million investment in 2001 and that was
used to buy 49 per cent of AMS from ABN Amro. Then in 2002,
Wizard and AMS merged into what is now AFIG, and split the
shareholding four ways.
The Packers did well out of their investment. Aside from the
millions of dollars AFIG spent on advertising with Channel 9 and
various ACP publications, PBL announced it would make an
after-tax profit of $58 million on the sale.
Bouris says that over the years a number of banks looked at
192
buying the company. One source close to ANZ said it had taken
a look and decided to walk away. Challenger Financial
Services, which is 20 per cent owned by the Packers, was also
interested in the business but was not willing to pay more than
$400 million.
Bouris says there were three potential buyers of the business
right up until the sale to GE, including one local bank and a
global bank.
"I take the view that if I hung in there for a couple more years,
this would be worth another couple of hundred million dollars,"
he says.
RAMS Home Loans

Most Readers will be familiar with the distinctive RAMS logo
from television commercials. RAMS was set by John Kinghorn as
a non-bank lender in the mid-1990s and played a major role in
Sydneys leasing, securitisation and structured finance markets.
Kinghorn is reported to have pocketed around $650 million
when he floated RAMS in July 2007, just days before worldwide
credit markets froze. The freeze in the credit markets left the
business struggling to refinance more than $5.5 billion of
mortgages.
On 2 October 2007, RAMS agreed to sell its 91 branches and
all the future business it writes to Westpac Banking Corporation
for the bargain basement price of $140 million.
The very next day RAMS became a high-profile local victim
of the US sub-prime mortgage crisis when shares in RAMS Home
Loans Group plunged despite it pricing $300 million worth of
bonds and speculation that it would receive a rival bid for its
franchise network.
RAMS shares, which were initially offered in July 2007, at
$2.50, fell over 22 percent to 66 cents on 2 October and plunged
again the next day by another 24.24 percent to trade at 50 cents.
RAMS sourced much of its funding from the US commercial
paper market (XTP) where the US sub-prime mortgage crisis has
pushed up costs and drained liquidity.
Glenn Dyer wrote this edited article in Crikey.com on 4
October, Shareholders in Rams Home Loans group who have
been gutsy enough to hang onto their shares are entitled to feel a
bit miffed about the way they have been stiffed by gutless
management and founder John Kinghorn, who not only sold them
an overpriced, over-hyped business back in July, but has now
193
turned around and sold them down the drain to Westpac in a

cheap, opportunistic deal.
Kinghorn got over $600 million from the float and hangs onto
it, the shareholders have lost heavily and Westpac has screwed a
great deal out of the floundering carcass of RAMS.
The shares fell heavily on both days to end at 48c yesterday,
which valued RAMS at just over $169 million: seeing Westpac is
paying $140 million for the name and outlets (or 40c a share),
that puts a value of 8c on the income streams and value of the
$14.5 billion in existing mortgages remaining with RAMS. They
were off another cent this morning at 47c just after the opening.
It's a damaged brand and if the company was in
administration, there would be bidders looking for the mortgages,
rather than the brand name of the outlets, which would have
very little value. So Westpac has gone Vulturing (screwing a
hard nosed deal out of a company that couldn't really resist).
To support his actions, Kinghorn does a patsy interview with
the Australian Financial Review (and no one else) where he
claimed RAMS was a case of 'sell or shut the door'. He says it's
not a great outcome for shareholders and they have at least got
something.
That might be the case, but did he and the company sell to
the first bank that wandered buy, or was there an auction and
this was the best they could get? There has been no mention of
any attempt to drum up an auction or maximise the price.
Therefore the shareholders should be asking if the board
flogged the brand name and franchises too cheaply and would
be entitled to ask at the special meeting of shareholders, if there
were other bids for the company.
The deal allowed RAMS to yesterday finally price a $300
million mortgage-backed bond issue: that was originally set
down at $250 million. $291 million were sold at a margin of
0.53% over the one-month bank bill swap rate.
And what about UBS, the investment bank that sold Rams
into the market in the last glorious deal before the great credit
freeze struck?
UBS worldwide is not in good odour at the moment: billions
of dollars of losses, billions of dollars of still dodgy loans on its
books, the head of investment banking and the group chief
financial officer (Australian, Clive Standish) have been 'retired'.
And of course there's the ill will the monstering of fund
manager Paul Fiani suffered before leaving over his opposition to
194
the opportunistic bid for Qantas: which would have generated fat
fees for UBS.
No wonder they don't want to draw any more attention here
to embarrassments like RAMS.
Conclusion
I trust you have enjoyed this book and gained some valuable
information and ideas such as, how to eliminate your mortgage in
half the time and how to structure finance to build a property
portfolio by becoming financially educated.
Becoming financially educated is not as difficult as many
people think it is. To continue your learning further feel free to
take advantage of the 21st Century property and finance
seminars I have asked to be available to readers of this book at
no charge, saving you $495.
For more information in regard to finance and for a review of
your finance and to have any finance questions answered, log on
to:
They will be able help you answer some of your questions and
help you implement some of the strategies
For all readers of this book

You qualify for a Free Finance Portfolio Review
and the opportunity to speak with one of our
experienced finance consultants
Phone 1800 444 710
or log on to
195
Index
21st Century the banks' illegal penalty Banks

Cash-Flow Manager fees tantamount to theft? and low doc loans 72
Loans 179 81 are happy to make loans
Education tips for avoiding ASIC 83, 92, 94, 100, 101, available because of the
predatory lenders 128 112, 123 interest they earn 66
education, A 147, 150 Ask create money by creating
Finance 121 for a raise 150 credit 66
questions 143 try to buy respectability 70
A Associated Securities 48 Barrett, Mike 89
10-year plan 161 ATMs 48 Be
21st century education 1. ATO 39 patient 151
147, 150 Australian your own best advocate 61
loan has three facets: 27 attitudes to debt 129-139 Become financially educated
pyramid for investment Bankers Association 152
success 156 (ABA) 69, 76, 77, 80, 83, Bell, David 83, 123
report on the finance and 123, 124 Bells and whistles can make
mortgage broker industry Banking Industry your home loan expensive
112 Ombudsman (ABIO) 81 145
ABA response to report on Bureau of Statistics 123 Beware
home loan lending 123 Central Credit Union 50 banking fees 151
ABC Financial Counselling and of scams 150
Radio 135 Credit Reform Bizarre sales practices 45
television 190 Association 104 Bleier Mortgage Corporation
ABC's PM program 122 financial market 49 97
ABN Amro 192 Institute of Criminology Bluestone 80
ABS 75 (AIC) 94 Bond, Alan 47
Abusive mortgage brokers Bond, Caroline 109
or unfair lending practices frustrated by the lack of Borrowing statistics 50
118 service provided by Bouris, Mark 125, 190
prepayment penalties 121 lenders 111 Brody, Gerard 123
1. Actual or transaction value 33 Mortgage Industry report Broker
Add an extra bedroom and 138 business confidence 86
increase the rental return 182 National Credit Union 50 facts 86
Additional payments 22 Payments Clearing Brokers need fixing 111
Adjustable rate mortgage 32 Association 69 Bruce-Page Government 70
Advanced Finance Strategies payments system 69 Budget, set a 148
155-187 Prudential Regulation Budgeting 153
AFG 112 Authority (APRA) 50, 74, Buy
AFIG 192 104 a used car 150
Allow Securities and airline tickets as far in
for the fact that interest Investments Commission advance as possible 151
rates may go up 149 (ASIC) 83, 92, 94, 100, two properties instead of
for the fact that your 101, 112, 123 one 182
income may go down 149 Australian Story 190 Buying a house 143
American President Australian Tax Office
Abraham Lincoln 71 (ATO) 39, 90 Cambridge Credit 48
Amortisation schedule 2 Avoid debt to the extent Can
AMS 192 possible 150 a broker arrange a loan
An example of legal tax Avoiding predatory lending when I am not be able to
minimisation for real estate 117 get a loan myself? 57
investors 172 you pay off a 30 year
Another way to buy property, Baby Boomers 138 mortgage in 10 years or
no money down 187 Bad debt 178 less? 6
ANZ Bank 74, 82, 193 Bait and Remember 95 you trust your finance
Appraised or surveyed value Bait and switch 95 broker? 85-115
33 Bank of Adelaide 47 Canberra's Care Inc
APRA 50, 124 Bankers Financial Counselling 104
Arbuthnot, Grant 79 depression of the 1930s 68 Cannex 61, 146, 147
Are quickly created the money1. Capital
brokers product sellers or for war 68 and interest 35
advisers? 108 complaints 81 appreciation or positive
196
cash flow: which is Credit Union Australia 50 Fiani, Paul 194

better? 181 Crikey.com 73, 193 Fielding, Senator Steve 82
Care Inc Financial Cross-securitised lending Finance
Counselling 104 178 and mortgage broker
Career and education 150 industry, A report on the
Carry out a cosmetic Deal 112
makeover 182 directly with the seller 151 brokers caught out 93
CAS Book Keeping 105 was no scam, just too Brokers Supervisory
Cash economy 87 good to be true 99 Board 105
Cash King 97 Debt brokers, Consumer Credit
Cash-Flow Manager Loans, in Australia 134 Legal Centre NSW (Inc)
21st Century 179 not a problem, on (CCLC) and the
Caveat emptor 121 balance? 131 Australian Securities and
Centrelink 42, 44 vs cash-flow 178 Investments Commission
Challenger Financial Australian attitudes to 129- (ASIC) 92
Services 193 139 Strategies, advanced 155-
Character 167 Reducer, The 16 187
Chart showing metropolitan savings, bank and user- tips you wont learn from
Melbourne housing prices pays retirement 135 your finance broker 140-
over 4 year period 175 Deductions on purchasing 154
Choice Magazine 45, 82, 83, costs 186 Financial
108, 109 Depreciation costs 186 education 120
Choose Deutsche Asset Management profiles 152
a basic package and get a 192 Fincorp 110
lower interest rate 9 Develop a second or third Fine print, Traps in the 41
the right loan 9 income 152 First American Loan
Civil War 71 Diakou Faigen Lawyers 99 Performance 114
CJC Book Keeping 105 Do brokers offer the best First World War effort 70
Coenen, Tracy 24 deals? 108 Fixed rate mortgage 32
Common law 28 Do not sign anything without Foreclosure and non-
Commonwealth Bank (CBA) reading it carefully first 57 recourse lending 30, 36
45, 47, 69, 70, 74, 82, 131 Don't be afraid or Fraser, Dawn 99
Commsec 73 embarrassed to ask Fraud 92, 109
Competing banks co-operate questions 143 Fraudster's greatest ally 86
69 Downing Centre Local Court Fujitsu Consulting report 124
Competition 120 105 Fujitsu/JPMorgan Australian
Compound Interest 19 Dyer, Glen 193 Mortgage Industry Report 138
Concerns with pay-day Future Fund, The 73, 75
lending 126 EFTPOS 49
Consumer Action Law Equity 168 GE Money 190
Centre 82, 109, 122 or homeowner's equity 34 Generation X 138
Consumer Affairs 101 1. Estimated value 33 Generation Y 138
Consumer Affairs Victoria Excessive fees 121 Get
103 Excuses used for not a better mobile phone plan
Consumer Credit investing in the Australian 151
Administration Act 105 Residential Property Market a professional certificate
Consumer Credit Code 126 for the last 40 years 171 150
Consumer Credit Legal Exorbitant fees 109 educated 150
Centre 50, 77, 92, 94, 106, paid what you are worth
112 Failure to disclose loan price and spend less than you
Contract chicanery 97 is negotiable 119 earn 148
Contribute to a retirement Fair Trading Act 105 rid of your credit card 15
plan 149 False declarations 109 started now 3
Cosmetic makeover 182 Falzon, John 83 yourself a financial mentor
Costello twiddles his thumb Family First 82 150
as the bank cartel gouges Fast track property strategies Getty, J. Paul
away 73 to make you money while Gibson, Sir Robert 131
Costello, Peter 75 you sleep 162 Gittings, Ross 131
Credit card debt 148 FCA 47 Good debt 177
Credit cards 49 Fees and charges 49 vs Bad debt 177
Credit Ombudsman 123 Ferrier Hodgson 100 Guernsey 71
197
Index
Guttentag, Jack 115 quickly 3 spread premiums) 122

to save thousands of Kinghorn, John 193
Hall, Eleanor 135 dollars in interest on your Kremnizer & Co 97
Harvey Norman 160 mortgage and how to pay
Harvey, Gerry 160 your mortgage off in less Lane, Katherine 103
Have than 10 years 4 Large loans and refinancing
a long 30-year principle to waste $175,000 in 10 61
and interest loan 182 years 24 Latham, Mark 75
a savings plan 149 wealth is generated 163 Law Council of Australia 81
an emergency fund 150 you can save thousands of Learn to calculate the amount
Heideman, Steve 115 dollars and take years off of interest on your loan 19
High Net Worth Individuals your mortgage! 1-25 Legal Aid NSW 98, 103
48 Howard Government 75 Legal tax minimisation for
Higher standards of product Howard, John 128 real estate investors, An
information needed 43 example of 172
Hints for getting the most out If you do use a mortgage or Legislation 57
of a broker 57 finance broker 53 Lender beware 52
Hold onto your paperwork Impossibility of paying off all Les and Maureen 14
and keep good records 143 debt 71 Letem dangle 95
Home loan predators In a fixed rate mortgage 32 Levinson, Cara 79
targeting vulnerable 124 In an adjustable rate Lincoln, Abraham 71
1. Homeowner's equity 34 mortgage 32 Line of credit 159
Honeymoon periods 11 In Australia after the great Live within your means and
House of Representatives depression in the 1930s 130 pay cash for any purchases 7
Standing Committee on Income 167 Lo doc lending 166
Economics, Finance and Increase Loan
Public Administration 123 your deposit by $35,000 5 application fee / package
House prices in Melbourne your payments 6 fee: $600 74
surged a record 25% in 2007 Industry competitiveness 52 flipping 122
174 InfoChoice 110 to value and down
House repossessions up Inside the box and outside the payments 33
after interest rate rises 76 box lending 166 LOC 159
How Insure yourself against Location 167
brokers scored 108 financial ruin 152 Low-ball Offers 95
do I know if I can afford Interest 31 Low-doc loans: are they for
my proposed mortgage only 35 you? 38
payment? 62 only loans to inappropriate
do reverse mortgages client borrowers 91 Mackay, Hugh 135
work? 40 compound 19 Macquarie Bank 89, 93
does your home Interim refinance 97 Mainline 48
loan compare? 21 International Monetary Fund Make
is property performing? 60 a point of checking your
174 Internet Banking 49 bank statements 20
many tens of thousands of Invest 149 extra repayments 9
dollars in interest will you in property for long-term sure you check the
pay between now and the capital growth 152 reverse mortgage contract
end of your mortgage? 14 Investigate different types of 43
money is created in mortgages 151 sure your loan is portable
Australia 36 Is todays dollar worth the 20
mortgages work: the same as a dollar in 30 years? your own meals 151
amortisation schedule 2 23 Mandatory arbitration 122
much does a broker cost? Matt and John's special
56 Joint Ventures 183 mortgage deal 106
to build and structure a Judicial practices 119 Mayne, Stephen 73
multimillion dollar McDonald's 160
property portfolio 156 Keating, Paul 48 MFL Property Holdings 101
to grow your property Keen, Steve 98, 104 Miller, Sir Denison 70
portfolio no money down Keep track of your spending Millionaires from real estate
utilising your current 151 157
assets 157 Keys to financial success 148 Mineral Securities 47
to pay off a mortgage Kickbacks to brokers (yield MKM Capital 99
198
Money for Living 99 Olszewski, Jolanta 99 RAMS Home Loans 80, 193
Money isn't everything 152 Optimise your structure 178 Reduce
Money, The Philosophy of 25 Orphan boy wins lottery the interest rate by just
Moratelli, John 98, 103 prize, buys house through 0.25% 6
Mortgage finance broker 106 the length of your
and Finance Association Orrock, Denis 110 mortgage to 15 years 6
of Australia 109, 123 Refinance
broker accused of Patten, Acting Justice David to interest only
predatory lending 122 98 repayments 181
brokers according to Pay your mortgage if you can
Choice Magazine 108 all credit card balances in cut at least one point 151
brokers do, What do? 54 full each month 150 Refinancing 61
Choice 50, 112, 145 all your mortgage fees and Should you consider? 21
Industry Association of charges upfront 20 Regulation of Mortgage
Australia 103 in a large deposit 181 Broking Industry required to
loan basics 31 off credit card debt 148 protect home-buyers, says
loan types 31 off your mortgage quickly Macquarie Bank 93
offset facility, Use a 21 with a bi-weekly plan 13 Reserve Bank of Australia 69,
processes and service Pay your bills on time 149 72, 83, 131
112 Pay-day loans 125 Residential Tenancies Act 76,
shoppers need to know quick tips to remember 79
how to protect themselves 127 Reverse
95 Paying off your mortgage 2 mortgage facts 42
Moss, Bill 93 Payment mortgagees 40
Munro, Kelsey 111 amount and frequency 32 Rig the market rate against
Murray, David 73 and debt ratios 34 floaters: 96
Payments, additional 22 Risk-based pricing 118, 120
National Australia Bank 72, Peer disparity in attitudes Risks 38
74, 82 towards mortgage lenders Rowland, Michael 74
National Loan Centre 93 and awareness of interest Ryan, Chris 131
Naylor, Phil 103, 123 rates 138
Negative Gearing 169 Permanent Custodians 78 Saidi, Dee 79
and the Australian Permanent Mortgages Pty Sampson, Annette 145
economy 186 Ltd 98 Save
Negotiate Perpetual Trustees 74 as large a deposit as
a deal with your lender 9 Pet owners 183 possible 8
the selling price 151 Plan before you buy 59 enough 150
Never buy the extended Play the market 96 thousands of dollars and
warranty 151 Pre-pay Your Mortgage 12 take years off your
Niche markets 182 Predatory mortgage!, How you can
1. No capital or interest 36 lending 76, 116-139 1-25
No doc lending 166 mortgage lending and thousands on your
No-cost loans that aren't 96 mortgage fraud 87 mortgage - a starting
Non-bank lenders up Prepayment 32 example 5
mortgage interest 80 Pressurised sales 109 Savings Accounts 48
1. Non-recourse lending 36 Property Scullin, Prime Minister 130
North, Martin 125 - a less volatile Security 167
NSW investment 184 Seniors 138
Consumer Credit Legal organising principles 164 Set
Centre 103 tax benefits 169 a budget 148
Dept Fair Trading takes tax benefits from negative concrete goals 149
action against shonky gearing 170 Seven signs of predatory
finance broker 105 versus buying stocks on lending - common abuses
Sheriff's Office 127 the Stock Market 164 121
Supreme Court 77, 78 Protect yourself from identity Sevior, John 74
theft. Shadow shopper findings 108
O'Neill, Gary 99 Punitive banking fees 73 Shares are a good long-term
O'Neill, Stephen Mark 99 investment strategy 152
Obstacles to financial Qantas 105 Sheriffs feel strain of
independence 176 Quantity Surveyor 183 repossessions 127
Offset accounts 9 Shop
199
Index
around and make sure Swan, Wayne 75 Future Fund 75

your lender knows it 20 Sydney median house prices great depression in the
around for your mortgage 1901 to 2006 172 1930s 130
loan 62 Sydney Morning Herald 78, lenders behind the
Short-term loans with 131, 145 majority of house
disproportionally high fees Symonds, John 189 repossessions 77
119 NSW government is
Should Take a close look at what you proposing new legislation
I buy my own home first really don't need to spend 114
or buy investment money on and apply those Philosophy of Money 25
properties? 177 savings to paying off debt 7 Sun-Herald 127
I get a finance broker to Take a deep breath 152 Sydney Morning Herald 75
arrange my loan? 59 Taking advantage of capital term 27
you consider refinancing? growth 184 U.S. subprime mortgage
21 Tax crisis 114
Single premium credit deductions - an overview Weekend Australian 73
insurance 119 185 World Today 76, 135
SLICE 167 deductions and successful Thompson, Chris 131
Smart ways to use mortgage property investment 185 Three types of investors 165
brokers 60 incentives for the property Time 181, 183
Some investor 186 Tips when dealing with
other ways to make Tenants are being forced out mortgage brokers 61
property cash flow of their homes at a dramatic Top of the boom 173
positive 181 rate, some with just two Transaction Accounts 48
painfully obvious but hours' notice 78 Traps in the fine print 41
rarely followed finance Tenants Union of NSW 79 Triguboff, Harry 65
tips 149 Tennant, David 104 21st Century
questions you should Term 31 Cash-Flow Manager
consider when choosing a the 27 Loans 179
Broker 58 The Education tips for avoiding
questions you should advantages of a bi-weekly predatory lenders 128
consider when choosing a mortgage payment 12 education, A 150
Mortgage Broker 58 Age 174 Finance 121
tips 5 Australian Banking
Sophisticated attempts at system 47 UBS 194
mortgage fraud 88 Australian Property Cycle Underlying issues of
Special conditions for low- 173 predatory lending 119
doc loans 38 banks 65-84 Understand the basics 142
Speers, Cameron 105 behaviour of rogue and Uniform Consumer Credit
Spigelman, Jim 78 fraudster brokers who Code 98
St George Bank 97 target the poor, desperate Unnecessary products 122
St George Credit Card 82 and nave 91 Unscrupulous finance
St Vincent de Paul Society 83 behaviour of rogue and brokers 44
Standard & Poor's 78 fraudster brokers who U.S. subprime mortgage
Standard or conforming target the poor, desperate crisis, The 114
mortgages 34 and nave 91 Use a mortgage offset facility
Standish, Clive 194 Calculation of APR 21
Stay up to date 19 (annual percentage rate)
Steering 27 Value of $25,000 Invested in a
and targeting 122 Code enables the broker $150,000 Residential
people in the wrong to charge a commission Investment Property Over 25
direction 103 even when the loan Years 175
Stop running up even more agreement is not Value: actual, appraised and
debt on your credit cards 7 completed 91 estimated 33
Strata Title a block of units correct way to pay off Vasse River Resort 95
183 personal debt 16 Veda Advantage 167
Subdivision and Joint Debt Reducer - The Victoria's Consumer Affairs
Ventures 183 correct way to pay off 100
Success Stories of Financial personal debt 16
Entrepreneurs 188-195 educated investor vs the WA mortgage broker jailed
Supreme Court of NSW 97 average person 179 for fraud 95
200
We are independent brokers! directly to a mortgage

Yes, but is it legal? 102 lender? 55
Well save you - Aussie John Without industry regulation,
189 consumers can be left in the
Western Australian investors dark 111
lose $100 million 105 Wizard Home Loans 124,
Westpac Banking 125, 190
Corporation 74, 81, 82, 193, Wizard Mark Bouris 190
194 Work on the four skills of a
Wharton School of the 21st century education 150
University of Pennsylvania
115 Yield spread premiums 122
What You can't lend without regard
about a line of credit? 159 for the borrower and their
do banks and lenders look circumstances 97
for when assessing Your
property investors for career is your most
finance for an investment valuable asset 150
property? 165 first mortgage 8
do finance brokers do? 46-
64
do mortgage brokers do?
54
I didnt learn at school but
wish I had 152
if I have problems with my
broker? 59
is a mortgage? 26-45
is the difference between a
mortgage broker and a
lender? 53
is the difference between a
mortgage broker and a
loan officer? 54
role do finance brokers
have? 51
should I do if a broker
approaches me? 55
tactics do predatory
lenders use? 118
When
choosing a Mortgage
Broker, Some questions
you should consider 58
will the property bubble
burst? 171
you receive a pay rise 20
your interest rate drops 16
Where does the money come
from for mortgage loans? 36
Which bank? 74
Who
can you trust? 85-115
is the finance broker
acting for? 107
Why pay off your mortgage
or loan? 3
Will
a broker find me the best
loan? 56
I save money going
201
MORTGAGE WATCHDOG
If there is one clear and obvious
lesson to be learned from the events
of 2008 in local and world financial
markets it is that banks (and other
lenders) are clearly very fallible.
Sometimes those mistakes send them
broke... more frequently however their
mistakes actually cost you money.
A study conducted by the Sydney Morning Herald about banking errors found that 54%
of monthly loan statements contain errors and that the average monthly error is $242.
This may not sound like much but an error like this can cost you well over $20,000 over
the life of a loan. Ann-Maree Enders of Kingsley in W.A. checked her statements and found
$7,563.04 was missing from her accounts.
To find these errors she used a program from Mortgage Watchdog and we highly
recommend you use it also. Mrs. Mackenzie from Logan City in QLD used it and said
"We found a discrepancy of $8,643.00 on our fixed loan and this has now saved us
$33,000 over the life of our loan."
That is some serious money right there... that's the deposit on another investment property.
This really can have that big an impact on your personal bottom line. That is why we have
spoken to Mortgage Watchdog and organised a discount on this for you.
Just go to www.mortgagewatchdog.com.au/c21 (Australian clients) or
www.mortgagewatchdog.com.au/c21nz (NZ clients) for further details.
Here is the amazing part, they are so sure you have mistakes in your statements waiting to be
found that they say check your statements and if you don't find any errors they will give you
$250 for wasting your time. You can't get fairer than that can you?
You really do need to be checking and it is crazy to think "this couldn't happen to me" ...
Because it probably already is. Grant Redding of Nerang in QLD checked and said
"I have found errors in some cases over hundred dollars on my monthly statements,
..... Which has added up to over $14,000.00. Thanks for the program"
Visit www.mortgagewatchdog.com.au/c21
now and get back the money you are owed by your bank.
www.mortgagewatchdog.com.au/c21
FREE FINANCE REVIEW
valued at $495
you
What if you could access a finance specialist that can help
achieve your investment strategies, can show you how
to turn negatively geared property portfolios into positively
geared ones, within 30 to 60 days, plus how to pay off your
home mortgage in half the time, saving you a fortune

21st Century Finance are offering limited free Finance Review Services to show
you how we can take your property investing to new levels. To receive a free
Finance Portfolio Review valued at $495 that can help you save thousands on your
home loan and to learn how to turn negatively geared investment properties into
positively geared instantly contact our team today.
For further information, please visit www.21stcenturyfinancereview.com.au/f6
or call 1800 444 710 or fax 03 8456 5973 or email finance@21stcenturyfinance.com.au
Visit www.21stCenturyFinanceReview.com.au or Fax back form to 07 3503 9021
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"What I Didn't Learn At School But Wish I Had"

In this book, Jamie lays the foundation for success with a blueprint of the same educational system he used
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"What I Didn't Learn From My Financial Planner But Wish I Had"
This book not only challenges what many people think is required to become wealthy in this country, but
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"What I Didn't Learn From My Finance Broker But Wish I Had"
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Many people perceive finance to be a boring subject, but finance is
not boring if its mastered. If mastered, its the fastest way to becoming
a property millionaire.
Jamie McIntyre
Finance is such an important subject. It is the backbone behind

any investment strategy, such as purchasing investment PROPERTY,
shares, acquiring businesses and to pay off your mortgage in
record time.
Without finance virtually everything that you see would not be possible.
Shopping centres need finance to fund their development of each new
shopping centre. Airlines require finance to fund the purchase of new
aircraft that can cost hundreds of millions of dollars. Even successful sporting teams
require finance. Many people perceive finance to be a boring subject, but finance
is not boring if its mastered. If mastered, well then its an investors best friend and the
fastest way to becoming a property millionaire. The world revolves around finance.
I never became a property millionaire by relying on Finance Brokers or taking their
advice! Unfortunately most Finance Brokers are not trained in finance broking, but are
simply commissioned Sales People who will often do anything to write a loan to earn
up-front commissions and trailing commissions as this book will highlight.
By mastering finance not only can you pay off your mortgage in record time and save
thousands you can actually kick start your property portfolio and over time potentially
become a property millionaire.
After learning this information in March 2006 I set myself a target of making $500,000 from the
stockmarket in a financial year. About 3 weeks ago I hit my target and I did it in 10 months
not 12. Today I spent that $500,000 profit plus borrowed an extra $700,000 to buy 2 investment
properties worth approximately $1.2 million. Prior to this knowledge, I had no idea I would
achieve this sort of success and now know that if nothing else, it gave me the confidence to
believe in myself and to succeed. It was just so unreal watching a bank officer trying to plug
my figures into her computer loan program which was obviously not designed to accept such
figures. Im now confidently looking forward to my next venture.
Kerrie Sheehan
If you are looking to accelerate your financial results and create an

extraordinary quality of life - then this book is for you! It is a must-read for
anyone wanting to excel and expand their knowledge. Jamie is one of
Australias most forward thinking educators and a fantastic teacher!
Dale Beaumont, Creator of the Secrets Exposed Series
Some of the strategies covered in this book.

How to accelerate paying off your home and save thousands in unnecessary interest repayments.
How to pay a typical 25 year mortgage in less than 10 years.
The fastest way to eliminate personal debt.
How debt can make you rich.
How to avoid the pitfalls of lending providers or to prevent brokers and banks from taking advantage of you.
How you can secure multiple properties, up to 10 or more within 10 years or less.
How to turn negatively geared property into positively geared within 30 60 days.
How to beat the banks at their own game.
Author|Jamie McIntyre:
Jamie is the best selling author of What I Didnt Learn At School But Wish I Had. He
became a self-made millionaire in his twenties through property investing and business
success. He is an entrepreneur, investor, a sought after public speaker, author and
Climate Change campaigner. He is founder of 21st Century Group of Companies some
include Pinnacle Capital Investments, E-minis Global, 21st Century Finance, 21st Century
Property Direct, 21st Century Recruitment and 21st Century Academy an education
organisation that has provided a valuable 21st Century education to Australians and
New Zealanders. He has been responsible for educating over 225,000 people through
his DVD courses and live seminars worldwide.
21 CENTURY
ST
FINANCE
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21 ST C

THAT MADE ME A PROPERTY MILLIONAIRE

This information has been prepared to provide general

Before making an investment decision, you need to consider

Published by 21st Century Publishing

Tel: (03) 1800 999 270

Copyright 2008 21st Century Publishing

All rights reserved. No part of this book may be reproduced or

National Library of Australia Cataloguing- in-Publication entry:

What I didn't learn from my finance broker but wish I had

Printed and bound in Australia by Griffin Press

2 What is a mortgage? .............................................................. 26

3 What do finance brokers do? .................................................46

6 Predatory lending .................................................................116

7 Australian attitudes to debt ..................................................129

10 Success Stories of Financial Entrepreneurs..................... 188

The first thing I didnt learn from my finance broker or banker

Paying off your mortgage

Why pay off your mortgage or loan?

How mortgages work: the amortisation schedule

Payment Principal Interest Principal Balance

As the chart shows each of the required payments is $599.55, but

How to pay off a mortgage quickly

Get started now

How to save thousands of dollars in interest on your mortgage

Save thousands on your mortgage - a starting example

Increase your deposit by $35,000

Total interest paid over the term of the loan is $450,280. By

Or, reduce the length of your mortgage to 15 years

Or, increase your payments

Or, reduce the interest rate by just 0.25%

Can you pay off a 30-year mortgage in 10 years or less?

A good first step to getting out of debt is to stop running up even

Your first mortgage

Offset accounts. Over time savings in an offset account can help

Get an offset account or an all-in-one package. Although not

An offset account example

The difference between scenario # 1 with an 8% interest rate

The Difference Between scenario 3 at 6.5% p.a. and Scenario 4

Honeymoon periods may seem attractive, but they expire

Every little bit helps. Just putting aside a small amount of

Pre-pay Your Mortgage

The advantages of a bi-weekly mortgage payment

payment method save you, versus paying the conventional

Pay off your mortgage quickly with a bi-weekly plan

Consider for example a loan of $100,000 at the interest rate

How many tens of thousands of dollars in interest will you pay

groceries in bulk, taking discounts for paying cash, bartering and

Regardless of how short you intend your loan to be it should be

Instead of abiding by the standard settlement period of six

on that part of the principal and will effectively make every

When your interest rate drops - remember interest rates

Can you arrange for your repayment and your partner's

Learn to calculate the amount of interest on your loan

Amount of compound interest

Get ahead and stay ahead of your repayments by making

Stay up to date dont forget about your mortgage

Rates change, new products and changes in the market itself

Pay all your mortgage fees and charges upfront

Shop around and make sure your lender knows it

Make sure your loan is portable

Make a point of checking your bank statements and loan

When you receive a pay rise always increase the repayment by