CIVMB IK T1-2 v3

Industry Knowledge
Topic 1-3: Products and services

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Certificate IV in Finance and Mortgage Broking
Contents
Overview ........................................................................................................ 1-3.3
Part 1: Mortgage broker services .................................................................... 1-3.4
1 About brokers ..................................................................................... 1-3.4
Part 2: Mortgage broker products ................................................................... 1-3.6
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2 About lending ...................................................................................... 1-3.6
3 Products overview ............................................................................... 1-3.8
Part 3: Property mortgage/home loan products ............................................ 1-3.13
4 About home loans ............................................................................. 1-3.13
5 Variable rate loans............................................................................. 1-3.17
6 Fixed rate loans ................................................................................. 1-3.19
7 Capped rate loans .............................................................................. 1-3.21
8 Discounted variable rate loans ........................................................... 1-3.22
9 Low start loans .................................................................................. 1-3.22
10 High start loans ................................................................................. 1-3.23
11 Split or combination loans ................................................................. 1-3.23
12 Home equity loans (line of credit) ...................................................... 1-3.24
13 Consolidation loans ........................................................................... 1-3.25
14 Low-doc and no-doc loans ................................................................. 1-3.25
15 Construction loans ............................................................................. 1-3.26
16 Equity release products ..................................................................... 1-3.27
17 Equity finance mortgages................................................................... 1-3.30
© Kaplan Education Pty Ltd 1-3.1

Part 4: Consumer lending products ............................................................... 1-3.31
18 Personal loans ................................................................................... 1-3.31
19 Personal overdrafts ........................................................................... 1-3.33
20 Credit and charge cards ..................................................................... 1-3.35
21 Consumer leases................................................................................ 1-3.38
Part 5: Commercial and business loans.......................................................... 1-3.41
22 Commercial and industrial finance ..................................................... 1-3.41
23 Development and construction finance .............................................. 1-3.43
24 Bank guarantee ................................................................................. 1-3.44
25 Commercial bill facility ...................................................................... 1-3.45
26 Debtor finance................................................................................... 1-3.46
27 Forward start loan agreement ........................................................... 1-3.47
28 Market rate commercial loans ........................................................... 1-3.48
29 Business overdraft facilities ............................................................... 1-3.49
30 Term loans ........................................................................................ 1-3.50
31 Trade finance .................................................................................... 1-3.51
Part 6: Equipment loans and leases ............................................................... 1-3.52
32 Leasing .............................................................................................. 1-3.52
33 Equipment finance facilities ............................................................... 1-3.52
34 Commercial hire purchase ................................................................. 1-3.53
Part 7: Marketing financial products and services .......................................... 1-3.54
35 Client sectors ..................................................................................... 1-3.54
36 Approaches to selling financial products ............................................ 1-3.58
Part 8: Keeping up to date with products and services ................................... 1-3.66
37 Following emerging industry trends ................................................... 1-3.66
References .................................................................................................... 1-3.70
Suggested answers........................................................................................ 1-3.70
1-3.2 CIVMB_IK_T1-3_v3
Overview
Mortgage brokers are intermediaries who match prospective borrowers with various
credit providers offering mortgage loan products. They are usually paid an up-front fee
by the credit provider for their services and may also receive an ongoing (trailer)
commission.
Consumers benefit from being able to compare different mortgage products available
from a panel of credit providers through one source (the mortgage broker)
and subsequently have access to products that match their needs and individual
circumstances.
Topic learning outcomes

On completing this topic, students should be able to:
• explain the products and services provided by a mortgage broker to their clients
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• review client requirements and match appropriate products
• communicate product particulars to a client, including features and benefits,
fees and charges and risks and concerns
• demonstrate strategies to keep up to date with product changes.

Part 1: Mortgage broker services

There are many financial institutions offering credit and mortgages. Many customers
are confused by the choice and decide to get a finance or mortgage broker to do the
legwork in choosing a credit provider and a mortgage product most suitable for their
circumstances.
1 About brokers
Finance broker
A finance broker negotiates with banks, credit unions and other credit providers on the
customer’s behalf to arrange loans or credit packages and arrange special deals.
Mortgage broker
A mortgage broker is someone who specialises in arranging home loans for customers.
Brokers can specialise in areas such as:
• residential loans or mortgages
• reverse mortgages or equity release
• equipment leasing
• chattel finance
• car and personal loans
• business loans
• debtor finance
• commercial property finance.
Licensing
Credit providers and brokers must be licensed to operate in Australia.
From 1 July 2010, the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act)
requires that credit for residential property, including residential investment property,
is regulated nationally by the Australian Securities and Investments Commission (ASIC).
Note that some state laws and Regulations continue to exist, such as maximum interest
rate caps in ACT, Queensland, NSW and Victoria.
Further resources: Credit licensing

For more details on credit licensing, see the ASIC website:
Australian Securities & Investments Commission (ASIC) n.d.,
‘FAQs — getting a credit licence’, ASIC, viewed 13 March 2017,
<www.asic.gov.au/asic/asic.nsf/byheadline/Getting+a+credit+licence?open
Document>.
Further resources: ASIC professional register

ASIC has an online register of professionals that can be searched by
members of the public. The link to the research can be found below,
viewed 13 March 2017,
<https://connectonline.asic.gov.au/RegistrySearch/faces/landing/Professio
nalRegisters.jspx?_adf.ctrl-state=wrnxsjqbi_45>.
What brokers do
Brokers work with clients to determine their borrowing needs and ability, select a loan
suited to their circumstances and manage the process through to settlement.
Finance or mortgage brokers can:
• offer a variety of loan options or products, possibly more than one financial
institution might offer
• assist a customer to select a loan
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• manage the loan negotiation process through to settlement
• complete the ‘legwork’ for the customer
• offer advice and experience across a range of products and institutions.
How brokers are paid

Residential brokers are paid by the credit provider and receive an up-front commission
and a trailing commission, based on the size and type of loans settled. It is not standard
industry practice for a residential broker to charge a customer for their service due to
this arrangement. However, sometimes a broker will charge the customer a fee directly
instead of, or in addition to, the credit provider’s commission.
According to the MoneySmart (2015):
A broker's fee or commission for arranging a loan is often paid by the credit
provider whose products they sell.
Different credit providers pay different commission levels. This can
potentially influence what loans the broker recommends to you.
Sometimes a broker will charge you a fee directly (instead of, or in addition
to, the credit provider's commission).
Who are the broker’s customers?

Mortgage broker customers include:
• individuals wanting a mortgage for a home purchase or investment
• individuals seeking to refinance an existing loan
• businesses that require assistance with finance needs, including car and equipment
leasing to loans, to help them expand.
Panel of lenders
Brokers can only offer loans from the lenders with whom they are accredited. This is
known as their panel of lenders. Lenders will normally range from the large banks
through to specialist non-bank lenders and mortgage managers. The size of a panel of
lenders will vary from broker to broker.

Part 2: Mortgage broker products

Currently in the debt market, there are many different types of finance products
offering many different features and benefits. While mortgage intermediaries focus on
home loans and investment loans for residential property investment, other types of
finance meet the needs of different client groups. Some brokers provide alternative
types of finance to meet the varying needs of their clients.
This section covers:
• some important concepts for lending
• client segments that mortgage brokers might deal with
• an overview of the product types a mortgage broker might deal in or be required to
know about.
2 About lending
Although lending associated with the purchase of real estate makes up a large
proportion of all lending that takes place in Australia, there are many forms of lending
and lending products.
Lending can be categorised as follows:
• corporate lending — loans are generally over $10 million, though some credit
providers reduce the threshold to $5 million
• small and medium enterprise (SME) lending — loans are generally greater than
$250,000 and are provided to business clients
• personal lending, which includes:
– residentially secured loans
– secured and unsecured personal loans
– other forms of consumer finance.
2.1 Loan term

Credit can be arranged over a variety of terms, ranging from:
• short term (up to 12 months)
• medium term (up to five years)
• long term (up to 30 years).
2.2 Secured and unsecured lending

Credit can be provided either on a:
• secured basis, that is, using the item being financed, or other assets, as collateral to
secure the loan, or
• unsecured basis, where the credit provider relies on the borrower’s capacity and
character to repay the loan.
2.3 Credit regulation

The NCCP Act provides national uniform regulation for the Australian credit industry.
It requires that all persons who engage in credit activities must be licensed with ASIC or
be a representative of someone who is licensed. By law, the credit provider must:
• make reasonable enquiries about the customer’s financial situation,
requirements and objectives
• take reasonable steps to verify the customer’s financial situation
• decide whether the credit contract requested is suitable for the customer.
A loan is regarded as suitable if:
• it meets the consumer’s requirements and objectives
• the consumer has the capacity to repay the loan without experiencing
substantial hardship.
For more information about what is covered under the NCCP Act,
see ‘Topic 1-2: Legislation and codes of practice’.
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2.4 Loan purpose
Loans can be made for a variety of purposes. Credit providers will generally assess the
type of loan offered and the security/collateral required to cover the debt, partly based
on the purpose of the loan.
Establishing the loan purpose enables the credit provider to determine if the loan is
valid under the credit providers’ policies, underwriting standards and guidelines
and procedures. It also determines if the loan will or will not be regulated by the
NCCP Act.
Loans that are not regulated by the NCCP Act lose the protection afforded by the
NCCP Act.
Banks today will typically make loans available for any worthwhile purpose.
Loan funds may be required for a range of personal uses, including:
• the purchase of residential or investment property
• refinancing or consolidation of existing debts
• personal use (e.g. holidays, motor vehicle purchases)
• payment of a taxation assessment
• investment purposes, such as the purchase of shares listed on the
Australian Securities Exchange (ASX).

Why the loan purpose is important

An essential part of the loan application process is the statement of loan purpose
provided by the applicant. The stated answer to this question, which the applicant must
confirm by signature, determines the legislation that will cover the loan.
Table 1 Why the loan purpose is important

If … Then the loan is …
the loan is primarily for business purposes not regulated by the NCCP Act
the loan involves home lending to company borrowers not regulated by the NCCP Act
(either joint and several)
more than 50% of the loan amount is to be used for personal purposes regulated by the NCCP Act
the loan is to be used for the purpose of investment in regulated by the NCCP Act
residential property
Disputes and loan purpose

It is important when accepting or processing a loan that the lender is satisfied that the
purpose of the loan is correctly stated and validated. If there is a dispute (e.g. arising
from loan default), the matter may be referred to an external dispute resolution service
such as the Financial Ombudsman Service (FOS). If the FOS decides that the credit
provider has not taken due care in identifying and confirming the purpose of the loan,
the loan may be set aside, which in effect means that the credit contract is invalid and
the borrower does not need to repay the loan.
The borrower, on the other hand, must take care that they receive the protection of the
NCCP Act where applicable.
3 Products overview
This section covers a brief description of the types of products in which mortgage
brokers may deal, including:
• property mortgage/home loan products
• consumer lending products
• commercial and business loans
• equipment loans and leases.
More detailed explanations of specific product types follow later in this topic.
3.1 Property mortgage/home loan products

For most Australians, home ownership is an important aspiration. Home loans are an
inevitable part of that aspiration because most people cannot buy a home without a
loan.
The table below lists the types of property mortgage products along with their
distinguishing characteristics.
Note: A number of products comprise the core of all mortgage loan products.
The products discussed below are presented in generic terms. Each credit
provider combines packages and markets products slightly differently.
Table 2 Property mortgage/home loan products

Mortgage product Characteristics
Variable rate loans The loan is subject to interest rate movements
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Fixed rate loans The interest rate has been fixed for a period
Capped rate loans The interest rate has a set ceiling rate that cannot be exceeded
Discounted variable rate loans Same as a variable rate loan except it has a discount to the standard
variable rate for a certain period
Low start loans Low initial loan repayments increasing over the term
High start loans High initial loan repayments decreasing over the term
Split or combination loans Part of the borrowing is on a variable interest rate and part of the
borrowing is on a fixed interest rate
Home equity loans Revolving line of credit
Consolidation loans Two or more loans consolidated into one to make managing loans
easier and in most cases reduces the loan repayments required
Low-doc and no-doc loans Little or no documentation to prove a steady income stream
Construction loans Used to fund the construction of a property, involving the progressive
draw down of funds
Equity release products Ability to release home equity without the obligation to make
regular payments
Equity finance mortgages (EFMs) Boost borrowing capacity or reduce repayments in return for
relinquishing a portion of any capital gain

3.2 Consumer lending products

Lending products, such as personal loans or credit cards, help people purchase
household items such as cars, white goods or holidays quicker than if they saved for
them. Credit involves interest, fees and charges, so it can be expensive.
The table below briefly describes different lending products.
Table 3 Consumer lending products

For more information on these products, refer to Part 4 of this topic.
Consumer lending product Definition
Personal loan A loan over 1 to 5 years for a particular purpose such as a car,
home renovation or holiday.
Personal overdraft An arranged revolving line of credit where a borrower can overdraw their
account, or withdraw more money than is in their account.
Credit and charge card A convenient form of short-term borrowing allowing consumers to carry less
cash and buy things easily over the internet or phone.
Consumer lease A credit arrangement usually with a retailer enabling a consumer to rent
items such as cars, computers or white goods for a designated period.
3.3 Commercial finance

While both business and commercial finance are usually secured by a residential or
commercial property, the lenders usually associate business finance as loans to small to
medium businesses. These loans are for business purposes only and the cost associated
with these loans can be tax deductible. Commercial finance is generally viewed as
financing for the purchasing of a commercial property.
3.4 Commercial equipment loans and leasing

Leasing is a form of commercial finance used to finance items that depreciate in value
quickly, such as motor vehicles, plants and equipment. Normally, leases will only be over
the medium term, up to a maximum of five years.
The lessor or credit provider retains ownership of the item but the lessee or borrower
may be able to purchase the item at the end of the lease period at the lessor’s
discretion. Generally, the lease is secured against the item itself.
Lessees may only partially fund the item and be left with a residual amount, which has
to be paid to the lessor if the lessee decides to purchase the item at the end of the lease
period. There are also operational leases that include ongoing maintenance as part of
the package, and novated leases that are provided to employees through salary
packaging schemes.
1-3.10 CIVMB_IK_T1-3_v3
3.5 Insurance products

When providing loans to both individual and business clients, there is a range of
insurance products available to protect against financial loss in unforeseen
circumstances. The circumstances of every person, family and business are different,
therefore, their specific insurance needs will vary.
While it is outside the scope of this topic to undertake an in-depth study of insurance
products, there nonetheless needs to be a broad understanding of them and what they
insure against to enable credit providers to identify when to advise clients to seek
independent advice from a qualified adviser regarding their specific insurance needs.
The following information is provided as a guide only to the main types of insurance
cover which may be required by individuals and businesses.
General insurance for individuals

The table below shows types of general insurance for individuals and the cover provided.
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Table 4 General insurance for individuals
General insurance Cover provided
Building (home) Provides protection against damage to or destruction of residential buildings, including
flats, units and townhouses. It generally includes other structures on the property,
such as garages, carports, sheds, fences and decks. Usually, this is the minimum insurance
required by a credit provider when the security comprises property.
Contents Covers loss or damage to domestic goods or property owned or being purchased by the
person insured. Building (home) and contents insurance are often combined in the one
policy.
Legal liability Legal liability refers to the insured’s responsibility to pay compensation for causing injury,
illness or death to another person, and loss or damage to property owned by another
person.
Legal liability insurance usually forms part of building and contents insurance policies.
Domestic workers Covers injury to domestic workers such as babysitters, cleaners and gardeners.
compensation Domestic workers compensation might be included in building and contents insurance or
taken out as a separate policy.
It does not cover people who are considered employees who must be covered by a
regulated workers compensation policy.
Owner-builder Protects owner-builders from losses while the building is under construction.
This cover may be optional under a standard building policy or it may need to be taken
out as a separate policy.
Landlord Provides landlords with extra protection against, for example, malicious acts and theft by
the tenants, or financial loss if the tenant fails to pay their rent.
Landlord insurance may be available as an option under building insurance or taken out
as a separate policy.
Boat and caravan Covers owners for the loss of or damage to pleasure crafts such as boats and caravans.
These policies also usually cover the owner for property and personal liability.
Motor vehicle Compulsory third party insurance (CTP) covers the insured against claims by a third party,
such as a passenger or pedestrian, for personal injury. This insurance is compulsory in all
states of Australia.
Comprehensive cover insures against damage to the insured’s car and to other people’s
property if the car is involved in an accident and the driver of the insured’s car is covered
by the policy. This insurance also covers damage to the insured vehicle caused by fire and
theft. It may include a range of optional or additional benefits.
Third party property damage (TPPD) and third party property damage, fire and theft
(TPPD F&T) can be taken out as separate insurances if the client does not wish to be
comprehensively insured.

Personal insurance for individuals

The table below shows personal insurance types and the cover provided for each type.
Table 5 Personal insurance for individuals

Personal insurance Cover provided
Life cover Provides a lump sum payment in the event of the death or terminal illness
of the insured.
Consumer credit insurance Provides protection for people with personal loans, mortgages,
credit card debt and other forms of loan contracts.
It is a way for the borrower to ensure that loan repayments are met in
case they become ill, disabled or injured and cannot work.
Income protection Provides the insured with compensation in the form of a regular income
benefit if they are sick or injured and are unable to work.
Trauma Provides a lump sum payment in the event that the insured suffers and
survives a major medical condition, such as a heart attack or stroke.
Total and permanent disability Provides a lump sum payment if the insured suffers an illness or injury
that results in them being totally and permanently disabled.
Business insurance
The table below summarises the main types of insurance that should be considered by
a business. Many business risks can often be covered in one umbrella business insurance
policy.
Table 6 Business insurance

Business insurance Cover provided
Key person insurance Provides financial protection for the business in the event of the loss of a
person who makes a significant contribution towards the profitability of
the business.
Fire and damage Covers loss or damage to buildings, business contents and stock against
(fire and perils) fire and other events such as water damage.
Business interruption Covers the business for loss of profit or gross rental as a result of damage
that interrupts or interferes with business.
Accident damage Covers the business premises, stock and contents of the business against
accidental loss or damage.
Burglary Theft of stock or contents resulting from forced entry to the

business premises.
Money Loss of money from the business premises, or when in transit between
the business premises and a bank or the member’s home.
Public liability Covers claims for compensation for personal injury or death of another
person, or damage to their property, while on the business premises.
Product liability Covers claims for compensation for personal injury to another person,
or damage to their property, as a result of defective product produced or
sold by the business.
Machinery or electronic Sudden and unforeseen breakdown of business machinery or electronic

equipment breakdown equipment that calls for immediate repair or replacement.
Professional indemnity Indemnifies professionals, such as architects, lawyers, engineers, doctors,

accountants and financial advisers for their legal liability to members and
others who rely on their advice.
1-3.12 CIVMB_IK_T1-3_v3
Part 3: Property mortgage/home loan products

Property mortgage products, or home loan products, make up a large proportion of all
lending in Australia. Home loan finance offers great flexibility and a multitude of
features to suit a wide range of client needs.
4 About home loans

This section describes some of the general characteristics of all home loans.
Uses
Home loan finance can be used for:
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• the purchase of existing residential property
• owner occupation, also known as owner-occupied property used as an investment,
for example, a property that is rented out to a third party
• a construction loan to build a new home, called a construction loan
• home renovation or improvements to the mortgaged property
• refinancing debt from another loan product and/or credit provider
• bridging finance, used to manage the transition between buying and selling
properties
• investment (e.g. self managed superannuation fund (SMSF) loans are home loans for
those who wish to invest their superannuation in property).
In addition, equity home loans allow borrowers to draw down the equity value on their
existing property to purchase other items such as cars, boats, shares and other investments.
Loan term
Loan terms vary in length, and can generally go up to 30 years. As a general rule of
thumb, the loan term is decided keeping in mind the borrower’s age, capacity to repay,
and purpose for the loan.
Repayments
Payments can be either:
• principal and interest (P&I), or
• interest only.
As a general rule, residential loans can be taken over a 30-year period, of which most
credit providers will allow a maximum period of five years interest-only repayments,
with some credit providers allowing up to 10 years interest-only repayments.
Mortgage
Home loans are secured by a mortgage, a debt instrument registered in the relevant
state’s titles office and recorded on the certificate of title for the property.

Borrowers
Borrowers (mortgagors) can be real persons or an entity such as a corporation or trust.
Interest rate
The Reserve Bank of Australia sets the cash interest rate, which is reviewed every
month.
Details of the cash rate can be found at <www.rba.gov.au/statistics/cash-rate>.
Credit providers set their own rates and can choose to increase or decrease the rates in
line with the cash rate.
Interest rate type

Home loan products offer a range of interest rate options:
• Variable rate, where the interest rate rises or falls in line with the changes in the
official cash rates.
• Fixed rate, where interest is paid at a fixed rate over the term of the loan.
• Split rate, or a combination loan, consisting of a variable interest component and a
fixed interest component.
Fees
Fees vary for the type of home loan product and the credit provider. Fees on a home
loan may include:
• Establishment fees: Also called as application fees, up-front fees, start-up fees or
set-up fees, establishment fees are a one-off payment to start the loan. When not
charged an establishment fee, borrowers may face higher ongoing fees.
• Lenders mortgage insurance (LMI): A premium payable by the borrower that
protects the credit provider against the potential loss incurred if the borrower is
unable to repay the home loan. LMI may amount to several thousand dollars.
For full-documentation loans, up to 80% of the property value can be provided
without the borrower having to pay a LMI premium. Some credit providers will
increase the loan size up to 95% of the property value with LMI.
For low-doc loans, LMI may be payable by the borrower when the loan to value ratio
(LVR) exceeds 60%.
• Ongoing fees: Also known as service or administration fees, these are fees charged
for managing or administering the loan.
• Early exit fees: May be charged on a home loan paid out in full within a specified
period, for example, the first five years of the loan. According to MoneySmart (2015):
Exit fees on new loans were banned on 1 July 2011. Exit fees can still be
charged on loans signed up before 1 July 2011 but some credit providers
have removed these fees from existing loans. Other credit providers will pay
your exit fees for you when you move your loan across to them.
• Break fees: Break fees or costs are charged for breaking a fixed rate loan contract.
They can be very high.
• Discharge fees: May be charged when a borrower pays out the mortgage in full.
1-3.14 CIVMB_IK_T1-3_v3
Home loan features

Home loan products are packaged in ways to meet the many and varied needs of
consumers. They are usually distinguished in terms of features or characteristics such as:
• interest rates
• method of calculating the interest, whether variable or fixed
• portability — the ability to keep the same loan if moving to a new home
• loan term
• fees and charges
• redraw facility — where a borrower has made additional loan repayments, they can
access these funds using a redraw facility
• top-up, or the ability to extend the credit limit on an existing loan
• offset accounts — the ability to link the mortgage loan account to a transaction
account where the funds in the transaction account then offset the loan account.
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Apply your knowledge 1: Home loan features
Research common features of home loans. Complete the table below with
your research. You might find the following website useful for your
research:
• MoneySmart, viewed 13 March 2017,
<http://www.moneysmart.gov.au/borrowing-and-credit/home-loans>.
Home loan feature Description Borrower appeal

Redraw facility
Portability
An offset account
All-in-one package
Note: You can access ‘Suggested answers’ for this activity at the end of this topic.

Comparison rate
MoneySmart (2015) defines a comparison rate as: ‘A rate that helps you work out the
true cost of a loan. It includes the interest rate, and most fees and charges relating to a
loan, reduced to a single percentage figure’.
It can be difficult for consumers to compare home loans that have different interest
rates and fees. Consequently, the National Credit Code (NCC) requires that credit
providers must give a comparison rate when they advertise a rate or a weekly payment
for home loans. The comparison rate includes the interest rate or weekly repayment
amount plus most fees and charges.
For example, a bank might advertise its home loan interest rate as 5.5% p.a. However,
when fees and charges are added, the real rate might be 6.75% p.a. They must also
advertise this figure, which is known as the comparison rate.
Calculation of the comparison rate

Calculation of the comparison rate is complex. It is determined using a standard formula
that takes the following factors into consideration:
• amount of the loan
• interest rate
• term of the loan
• frequency of repayments
• fees and charges connected with the loan.
Fees and charges do not include government charges such as stamp duty,
mortgage registration fees, and fees and charges that are not ascertainable at the time
the comparison rate is provided.
The table below shows how applying the comparison rate can change the perspective of
two loan interest rates.
Table 7 Calculation of the comparison rate

Interest rate Fees and charges (%) Comparison rate
Loan A 6.00% 0.5% 6.5%
Loan B 6.25% 0.1% 6.35%
Using the comparison rate, it becomes clear that the loan which first appeared to be the
most expensive, is, once fees and changes are taken into consideration, the cheaper of
the two.
1-3.16 CIVMB_IK_T1-3_v3
Other factors
Because the comparison rate does not include government fees and charges, and other
changes that cannot be determined at the time, it may not provide a complete summary
of the total cost of a loan.
Consumers also need to take into account those factors which may make one loan more
attractive than another, such as free banking services, flexibility of repayment
arrangements and redraw facilities. For these reasons, consumers should carefully
consider the whole loan package being offered and the price being charged. However,
the comparison rate does provide an excellent starting point in determining the most
suitable loan for individual circumstances.
When providing the comparison rate, the credit provider is obliged to tell the client the
amount of credit and the term on which it was based. The credit provider must also
include a statement that informs the consumer that the comparison rate applies to the
example or examples only, and that it will differ under different circumstances.
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Further resources: Home loans
For more information on home loans, see:
• MoneySmart website — home loans, viewed 13 March 2017,
<https://www.moneysmart.gov.au/borrowing-and-credit/home-loans>.
• Australian Broker Online — comparison of types of home loans,
<http://www.brokernews.com.au/tools/compare-home-loans>.
5 Variable rate loans

Variable rate home loans are Australia’s most popular type of home loan. The interest
rate can vary throughout the term of the loan, going up or down, in accordance with
prevailing economic conditions.
Variable rate home loans offer interest rates defined by the Australian industry cash
rate. When interest rates are low, credit providers can pass on these rates to borrowers.
Likewise when interest rates are high, credit providers increase the interest rate,
thus increasing the mortgage repayments for the customer.
Loan terms can vary, with maximum terms typically up to 30 years, depending on the
age of the borrower.
The table below shows the advantages and disadvantages of variable rate loans.
Table 8 Variable rate loans

Borrower Credit provider
Advantages If interest rates drop, repayments also drop. Credit providers can pass on all
Generally extra or additional repayments on the changes in the cost of funding to
principal can be made without adjustment. Thus, the borrower.
the loan can be paid off faster.
Disadvantages If interest rates rise, repayments also rise, These loans are more difficult to sell
requiring the borrower to make larger payments. in a rising interest rate
Borrowers may find it harder to budget when the environment.
market rate fluctuates.

Apply your knowledge 2: Variable rate home loans

Many websites now provide a convenient interest rate comparison
between home loan products.
Visit one of these sites and research the companies and products currently
offering the best variable home loan rates. Complete the table below with
at least three (3) products. Make a note of which organisation has the
biggest difference between the interest rate quoted and the comparison
interest rate.
Credit provider Product Advertised rate Comparison rate Other costs or benefits
Note: This activity requires independent research, therefore, no suggested answers are provided.
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6 Fixed rate loans

A fixed rate loan means that the borrower’s interest rate and repayments are fixed or
locked in for a set period, usually one to five years.
At the end of this fixed period the customer typically has a choice to switch to a variable
rate or fix the loan for another few years. Some fixed loans automatically revert to a
variable loan at the end of the term. A lot of Australian borrowers choose a fixed rate so
they can take advantage of low interest rates by locking it in for a set period,
usually from 1 to 10 years. This offers them financial certainty and the ability to budget
their set repayments each month, as they will not be affected by fluctuating interest
rates.
The table below shows the advantages and disadvantages of fixed rate loans.
Table 9 Fixed rate loans

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Advantages Fixed rate mortgages afford the borrower some Fixed rate mortgages have premium
certainty about how much their regular interest rates. Credit providers are
repayments will be. When rates rise, borrowers selling risk management as a service
are guaranteed that their interest rate, and to borrowers.
consequently their repayments, will not go up, at
least for the duration of the fixed term.
Disadvantages On a fixed loan, the interest rate does not drop if The credit provider could end up
variable rates drop. with a loan that provides
It may not be possible to pay extra repayments on comparatively low profit if interest
the principal without incurring a financial penalty. rates were to increase substantially
during the period the loan is fixed.
There may be financial penalties for changing
from a fixed rate to a variable loan, or changing
credit providers, before the fixed term is over.

Apply your knowledge 3: Fixed rate home loans

As with ‘Apply your knowledge 2’, visit one of the comparison websites and
research the companies and products currently offering the best fixed
home loan rates. Complete the table below with at least three (3) products.
Make a note of which organisation has the biggest difference between the
interest rate quoted and the comparison interest rate.
Credit provider Product Advertised rate Comparison rate Other costs or benefits
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7 Capped rate loans

A capped rate loan has a set interest rate ceiling. The rate cannot exceed this ceiling
during the period of the capped rate, however, the interest rate can move below
the ceiling.
Rates are normally capped for one year or less and then revert to the normal variable
rate. These loans are designed to attract new loan business.
The table below shows the advantages and disadvantages of capped rate loans.
Table 10 Capped rate loans

Advantages If interest rates increase, the mortgage interest Capped loans provide an incentive
rate will not rise beyond the credit provider’s to borrowers, while minimising the
ceiling or cap. This provides the borrower with a credit provider’s exposure.
degree of security.
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If rates decrease, the interest rate will probably
fall in line with market rates.
Disadvantages Capped loans are generally only offered as a If interest rates rise significantly
honeymoon rate to new clients. above the imposed ceiling, a credit
There is no guarantee that the variable rate the provider may face a loss on the
loan reverts to will be lower than other credit transaction.
providers’ rates.
There are exit penalties for early repayment.
Apply your knowledge 4: Capped rate home loans

Using a comparison website, research a few capped rate home loans.
1. Which credit providers currently offer capped rate home loans? Of those
credit providers you have researched, determine which credit provider
offers the best capped rate product and why.
2. In what economic conditions are capped loans a popular choice for

borrowers?

8 Discounted variable rate loans

This product is almost the same as a variable rate loan except that it offers a discount
to the standard variable rate for a certain period of time, usually one year. This rate is
sometimes referred to as a honeymoon rate.
If the standard variable rate decreases, the discounted rate decreases by the same
margin. For example, if the standard rate is 10% and a discount of 2% is given,
the borrower’s rate is 8%. If the standard rate drops to 7%, the borrower’s rate also
drops proportionately to 5%. A discount may also apply for the full term of the loan,
although the loan will generally lack features such as repayment redraw and
interest offset.
The table below shows the advantages and disadvantages of discounted variable rate
loans.
Table 11 Discounted variable rate loans

Advantages A reduced interest rate often equates to Discounted variable loans give an incentive
lower repayments, with the borrower also to borrowers, while minimising the credit
having the ability to make additional provider’s risk.
repayments without penalty. The ‘cost’ of the discounted portion of the
loan can be easily calculated.
Disadvantages Penalties for discharging the loan early Because the NCC places limitations on exit
(generally within the first five years) can be fees, credit providers must be careful not
very high. to breach the NCC.
9 Low start loans

Low start loans allow for low initial repayments, which increase over the term of the
loan.
The table below shows the advantages and disadvantages of low start loans.
Table 12 Low start loans

Advantages Attractive to borrowers with low incomes, Allows credit providers to target a specific
or large financial commitments, borrower market.
who expect their income to increase
during the term of the loan.
Disadvantages Very little principal is paid off in the early Because these loans are offered to lower
years, so total interest payments are income earners, there may be a greater risk
greater than a standard loan over the life of borrowers’ default.
of the loan. Higher level of delinquencies/losses
Repayments increase by a certain (e.g. home fund).
percentage each year, while incomes do
not generally increase at the same rate.
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10 High start loans

High start loans, as the name implies, are the reverse of low start loans;
repayments decrease over time. The table below shows the advantages and
disadvantages of high start loans.
Table 13 High start loans

Advantages Attractive to borrowers who have access to Allows credit providers to target a
higher income in the early stages of the loan, specific borrower market.
thereby reducing the loan principal earlier.
Disadvantages If the borrowers lose some of their income in New loans are needed to replace these
the early stages of the loan, they may have rapidly repaid loans so as to maintain
trouble meeting the higher initial payments. the credit provider’s loan portfolio.
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11 Split or combination loans
Split (or combination) loans allow borrowers to take up part of their loan at a variable
rate and part at a fixed rate.
Credit providers offer home loans which give you the option of combining a fixed rate
home loan with a variable rate home loan. By choosing to combine fixed and variable
loans a borrower can take advantage of the flexibility offered by a variable rate loan and
the certainty of repayments offered by a fixed rate loan. The table below shows the
advantages and disadvantages of split or combination loans.
Table 14 Split combination loans

Advantages Offers borrowers the chance to minimise risk The same advantages as for fixed rate
in times of rising interest rates by having a and variable rate loans.
portion of their loan with a fixed interest rate.
This gives a blend of repayment flexibility and
interest rate security.
Disadvantages The variable interest rate portion of the loan The same disadvantages as for fixed
is still vulnerable to increases if rates go up. rate and variable rate loans.
If interest rates drop below the fixed rate,
borrowers are still compelled to make
repayments at the higher rate for that portion
of the loan.

Apply your knowledge 5: Split or combination home loans

Research split or combination home loans.
1. Identify some credit providers that offer split or combination home
loans.
2. What types of borrowers might prefer split or combination home loans?
12 Home equity loans (line of credit)

A home equity loan is a line of credit secured by a registered mortgage over a residential
property. Most home equity loans operate like an overdraft facility. Funds drawn from
the facility can be used for lifestyle and investment purposes.
The table below shows the advantages and disadvantages of home equity loans.
Table 15 Home equity loans (line of credit)

Advantages When the loan is established, borrowers can use Allows credit providers to provide
the money, as needed, for whatever purpose loans for purposes other than real
they choose. estate investment, secured with a
Interest rates are lower than other forms of mortgage.
credit, such as credit cards.
Disadvantages Easy access to money for any purpose. However, Reduction in the value of the asset
a maximum limit is established on the loan may lead to amount advanced not
account, usually within an acceptable lending being fully recovered.
ratio, and therefore borrowers are rarely able to
extend beyond their payment capacity.
Debt is not reduced over time, leaving borrowers
with an ongoing commitment.
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13 Consolidation loans
These loans allow borrowers to combine or consolidate several loans into one single
rate loan secured by mortgage, for example, the borrower may already have a home
loan, but may also be paying higher interest rates on a car and personal loan, and a
credit card debt. By consolidating all these loans into the home loan, the overall interest
rate is reduced.
The table below shows the advantages and disadvantages of consolidation loans.
Table 16 Consolidation loans

Advantages Consolidation of several of the Allows credit providers to provide loans for
borrower’s debts means a lower purposes other than real estate investment,
overall interest rate and cheaper which are secured with a mortgage.
monthly payments.
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Disadvantages Loans that would have normally been Consolidation loans can present more risk to the
paid off over a short period, credit provider. Although some people consolidate
for example, five years with a loans for convenience and ease of payment,
personal loan, are not finalised until others rely on the smaller regular repayments to
the mortgage is repaid. carry them through periods of financial difficulty.
If circumstances deteriorate, the credit provider
may have to deal with a default situation.
14 Low-doc and no-doc loans

Low-doc and no-doc loans were initially designed for those in business who could not
supply two years of trading and financial results. To be eligible for one, an applicant had
to supply an Australian Business Number (ABN). Low-doc loan applicants had to provide
a statement that their earnings were a certain amount, while no-doc loan applicants
simply required a statutory declaration that they could ‘afford’ the loan.
These loans were available to both individuals and private companies.
Under the NCCP Act, no-doc loans to consumers are no longer possible due to the
requirement that credit providers make reasonable enquiries about the applicant’s
financial position and objectives. There is also a requirement that the credit provider
make reasonable enquiries to verify the information provided.
Because the extent to which credit providers need to identify and verify an applicant’s
financial position and objectives is scalable, low-doc lending is still possible where, for
example, the stated income is supported by the applicant’s accountant or a loan with a
low LVR is being made to an experienced consumer.
Every lending organisation will have its own policies and procedures with regard to
low-doc and no-doc loans. It is expected that the policies and procedures will
incorporate a process to counsel and advise clients of the risks associated with these
types of products if incorrect or inaccurate information is provided.
By nature, low-doc and no-doc loans present the credit provider with a higher degree of
risk. This additional risk is offset by higher interest rates and possibly costs associated
with the loan.

Apply your knowledge 6: Low-doc loans

Using an online comparison website, research some low-doc loans.
1. Which type of borrowers are low-doc loans aimed at?
2. Name some credit providers that provide low-doc loans.
3. What information needs to be supplied for a low-doc loan?
15 Construction loans
Construction loans are designed for borrowers who are building a home.
With this type of loan, a borrower withdraws funds in stages to pay tradespeople and
suppliers. Interest is paid only on the funds used.
Most lenders offer their construction loans at a variable interest rate. Once the
construction is finished, the loan will revert to P&I repayments.
Approval for a construction loan often requires plans, permits and a fixed price
building contract.
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16 Equity release products

Equity release products allow people to access the equity they have in their homes while
continuing to live in the home. Two types of equity release products are:
• reverse mortgages
• home reversion schemes.
16.1 Reverse mortgages

MoneySmart (2015) defines a reverse mortgage as:
A type of home loan used in retirement as a way for people to access the
equity in their home. The loan amount depends on your age, the value of
the home and how it is taken (lump sum, regular payments or draw down as
needed). Interest is added to the loan and does not have to be repaid until
the house is sold, usually as part of a deceased estate.
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Reverse mortgages (also known as ‘equity tap’ or ‘seniors’ loans’) allow people to access
the wealth stored in the home (equity) without selling the home and without needing to
make regular loan repayments.
Reverse mortgages, as the name implies, work in the opposite way to a home loan.
A loan is made using the borrower’s home as security. The P&I are not repaid until
the home is sold, which in many cases occurs when the borrower permanently vacates
the home, for example, when the person dies or sells the home to move to a
retirement village.
This type of loan is increasing in popularity with certain groups, particularly retirees,
who no longer have a permanent or sufficient income stream to maintain their lifestyle.
It is difficult to estimate the total cost of a reverse mortgage because this depends on a
number of uncertain variables, including:
• future interest rate movements
• the duration of the reverse mortgage, which is unknown at the time of establishment
• future movements in real estate prices.
Risks of reverse mortgages

There are a number of risks associated with reverse mortgages, of which both the credit
provider and the borrower must be aware. These include the following:
• The borrower may use all the available credit for living expenses or lifestyle
purchases. This may result in a drop in income with no further credit available or in
the borrower needing to sell the home to cover living expenses or to pay for
emergencies, such as a sudden illness.
• The borrower may reach the end of their credit limit and may not be able to afford to
maintain the property. This situation may too result in the need to sell the property.
• The combination of spending money derived from the equity in the home and
compounding interest could mean that all the equity in the home is exhausted.
After selling the home, there may not be sufficient funds left for the borrower to
fund satisfactory alternate accommodation, for example, an aged care facility.

Apply your knowledge 7: Reverse mortgages

Read the information about reverse mortgages in the following information
from the MoneySmart website and answer the questions below:
MoneySmart 2015, ‘Consumer credit regulation’, MoneySmart, August,
viewed 13 March 2017, <https://www.moneysmart.gov.au/borrowing-and-
credit/consumer-credit-regulation>.
1. What are the changes for credit providers implemented in
September 2012 in relation to reverse mortgages?
2. What are the changes for credit providers implemented in March 2013
in relation to reverse mortgages?
The table below shows the advantages and disadvantages of reverse mortgages.
Table 17 Reverse mortgages

Advantages Allows borrowers to free the equity in their Allows credit providers to provide loans
homes to maintain or improve their lifestyle. for purposes other than real estate
Allows financial independence without the investment, which is secured with a
need to sell the home. mortgage.
No need to ‘downgrade’ the home or relocate Allows targeting of a specific market.
to obtain additional funds.
Disadvantages Reduces the value of the owner’s estate. Expenses may be incurred in selling the
There may be little or no equity left after property on the death of the borrower to
death. repay the loan.
Limits future options, such as the need to Debt may increase at a different rate
move to a residential care situation. from the increase in value of the
underlying security property.
May cause family disputes.
May affect Centrelink benefits.
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16.2 Home reversion schemes

Home reversion schemes are similar to reverse mortgages in that they enable retirees
to remain in their home and access the equity without incurring an obligation to make
regular repayments. However, there are significant differences in the way these two
equity release products operate and consumers will face different risks depending on
the option they choose.
Unlike a reverse mortgage, which is based on a charge (i.e. mortgage security), a home
reversion scheme is based on a conveyance (i.e. part-sale of the home). The client
receives a discounted payment in exchange for a fixed proportion of the future value of
their home. This discount compensates the provider for the absence of any repayment
cash flows over the term of the facility and the right granted to the client to continue to
occupy the secured property.
For example, assume a home is valued at $200,000 and the owner wishes to equity
release 50% of the value of their home. Although this equates to $100,000, they will
only receive a discounted sum. This sum will be affected by the location of the property
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and the client’s age. The discounted sum may be 40–65% of the value or, in this
example, $40,000–65,000.
When the home is sold, the provider of the home reversion scheme will be entitled
to the equity release portion of the sale proceeds (i.e. 50% or $100,000 in the above
example).
At the time of writing, home reversion schemes are only available in certain postcodes
of Sydney or Melbourne, and there is a limited number of providers of home reversion
schemes in Australia.
As with a reverse mortgage, it is difficult to estimate the total cost of a home reversion
scheme as it depends on a number of uncertain variables. These include:
• the duration of the home reversion scheme
• future movements in real estate prices.
Because the home reversion scheme is a real estate transaction rather than a loan,
home reversion clients do not face interest rate risk. The cost of a home reversion
scheme will depend on how property values change.
The table below shows the advantages and disadvantages of a home reversion scheme.
Table 18 Home reversion schemes

Advantages Allows borrowers to release the equity in Allows a provider to extend their
their homes to maintain or improve their client base to include retirees.
lifestyle. Enables investors that fund these products
Allows financial independence without the to access high-quality security rights.
need to sell the home.
No need to ‘downgrade’ the home or
relocate to obtain additional funds.
Disadvantages May reduce the value of the There is no regular cash flow received
owner’s estate. through ongoing repayments.
Limits future options to deal with the The cost of providing the facility may
property offered as security. increase if property values move at a
May cause family disputes. different rate to interest rate movements.
May affect Centrelink benefits.

16.3 Advice regarding equity release

Particular care needs to be taken when dealing with and advising on equity release
products in order to protect the client and the bank. As with other products, banks will
have specific policies, procedures and guidelines in place to ensure such protection,
and to ensure compliance with relevant regulation and codes.
Some of the protections may include:
• being fully informed about the client and their financial situation when assessing the
suitability of an equity release strategy
• ensuring that the client is fully informed about how the equity release option they
have selected works and its potential pitfalls
• encouraging the client to discuss the proposed loan with family members, as they too
should be aware of the potential financial risks associated with the type of product
and how it might affect any anticipated inheritance
• encouraging the client to seek independent legal and financial advice, and discussing
the implications with Centrelink
• ensuring that the client is fully aware of conditions that are normally attached to
these facilities, for example, the need to maintain adequate insurance on the
property, to maintain the property in good condition, and the possibility of having to
obtain the provider’s approval for other people to live in the home.
ASIC has prepared a number of publications and tools to assist consumers with equity
release products. These can be accessed through the ASIC consumer website at
<www.moneysmart.gov.au> by typing ‘equity release’ in the search field.
17 Equity finance mortgages

An EFM works in conjunction with a traditional home loan. It can boost a credit
provider’s potential borrowing capacity up to 25% or reduce the size of their
repayments up to the same amount. The shared equity portion, which can be up to 20%
of the purchase value of a home, is funded by the ‘equity finance’ part of the mortgage.
A borrower pays zero interest on this part of their loan total, however, in return for
trading off that interest, the equity finance credit provider is entitled up to 40% of any
future capital gains or will absorb up to 20% of any capital losses on the property as a
substitute for a traditional interest rate.
Key aspects of an EFM include:
• A borrower is allowed to borrow up to 20% of a property’s value.
• There is no annual percentage rate applicable to the equity finance portion of a loan
unless the borrower is in default.
• Borrowers are not required to make any regular monthly interest repayments
throughout the EFM loan, which they can hold for 25 years.
• When a borrower sells the property or repays the EFM for some other reason,
they repay the EFM amount they originally borrowed plus up to a 40% share of any
increase in the value of the property.
An EFM can also reduce current monthly mortgage repayments for borrowers
refinancing their existing loan, or allow borrowers to buy a more expensive property
than they might otherwise be able to afford.
However, consumer groups have warned borrowers to ensure that they are aware of
the number of fees, charges, terms, conditions and lending criteria applicable to an EFM
before considering whether it is appropriate to their circumstances.
1-3.30 CIVMB_IK_T1-3_v3
Part 4: Consumer lending products

This section deals with the range of lending products available to meet client needs.
There are a large number of different loan products on the market, each with its own
characteristics and features. Loan providers can apply flexibility in the way they package
and market their products to further expand the range of product options.
Uses
Personal lending or consumer finance, usually in the form of personal loans, is
predominantly used by individuals to purchase goods and services for personal use.
Types
Personal lending products include:
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• personal loans
• personal overdrafts
• credit cards
• consumer leases.
Types of personal lending products, their purpose, features and benefits are
described below.
18 Personal loans
A personal loan is a predetermined loan of a fixed amount borrowed from a bank or
other credit provider by an individual, generally for a specific purpose.
Depending on the provider, there may be flexibility to choose between a variable rate
loan or a fixed rate loan, and fixed repayments or variable repayments.
There are usually minimum and maximum amounts that can be borrowed using a
personal loan facility.
Use
There are many purposes for which personal loans are approved. Some common
uses are:
• consolidation of other debts
• the purchase of cars
• travel
• paying for medical and dental expenses.

Security
Personal loans may be unsecured or secured.
Often, secured personal loans are sought for the purchase of motor vehicles, with the
motor vehicle being used to secure the loan. Interest rates for secured loans are usually
lower than for unsecured loans. Secured personal loans usually attract a lower rate of
interest than unsecured loans.
Unsecured personal loans are often used for debt consolidation, holidays and to fund
personal needs such as furniture and white goods. These loans are unsecured
because there may be little or no tangible property over which the credit provider can
take charge.
Term
Unsecured and secured personal loans can have a term of up to seven years.
Advantages
A personal loan can have many advantages for the borrower, for example, if used for
consolidating a debt, several outstanding credit card debts, which usually attract a
high rate of interest, can be combined into one personal loan, typically at a
considerably lower rate of interest. Although the interest rate on a personal loan is
typically lower than credit card debt, it is still higher than other forms of loan such as
home equity lending.
Interest
When fees and charges are factored into the interest rate equation, the rate can
be quite high, for example, the effect of establishment fees and loan servicing fees,
if applicable, can increase the interest rate from 15% p.a. to 18% p.a. This is why
the client is advised to review the comparison rate that takes account of such fees
and changes.
Fees and charges

As well as the establishment fee and loan serving fee, other fees may be applicable.
These include:
• guarantee fee, when adding a guarantor to the loan
• settlement cheque fee
• late payment fee.
Note: Most providers offer at least the first cheque free, but may charge for
subsequent cheques. Multiple cheques may be required and drawn to
consolidate a number of existing debts into one loan.
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Apply your knowledge 8: Personal loans

Review the following information on personal loans from the MoneySmart
website and then answer the question below:
MoneySmart 2015, ‘Personal loans’, MoneySmart, April,
credit/other-types-of-credit/personal-loans>.
What are the responsibilities of a credit provider when assessing a
customer for a personal loan?
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19 Personal overdrafts
When the amount of money withdrawn from an account is greater than the amount
available in the account, the excess is known as an overdraft and the account is said to
be overdrawn.
Use
Although used more commonly in the business sector, the usual purpose of an overdraft
facility is to fund temporary cash flow requirements, although the facility can be put in
place permanently and funds can be drawn if required.
The use of overdrafts has become less common with the advent and proliferation of
credit cards, which serve a similar purpose.
In a sense, an overdraft can be considered to be a ‘line of credit’, although this term is
commonly applied to home equity loans.
Features
Some features of overdrafts are:
• A limit is set on the total amount that can be overdrawn at any time.
• There are usually no minimum repayments required. However, note that interest
continues to accrue and compound until the overdraft is repaid. Therefore, cautious
and judicious use of the facility is essential.
• Overdraft facilities are normally linked to one or more of the client’s working
accounts.

Advantages
The advantage of a permanent overdraft facility is that funds are available to fill any
cash shortfall when required without the need to apply for a loan at the time because
approval has been arranged in advance.
Interest rates
Interest rates for these facilities are relatively high but vary from provider to provider.
The rate can also vary depending on whether it is a permanent overdraft or
temporary facility. Temporary overdrafts usually incur a higher rate of interest.
Interest is only charged on the amount drawn at any particular time and ceases once the
amount is repaid.
Fees
In addition to the interest paid on the amount borrowed, fees apply. Although fees vary,
they may include the following components:
• establishment fee
• loan servicing fee
• other banking fees (e.g. ATM charges).
The loan servicing fee, if applicable, may be based on a sliding scale and may range from
$0 upward, depending on the amount of the debt at a certain point in time.
Apply your knowledge 9: Overdrafts

Review the following information on overdrafts from the MoneySmart
website and then answer the questions below:
MoneySmart 2015, ‘Overdrafts’, MoneySmart, June, viewed 13 March 2017,
<https://www.moneysmart.gov.au/borrowing-and-credit/other-types-of-
credit/overdrafts>.
1. What is an unarranged overdraft?
2. What is an arranged overdraft?
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20 Credit and charge cards

Credit and charge cards are also common forms of consumer borrowing.
Credit cards, such as Visa and MasterCard, allow the user to use the card provider’s
money to fund purchases up to a set limit. The user may borrow money up to a certain
limit as long as regular minimum repayments are made.
If the funds are not repaid in full at the prescribed time, interest will be charged on the
outstanding balance. Credit cards are not required to be paid in full but the provider will
set a minimum amount based on the outstanding balance and interest charges to be
repaid each month.
Charge cards such as American Express and Diners Club may not set limits, but require
the user to repay in full the funds used at a prescribed time. A range of home loan credit
providers provides credit cards as part of a loan package.
Credit card issuers are usually banks, even though the card may bear another company
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name or logo. The name of the issuer appears somewhere on the card.
Trade names such as Visa and MasterCard are not actually card issuers. They are termed
‘membership associations’. Banks use them for their payment processing services,
policy setting and marketing assistance. Many different credit providers package
their own cards and different terms of credit using the logo and services of an
association membership.
Use
A credit card is a revolving line of credit to enable daily purchases and represents an
approval by a bank or company to use their money. This gives the borrower the ability
to buy goods or services now and pay for them later.
Advantages
Most Australians have at least one credit card. Credit cards are easy to get and easy to
use. Carrying a credit card is more secure than carrying cash, provides more flexibility
and enables the user to buy things over the phone or online.
Interest
Credit cards tend to have higher interest rates than other forms of credit. The interest
rate varies depending on the type of card and features offered.
The credit card user is charged interest on all outstanding transactions if the balance is
not fully paid each month.
Some credit cards have an interest-free period. If the credit card does not have an
interest-free period, the user pays interest either from the day a purchase is made or
from the day the monthly statement is issued.
Fees
Most credit cards have an annual fee.

Types of credit cards

Common credit cards are:
• Visa
• MasterCard
• American Express.
The range of credit cards available and the facilities they offer are extensive.
Also extensive is the range of fees and charges that can be incurred, especially through
ill-considered use by the consumer.
Below is a summary of some of the combinations and options available for credit cards.
• No fee cards: There is no annual fee for no fee cards and they usually provide a
number of interest-free days, that is, no interest is payable on the debt until the due
date, which will fall on a particular date each month. However, these cards normally
attract a very high rate of interest on amounts not paid by the due date.
The provider may also make it a condition of retaining the no annual fee status that a
minimum amount is purchased each year.
Most credit card providers charge the merchant, from which goods or services are
purchased, a percentage of the price paid by the consumer. This rate usually varies
with the volume and value of transactions for each merchant: the greater the volume
and value, the lower the percentage charged.
• Low-rate cards: Incur an annual fee but the interest charged on the outstanding
amount is usually lower than no fee cards. These cards also normally offer a number
of interest-free days.
• Reward cards: Are linked to one of the many rewards schemes available,
where points are allotted to the consumer for purchases made on the cards. For each
dollar spent on the card, the client is awarded a certain number of ‘points’.
Usually, one dollar spent equals one reward point, however this can vary. Once a
specified number of reward points have been accumulated, the client can exchange
the points for the ‘reward’, which may be an airline flight, shopping voucher or
merchandise. Fees are charged and vary depending on the type of scheme, but they
can be relatively high in some cases.
• Store cards: Some large department stores or groups issue their own credit cards
that operate in a similar way to other credit cards. They may also offer rewards and
options, such as fee-free or no annual fee cards, depending on whether or not the
consumer wishes to participate in the rewards or other schemes.
Most of the other facilities applicable to other credit cards are also applicable to
store cards. Most store cards are only designated as such because they bear the
name of the store or group. The credit provider is usually a financial organisation,
not the store or group. Therefore, the credit contract associated with the card is with
the credit provider, not the store.
Consumers need to be made aware of with who they actually have a contract, as well
as the conditions of that contract, especially in relation to the interest rates that are
charged for outstanding balances and other fees.
1-3.36 CIVMB_IK_T1-3_v3
Apply your knowledge 10: Credit card reforms from July 2012
Scott Pape explains rules for new credit cards from 1 July 2012. View the
videos by clicking the links below and then answer the question below:
• Australian Banking Reforms 2012, ‘Changes to new credit cards’,
Scott Pape, June, viewed 13 March 2017,
<https://www.youtube.com/watch?v=DZ9lbQ4wHZw>.
• Australian Banking Reforms 2012, ‘Changes to all credit cards’,
Scott Pape, June, viewed 13 March 2017,
<https://www.youtube.com/watch?v=2EltHNbYCK0>.
• See also the information on the MoneySmart website regarding
credit cards:
MoneySmart 2015, ‘Credit cards’, MoneySmart, October,
<https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards>.
What are the reforms that apply to credit cards that are covered in the
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videos? To which credit cards do these reforms apply and from when?

21 Consumer leases
A consumer lease is a form of finance obtained through a credit provider for the
acquisition of items such as cars and more expensive consumer goods such as
televisions, computers and white goods.
Consumer hire purchase and consumer rental agreements are an extension of the
personal loan concept. These loans are often arranged by the store from which the
goods are purchased. They usually attract high interest rates.
Consumer leases are different from business or commercial leases that are often taken
out for the acquisition of equipment, including cars, required to conduct a business or
commercial enterprise. These types of commercial leases are often attractive to
business because of their potential for tax deductibility of lease payments and because
they mean the business can retain capital for other purposes.
Features
Under a consumer lease arrangement, the consumer does not immediately own the
product but leases it for an agreed regular payment and for an agreed time. At the end
of that time, the consumer usually has several options. For example, they may have the
option to:
• pay an additional amount, usually agreed in advance, to buy the product and
therefore acquire ownership
• return the item to the provider
• upgrade the product and the lease to a newer model of the product.
Advantages
Consumer leases are attractive to some consumers because they allow them to have
and use the product they desire or need without having to pay the full price up-front.
At the end of the lease period, they have options about what they can do.
Disadvantages
There are a number of areas of caution that consumers need to be aware of, including:
• The consumer does not own the product when they start making lease payments.
Many consumers believe they own the product once they take possession. This is not
the case. The ownership remains with the credit provider until they make the
decision to pay whichever amount is required at the end of the lease period.
• Leasing is an expensive option. The total amount paid is high compared to buying the
item outright at the start and often higher than other forms of credit.
• Defaulting on a payment can have severe consequences. Because the consumer does
not own the product, it may be repossessed if even one payment is missed.
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The NCC and consumer leases

The NCC applies to consumer leases except in the following circumstances:
• leases for a period of four months or less, or for an indefinite period
• leases where goods are hired by an employee in connection with the employee’s
remuneration or other employment benefits.
Under the NCC, a consumer lease must be in writing and contain at least the following
information, if ascertainable:
• a description or identification of the goods
• the amount or value of any amount to be paid by the lessee before the delivery of
the goods
• the amount of any stamp duty or other government charge payable by the lessee
• the amount of any other charges payable not included in the rental and a description
of these charges
• the amount of each rental payment to be made by the lessee, the date of the first
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rental payment and the dates on which subsequent rental payments are due, or the
interval between rental payments
• the number of rental payments to be made by the lessee and the total amount of
rental payable
• a statement of the conditions on which the lessee may terminate the lease
• a statement of the liabilities (if any) of the lessee on termination of the lease.

Apply your knowledge 11: Consumer leases

Review the following information on consumer leases from the
MoneySmart website and then answer the questions below:
MoneySmart 2016, ‘Consumer leases’, MoneySmart, February,
credit/other-types-of-credit/consumer-leases>.
1. What are the consumer responsibilities for a lease agreement?
2. Is there a cooling-off period for a consumer lease agreement?
3. What are the responsibilities for the lease provider?
1-3.40 CIVMB_IK_T1-3_v3
Part 5: Commercial and business loans

Types of commercial and business loans covered in this section include:
• commercial and industrial finance
• development and construction finance
• bank guarantee
• commercial bill facility
• debtor finance
• forward start loan agreement
• market rate commercial loans
• business overdraft facilities
• term loans
• trade finance.
A number of elements combine to comprise a loan. Some of these elements are the
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interest rate, how interest is charged, the loan term and the flexibility of repayments.
How these elements are combined by organisations is called ‘packaging’ and it
determines product offerings. In many cases, it is difficult for borrowers to easily identify
which product is best suited to their needs. The role of the lender or broker is to help
borrowers understand the features and benefits of the various packages.
22 Commercial and industrial finance
Purpose
There is a wide range of lending products available for a similarly wide range of
commercial purposes. Some of the purposes for commercial lending include:
• purchase of non-residential commercial or industrial property, such as business
premises, shops or factories for owner occupation or investment
• import or export of capital equipment and/or stock for a business
• purchase or expansion of an established business
• fund a new business venture
• purchase of plant and equipment
• provision of working capital
• construction and developments
• rural enterprises.
In fact, commercial loans are available for any genuine business-related need.
Term
Generally, the loan term of a commercial loan is shorter than loans for residential
property.

Loan to value ratio

For a commercial property loan, credit providers will normally provide up to 70% of the
value of the commercial property.
Security
Loans of this type are secured by mortgage.
Some credit providers may provide commercial loans to SMEs that are secured by
residential property or some other asset of value. The credit provider will apply
commercial interest rates and terms and conditions to the loan as the loan will be for
business purposes.
Interest rates
Commercial interest rates are generally higher than residential interest rates.
Borrowers
Borrowers can be either real persons or other legal entities, such as companies.
Types of commercial lending products

The range of commercial lending products includes:
• Overdraft facilities are principally used for working capital needs of a
short-term nature.
• Term loans usually cover borrowings for business or commercial property purchases
or major plant and equipment upgrades. There are also market rate commercial
loans that are offered at competitive rates for more complex business members for
specific projects.
• Forward start loan agreements are for business members wishing to borrow funds at
a set date in the future.
• Bank guarantees pay a nominated beneficiary a defined amount on demand.
• Commercial bills are suitable for sophisticated business borrowers seeking a more
flexible lending product.
• Debtor finance assists cash flow to fund growth for businesses with a substantial
annual turnover.
• Leasing finance is used by business members to finance plant and equipment or for
the purchase of motor vehicles used in the business.
• Trade finance is for business members undertaking international trade
(exporters and importers).
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23 Development and construction finance
Purpose
This type of finance is provided to property developers who acquire and develop sites to
onsell to end users or to hold themselves.
Interest rates
Interest rates are generally higher than residential mortgage rates, and rates usually
vary from borrower to borrower according to their perceived risk. Development and
construction finance is based on risk for rate.
Term
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This type of finance can be either:
• short-term finance to pay for the costs of production, that is, land acquisition costs,
building and construction costs, professional fees and promotional costs, or
• long-term finance to enable the developer to retain the development as
an investment.
Security
As is the case with other types of secured loans, loans provided for property
development are secured by a mortgage.
Loan to value ratio

The size of the loan as a percentage of the property value, including the end value once
it is completed (known as gross realisation), will vary according to the level of risk
perceived by the credit provider and potential profit to be realised.
Property developers may also want to increase their borrowings and will seek secondary
or even tertiary loans through mezzanine and equity funding, so that their financial
exposure is minimised.
Borrowers
Borrowers may also be real persons or other legal entities.

24 Bank guarantee
A bank guarantee is a guarantee issued by a bank to pay a nominated beneficiary, in a
fixed amount and on demand. This product is normally only available to established
members of high financial standing and integrity.
Bank guarantees are typically used instead of cash by businesses as a security deposit to
the property owner of rented premises, and similarly by government entities for
statutory requirements. This facility may also be used by businesses for their suppliers.
Features
Typical features of bank guarantees are that they are:
• unconditional
• irrevocable
• in Australian dollars
• drawn in an Australian financial institution
• secured in the same way as other business products.
Example: Bank guarantee requirement

A commercial customer wishes to move to larger, more modern premises.
The business seeks a long-term lease of five years with a further five-year
option. The owner of the new premises has not previously had dealings
with this member and seeks a security deposit of one year’s rent totalling
$250,000.
In lieu of the business providing a cash deposit, the business can request
the bank to issue a bank guarantee for $250,000 in favour of the owner.
The facility will need to be secured along normal commercial requirements.
The owner will accept the bank guarantee in lieu of cash because the
document is payable on demand with the risk being borne by the bank
instead of the lessee.
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25 Commercial bill facility

This product suits borrowers looking for a more flexible borrowing instrument than
normal market rate commercial loans.
Commercial bills are discounted securities. A bank adds their acceptance to the bill
before seeking to sell the bill(s) to investors. By adding its acceptance, a bank takes on
the liability to the investor for payment at maturity.
Being a discount security, the drawer or borrower receives a discounted amount from
the face value on the drawdown date and pays back the face value on the maturity date,
the difference being the interest charged.
The size of the facility determines the interest rate on a bill. The borrower is also
charged an acceptance fee that varies with the member’s level of credit risk.
Typically, a commercial bill facility funds business needs that are of a capital nature, or a
substantial sum is required.
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Features
Typical features of a commercial bill facility include:
• drawn by borrowers, accepted by banks, meaning the bank takes on the risk to repay
the buyer at maturity
• an acceptance fee applies
• terms are usually 90 days
• a fixed rate may be available if structured as a loan for longer periods with
intervening rollover dates.
Example: Commercial bill facility requirement

Top Fashion Designs is a large retail clothing chain of stores. It has
400 outlets across Australia. Strong sales are achieved during the summer
and winter seasons when the business’s cash flow is high. During spring and
autumn, sales are not so strong and the business needs to borrow during
these periods, usually requiring a minimum of $2 million. Therefore, the
business needs a flexible facility to draw down in spring and autumn and
the ability to repay the facility during summer and winter.
A commercial bill facility would be the most appropriate product because
the facility can be drawn down during the time of need, for example,
a 90-day bill during spring. At the maturity of the bill at the end of 90 days,
the facility need not be rolled over until the business next requires funding.
The product would be competitive as it is aligned to a market rate.
A market rate commercial loan does not have this same flexibility.

26 Debtor finance
Debtor finance is a cash flow product that provides cash for business growth or to
support cash flow.
Features
Typical features of debtor finance include:
• the facility may be secured against business assets, such as outstanding debtors,
that do not include real property
• funds can be provided at very short notice if paperwork is in good order
• each business is assessed on factors such as how profitable it is, the quality of
debtors, and future prospects.
This kind of financing suits businesses that are growing quickly but have insufficient
assets available to offer as security.
Example: Debtor finance facility requirement

Beverly Hills Educational Book Productions Pty Ltd produces educational
material for secondary educational needs (i.e. for high schools).
The company’s annual turnover is $2.5 million. Its main customer is the
state government that purchases the books for all public secondary schools
across the state. As a government body, they are slow with payment of
invoices and funds are generally not received by Beverly Hills Educational
Book Productions until an average 70 days after the invoice date. At any
given time, the government has outstanding debts to the company of
$380,000.
The company rents its operating premises and production equipment is
fully financed under a lease arrangement. The owners of the company,
Max and Judy Johnston, also rent their home property as all equity has
been invested in the company.
In this example, neither the company nor its owners have acceptable assets
that could be provided to the bank as security support for the company’s
borrowing needs. Its main customer, however, is considered very safe and
reliable for payment of its debts, though they are slow payers. Therefore,
this would represent an ideal member for a debtor finance facility whereby
the bank could fund up to 80% of the moneys owed by the state
government (i.e. on average $304,000), to assist with the company’s cash
flow and ability to grow further. When the state government does pay its
invoices, the balance (the remaining 20%) of on average $76,000 is then
reimbursed to the member, less the bank’s fees and interest charges.
1-3.46 CIVMB_IK_T1-3_v3
27 Forward start loan agreement

This type of product suits borrowers who wish to borrow funds at a date in the future,
but want to fix the interest rate for a loan. The benefit of this approach is that the
borrower knows in advance what the interest rate will be, hence reducing their
exposure to movements in interest rates until the loan is drawn down.
This involves a separate agreement to the loan. If the loan does not go ahead,
the borrower may be required to pay a fee to break the arrangement.
Features
Typical features of a forward start loan agreement usually include the following:
• large minimum loan amount
• underlying loan is for a fixed term
• two sets of documentation are required — one for forward start agreement and one
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for the loan.
Example: Forward start loan agreement requirement

Smith Wholesalers Pty Ltd is constructing new warehouse premises.
The construction is being progressively financed by the company’s own
cash resources. However on completion, estimated in one year’s time,
the bank has preapproved a $2 million business term loan with a fixed
interest rate and monthly P&I repayments over five years. There is market
speculation that interest rates will increase over the next 12 months and
the management of the company wishes to reduce their interest rate
exposure and take advantage of the bank’s current five-year fixed interest
rate.
The benefit of the product for this member is that they know what their
borrowing requirement will be in the future and so they will be able to
satisfy their need to lock in the interest rate now although the loan will not
be drawn down until 12 months time.

28 Market rate commercial loans

Market rate commercial loans cater for more complex business members that require
market-competitive interest rates for specific projects, such as acquiring a new business
or developing a property. These loans are for business needs of a capital nature,
or where a substantial sum is required.
Market rate commercial loans can usually be structured according to the borrower’s
needs, including:
• variable rate
• interest capitalised variable rate
• fixed rate
• interest prepaid.
Features
Examples of other product features include:
• minimum loan amount (varies with lender)
• maximum loan term (varies with lender)
• interest-only payment option available
• scheduled principal reductions available.
Example: Market rate commercial loan requirement

Shortbread Biscuit Manufacturing Ltd is a large company employing
over 500 people. They wish to acquire a significant local competitor for
$10 million. They require a loan of $2 million. Because of the significant
cash outlay towards the purchase, the company is unable to make any
principal repayments for the next five years. Given the large loan amount,
the interest rate offered must be competitive and thus a market rate is
requested. The company would also like to make interest payments
three months in arrears.
In this example, a market rate commercial loan is more appropriate than a
business term loan for the following reasons:
• The loan amount is substantial and requires a market-related interest
rate to be competitive.
• The company wishes to make quarterly interest payments, an option
that is usually not available for a business term loan.
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29 Business overdraft facilities

A business overdraft facility assists with funding the short-term cash flow requirements
of businesses, mainly the timing difference between paying expenses and purchasing
inventory until income is received from its members.
Features
Typical features of a business overdraft usually include the following:
• ongoing line of credit with on demand drawing of funds
• choice of repayment amounts and frequency, provided the balance remains within
the approved limit
• maximum loan amount is usually only restricted by the business’s capacity to repay
• may be for short-term usage (with a specific clearance date) or it may be ongoing.
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Example: Business overdraft requirements
ABC Pty Ltd sells computers to business customers. The inventory is
purchased four times per year from a supplier in Melbourne.
ABC Pty Ltd offers its members 30 days terms of trade for payment
following installation.
In this example, the company has a high cash outflow at the time of
purchasing goods from its supplier with a timing difference or gap until it
receives payment from sales from its members.
This gap can be funded from the company’s own cash resources, however,
given the purchase of supplies occurs four times per year, the purchase
amount would be substantial and most businesses would not carry
sufficient cash reserves to self-fund this part of the operation.

30 Term loans
Variable or fixed interest rate loans are offered for business borrowings, such as the
purchase of major assets. Typically, a term loan to a commercial member funds business
needs of a capital nature or where a substantial sum is required.
Security
Business term loans can be secured by property and/or the assets of the business.
Features
Typical features of commercial term loans include:
• Minimum loan amount is required (varies with lender).
• Maximum loan amount generally depends on the security provided and ability
to repay.
• No additional repayments are allowed on fixed rate loans.
• Lump sum repayments are usually allowed into a variable rate facility.
• Various repayment options are available.
• Interest-only payments are usually available.
Example: Business term loan requirement

Hardy’s Retail Store Pty Ltd wishes to purchase the commercial premises
from which it operates. The purchase price is $3 million and the business
wishes to contribute $1.5 million towards the purchase. Net impact on cash
flow is nominal because the member is replacing current rental expense of
$140,000 p.a. with an estimated interest expense of $150,000 p.a.
The residual amount required to fund the purchase ($1.5 million) is still
substantial and the business will therefore require long-term funding.
The directors of the business are conservative in nature and would like the
comfort of fixing the interest rate for five years.
A business term loan at a fixed interest rate will therefore be the most
appropriate product in this example.
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31 Trade finance
This product is available to members who are exporters and importers. Funds can be
borrowed to assist in financing the production of goods or to manage cash flow between
the time of shipping and receiving payment.
Trade finance is available in various currencies, which is useful in managing currency
risk. The interest rate on these arrangements is fixed and may be determined by each
member’s level of credit risk. Trade finance is a short-term form of financing.
Typical features of trade finance usually include:
• maximum term for each transaction is often 180 days
• the interest rate is fixed for the term
• facility is generally available in the major currencies
• the facility is available for international trade purposes only.
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Example: Trade finance facility requirement
Tim’s Toyworld imports toys, games and novelty items on a revolving
quarterly basis from a main supplier in Taiwan. There are regular imports of
$US100,000 per quarter. Payment terms are in USD and due approximately
six weeks after the arrival of the goods in Australia. Tim’s Toyworld closely
manages its currency exchange risk by taking a forward exchange facility at
the time of arranging its import requirements. Once the stock arrives in
Australia, it generally takes three months to sell the goods through
Tim’s Toyworld retail outlets.
• The bank would issue a letter of credit in USD in favour of the Taiwanese
supplier. This is to confirm that Tim’s Toyworld has the ability to pay the
supplier, thus providing assurance to the Taiwanese supplier that they
can send the goods to Australia before payment.
• A forward exchange facility is put in place at the time of issuing the
letter of credit, thus allowing the exchange rate to be predetermined
now with payment due in approximately six weeks time.
• When payment for the letter of credit is required (i.e. in six weeks time),
the funds are debited to a short-term import facility during the time it
takes Tim’s Toyworld to sell the goods and generate sufficient funds to
repay the facility.
As this is a revolving facility, there may be different exposures to different
parts of the facility (i.e. some exposure to an outstanding letter of credit,
some exposure to a forward exchange facility and some exposure to an
outstanding balance within the short-term import facility, and all
concurrently). This aspect would normally be managed by the international
department of the bank that would also manage the exposures to ensure
each individual transaction is repaid in full within an overall maximum term
of 180 days.

Part 6: Equipment loans and leases

This section covers equipment loans and leases for commercial and business purposes.
32 Leasing
Uses
Leasing is a form of commercial finance used to finance items with value that
depreciates quickly, such as motor vehicles, plants and equipment.
Term
Normally, leases will only be over the medium term, up to a maximum of five years.
Security
The lessor (credit provider) retains ownership of the item but the lessee (borrower) may
be able to purchase the item at the end of the lease period at the lessor’s discretion.
Generally, the lease is secured against the item itself.
Lessees may only partially fund the item and be left with a residual amount that has
to be paid to the lessor if the lessee decides to purchase the item at the end of the
lease period.
Operational leases
Operational leases include ongoing maintenance as part of the package.
Novated leases
Novated leases are provided to employees through salary packaging schemes.
33 Equipment finance facilities

There are various forms of lease (equipment) finance, many offering the same features.
The main differences between products relate to the item being financed and the
possible tax benefits.
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Types
The different types of leasing facilities are:
• Chattel mortgage is a bill of sale facility that can be used by a business member to
finance equipment used in their business.
• Lease facility is used to fund the purchase of plant and equipment used in the
business.
• Commercial hire purchase (CHP) can also be used to purchase equipment.
• Novated leases are appropriate for salaried employees who are entitled to salary
sacrifice a car. The vehicle does not have to be for business use and the lease rentals
are paid on behalf of the employee from their pre-tax salary by the employer.
• Revolving lease limit facility, also known as a ‘master lease’, is used to establish a
pre-approved finance lease limit. Master lease documents can then be executed by
all parties to the transaction and authorised signatories for drawdowns determined.
This facility makes lease drawdowns simpler and is useful for company borrowers
where there are several directors.
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Features
Typical features of lease finance include:
• The bank provides 100% finance, meaning that no deposit is required.
• Finance is specific to a piece of equipment.
• Fixed interest rate and repayments are determined at the start of the arrangement.
• The facility can be set up quickly and easily.
• Tax benefits may be available.
Example: Lease facility requirement

David and Mary have owned restaurants for many years. An opportunity
has come up to purchase a well-known, upmarket restaurant in the heart of
the city for $300,000. David and Mary have sufficient cash resources to
purchase the restaurant, however, the premises are dilapidated and the
restaurant requires a total refit that will cost $150,000. David and Mary do
not own any residential property, however, they have a long relationship
with the bank and a good credit history. They have approached the bank for
funding of the $150,000 requirement. Under traditional bank finance,
David and Mary would probably only be able to borrow up to 25% of the
value of the business (i.e. $75,000) because of the limited security they
can offer.
Under a lease facility, however, the total cost of the refit could be financed
with the sole security being the financed plant and equipment. There would
also be tax benefits for David and Mary because they may be able to claim
the full lease repayments as tax deductions.
34 Commercial hire purchase

Similar to leasing, CHP is a form of commercial finance used to finance items that
depreciate quickly. It has the same characteristics of leasing, except the hirer (borrower)
has the absolute right to purchase the item financed at the end of the CHP term.

Part 7: Marketing financial products and services

This section covers:
• financial services market sectors and their characteristics and needs
• marketing and promotional strategies for financial products and services
• ASIC Regulations for marketing financial products and services.
35 Client sectors
Financial organisations usually have a range of client segments or markets to serve.
This section provides an overview of the various client segments and looks at identifying
product and service requirements within these segments.
The client segment groups described here are:
• retail and consumer
• premium/high net worth
• business and commercial
• corporate and wholesale.
35.1 Retail and consumer

Retail and consumer clients are usually individuals and small businesses. They are
normally characterised by high volumes of transactions of relatively low value.
What are the needs of this segment?

Typically, this client segment requires services such as:
• cash and cheque withdrawals
• deposit facilities
• credit and debit cards
• finance for home and motor vehicle purchases
• finance for other loan types
• funds transfers within Australia and overseas
• foreign exchange transactions, such as travellers cheques.
How are these needs serviced?

Usually, this segment of the market is serviced daily by:
• over-the-counter banking at a branch
• telephone banking
• mobile banking applications
• internet banking.
Loan requirements are often managed at local branch level or via mobile lenders.
Loans can often be arranged by telephone and via the internet.
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35.2 Premium/high net worth

This client segment is composed of clients that the organisation considers wealthy or of
sufficient significance to warrant special attention and service. Inclusion in this segment
is normally at the discretion of the financial organisation. The criteria used may include:
• the individual’s net worth
• deposit or borrowing levels and history
• numbers and range of products used by the individual
• likelihood that the individual might change their financial service provider or bank.
The types of clients in this segment include:
• professionals such as solicitors, barristers and medical practitioners
• well-known, high-profile and influential individuals, such as media personalities,
politicians and community leaders
• corporate executives.
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Although similar to the retail and consumer segments, the needs of this segment are
typically more demanding. As well as the usual deposit, loan and card facilities,
this segment might also need:
• multiple and possibly complex account arrangements
• estate planning
• financial planning, including advice on wealth creation and taxation planning
• more complex lending arrangements beyond the scope of normal consumer finance.

This client segment is usually serviced by dedicated relationship managers or by a
separate area of the organisation. The people servicing this segment are usually highly
experienced in their own right, and would also have access to a range of specialist
advisers such as financial planners, accountants and legal specialists to assist clients with
their individual financial needs.
35.3 Business and commercial

This segment contains SMEs. Typically, most financial organisations would regard
business clients with a turnover of $5 million to $20 million, or with fewer than
150 employees, as being in this category.


Most businesses in this group have financial and banking needs such as:
• borrowings to fund business-related items such as:
– office accommodation
– factories and storage
– manufacturing equipment
– motor vehicles
• cash flow management transactional financial services such as:
– EFTPOS
– direct credit and debit facilities
– payroll facilities
• cash requirement services to allow for the import or export of goods and services
such as:
– foreign exchange accounts letters of credit.

This client segment is usually serviced by dedicated relationship managers.
Loan arrangements in particular can be complex and require specialist attention to
negotiate and arrange the client’s requirements.
35.4 Corporate and wholesale

This segment contains publicly listed and very large companies that may be listed in
the future.

The overall banking and financial needs of this segment are usually demanding and high
in volume.
The number of everyday transactions for large companies would usually be very high
and require specialist payment systems and facilities.
In addition, large companies would also have requirements related to:
• development and research funding
• funding for major infrastructure such as buildings, logistic operations and large
telecommunication systems and facilities
• public and private fundraising.

Inclusion in this client segment is usually at the discretion of the financial institution.
Relationship managers with a limited number of clients manage each client in this
segment. As with some other client segments, other specialist advisers often become
involved due to the complex nature of certain needs and requirements.
1-3.56 CIVMB_IK_T1-3_v3
Apply your knowledge 12: Identify target markets

Identify and compare two (2) organisations within the financial services
industry of roughly the same size which sell a range of similar products
and services. For example, compare the financial products of two banks or
two mortgage specialists such as Aussie Home Loans and RAMS.
For organisations with a large range of products, focus on at least three
different products. Using the tables below, list the products offered by the
two organisations. Identify the target market for each of the products.
Identify how these products are marketed or promoted to their respective
markets. Note any differences in approach in marketing.
Organisation:
Product name Target market Marketing or promotional strategy
1.
1-3
2.
3.
Organisation:
Product name Target market Marketing or promotional strategy
1.
2.
3.

36 Approaches to selling financial products
36.1 Promotional strategy

Promotion is how you spread the word about your product or service to customers,
stakeholders and the broader public. In order to promote a product or service,
you need to:
• identify the target market
• identify the best way to reach them including:
– advertising
– personal selling
– referrals
– sales promotion
– public relations.
36.2 Advertisements
Advertisements for financial products and services can be placed in a range of media
channels including:
• electronic broadcast media such as television and radio
• print media such as newspapers or magazines
• online, on websites and search engines or via mobile applications.
For more information about ASIC guidelines on advertising, see ‘ASIC Regulations on
marketing financial products’ in Part 7, section 36.6.
36.3 Seminars
Financial seminars are ways of providing information about financial products and
services to an interested and motivated audience. Seminars may be a useful way to:
• provide information and education to potential customers about financial products
• generate new sales leads
• network with customers
• raise your profile.
Further resources
Read the following information on investment seminars and unethical
behaviour at the MoneySmart website:
MoneySmart 2015, ‘Investment seminars’, MoneySmart, September,
<http://www.moneysmart.gov.au/investing/investment-
warnings/investment-seminars>.
1-3.58 CIVMB_IK_T1-3_v3
36.4 Direct marketing

Direct marketing enables you to contact customers or potential customers directly with
advertising techniques that include:
• mobile phone text messaging
• email
• interactive consumer websites
• online display ads
• database marketing
• flyers
• catalogue distribution
• promotional letters
• targeted television commercials
• response-generating newspaper/magazine advertisements
• outdoor advertising.
1-3
Direct marketing requires a list of the names and contact details of sales prospects or
existing customers who are the target of the advertising campaign.
36.5 Relationship marketing

Relationship marketing is marketing activities that are aimed at developing and
managing trusting and long-term relationships with larger customers. In relationship
marketing, customer profiles, buying patterns, and history of contacts are maintained in
a sales database, and an account executive is assigned to one or more major customers
to fulfil their needs and maintain the relationship.
Relationship marketing presents client service as a process over time rather than a
series of single unconnected events. The technique involves getting to know your client
and their needs, and recommending products and services that best meet those needs.
This strategy is the basis of much of the compliance legislation, regulation and codes of
practice that guide the finance industry today.
Relationship marketing is about tailoring the:
• products offered to customers
• messages and information given to customers
• way those messages match the stage of the client life cycle.

Strategies
A simple example of relationship marketing is the practice of sending new clients a
‘welcome pack’ when they first become a client of an organisation. The pack might
offer an incentive to purchase a complementary product or service. By doing this,
the organisation is targeting the early stage of the client life cycle.
Another strategy is the use of a trigger, based on a known behaviour pattern, to initiate
a marketing approach. An example of this might occur when a client, who normally
makes regular purchases of a product, suddenly stops the purchases. The credit provider
needs to act on this trigger and investigate why the customer has changed his or her
normal pattern. The reasons could be:
• the client is unhappy with the product
• the client has found another product they prefer
• a part in the sales system or process that the client does not like
• something in the organisation has changed
• the client’s circumstances have changed.
This change in a behaviour pattern is an opportunity for action on the part of the
organisation, team or individual responsible for that client. After speaking to the client
and identifying the reason for the change, there is an opportunity to rectify the situation
and perhaps retain the client.
If the client is dissatisfied with the service in some way and, instead of complaining,
has simply stopped depositing, there is an opportunity to recover the situation.
If, on the other hand, it is established that the client has found a product they consider
better suits their needs, there may be an opportunity to offer them a comparable or
even better product.
Tracking client activity (and client segment activity) over time establishes the client life
cycle. By tracking the life cycle, client behaviour can be predicted and match marketing
and service efforts at the most critical trigger points in the client life cycle.
A summary of relationship marketing

The following points summarise the main factors underpinning relationship marketing:
• Listen to and observe clients, individually and in their segment groups. They will tell
you what they need.
• Seek information about clients and their needs. Once you have the information,
focus on meeting the need or solving the problem.
• Be honest with clients. Only sell products and services that will meet their stated
needs. Be driven by the client’s need rather than sales targets.
• Deal with problems and complaints in a positive way. See them as an opportunity to
not only recover the client relationship, but to build it.
1-3.60 CIVMB_IK_T1-3_v3
The client life cycle

The typical client life cycle can be used to established patterns for the majority of
client groups based on their stage of life. An important point to keep in mind, however,
is that not all clients can be segmented and categorised so easily — there will always
be exceptions.
The table below shows a generic view of the client life cycle and links each stage to an
example of a range of financial products that might be needed at that stage.
Table 19 The client life cycle

Age
(years) Life stage characteristics Financial needs Typical financial products
15–18 Likely to be a student and Multiple transactions of Low-value transaction or
living with parents small amounts savings account required with
ATM access and
mobile banking
1-3
18–21 Likely to be: Account needed to receive Savings account with ATM
• a student or apprentice salary with ATM access to access and mobile banking
withdraw funds Debit or credit card for
• possibly has a part-time
work salary Loan assistance for the convenience in
purchase of first car making purchases
• may have entered the
or furniture May require a personal loan
full-time workforce
21–25 Likely to be: Credit card to assist with Cash management/

• working everyday purchases savings account
• repaying personal loans Access to internet banking to Term deposit
self-manage banking accounts Credit card
• saving part of salary for
future large purchases Internet banking
such as travel or a Personal loan for travel, car or
home purchase furniture purchase
25–35 Likely to be: Likely to have high debt and Home loan
• married or in a partnership low savings if savings have Credit cards
been used to purchase home
• commencing a family Transaction accounts
May need insurance
• purchasing first home Children’s accounts
protection for the family
Life/disability/
Additional transaction or
income insurance
savings accounts may
be required Superannuation accounts
May have superannuation
funds accumulated and need
advice by a specialist to meet
needs and objectives
35–45 In the ‘growth stage’ likely May need additional Home loan
to have: insurance protection for Credit cards
• a reasonable amount of the family
Transaction accounts
equity in home Likely to have significant
Children’s accounts
• commenced investing into superannuation funds
accumulated and need advice Increased life/disability/
additional property and
by a specialist to meet needs income insurance
other investments
and objectives Superannuation accounts
• a large debt load
May need investments advice Investment property loans
Margin loans
Investment accounts
Financial plan for wealth
protection and creation

Age
(years) Life stage characteristics Financial needs Typical financial products
45–55 Likely to have: Strong emphasis on the Credit cards
• home loan repaid or low financial plan to reflect Transaction accounts
balance outstanding desires for retirement lifestyle
Term deposits
planning.
• lower debt load Life/disability/
Likely to require
• an amount of investments income insurance
superannuation advice
accumulating Superannuation accounts
May need investments advice
Investment property loans
May need a more defined
financial plan in preparation Margin loans
for retirement including a Investment accounts/
review of estate plan and products
taxation issues
55–65 Likely to: Increase in investments Credit cards

• be either in retirement or Implementation of retirement Transaction accounts
close to retirement financial plan to provide Life/disability/
• have most loans repaid future income needs income insurance
(until retirement)
Term deposits
Superannuation accounts
Investment property loans
Margin loans
Investment
accounts/products
Implementation of retirement
financial plan
65+ Likely to: Advice on management Transaction accounts

• be in retirement of investments Cash management accounts
• have income needs Management of retirement Term deposits
provided through term financial plan to provide
Investment
deposits, investments and future income needs
accounts/products
draw down of
Superannuation accounts
superannuation funds
• have all loans repaid
1-3.62 CIVMB_IK_T1-3_v3
36.6 ASIC Regulations on marketing financial products

As ASIC Regulatory Guide RG 234 ‘Advertising financial products and services
(including credit): Good practice guidance’ (2012, p. 4) states:
Consumers are heavily influenced by advertisements for products and
services. Advertisements that do not fairly represent the product or its
key features and risks, or the nature and scope of the service, can be
misleading and create unrealistic expectations that may lead to poor
financial decisions.
ASIC RG 234
ASIC RG 234 is for:
• promoters of financial products, financial advice services, credit products and
credit services
1-3
• publishers of advertising for financial products and services.
It contains good-practice guidance to help promoters comply with their legal
obligations not to make false or misleading statements or engage in misleading or
deceptive conduct.
Apply your knowledge 13: ASIC RG 234

Read the following guide and answer the questions below:
ASIC RG 234 ‘Advertising financial products and services (including credit):
Good practice guide’, viewed 13 March 2017, at:
<http://www.asic.gov.au/asic/asic.nsf/byheadline/Regulatory+guides?open
Document>.
1. What is ASIC’s guidance on advertising in all media in relation to returns,
features, benefits and risks?
2. What is ASIC’s guidance on advertising in all media in relation to

warnings, disclaimers, qualifications and fine print?

3. What is ASIC’s guidance on advertising in all media in relation to fees

and costs?
4. What is ASIC’s guidance on advertising in all media in relation

to comparisons?
5. What is ASIC’s guidance on advertising in all media in relation to past

performance and forecasts?
6. What is ASIC’s guidance on advertising in all media in relation to use of

certain terms and phrases?
1-3.64 CIVMB_IK_T1-3_v3

target audience?

consistency with disclosure documents?
1-3
photographs, diagrams, images and examples?

nature and scope of financial advice and credit assistance?

Part 8: Keeping up to date with products and

services
It is important for brokers to remain aware of happenings within the financial services
industry so they can serve their customers well. Keeping up to date involves:
• being aware of current economic trends and events that impact customers
• watching the market and the industry
• keeping up with technologies that impact financial services
• networking with colleagues and industry professionals
• being aware of new products and services that are being introduced
• being aware of customer needs and any changes
• being aware of competitor movements and changes
• understanding the legislative and regulatory environment
• being aware of any legislative and regulatory changes and the impacts of these
changes to work practices
• implementing systems and office technology to assist with keeping up to date.
37 Following emerging industry trends
Why networking is important

Networking assists industry professionals to:
• acquire contacts
• get information and advice about the industry
• be informed about new products or services or changes in the industry, such as
new regulations
• find job opportunities
• find new employees
• obtain invitations to industry events
• open sales opportunities or receive referrals
• raise their profile within the industry.
FSI conferences and events

Conferences within the financial services industry bring together expert speakers,
industry members and colleagues from different organisations to share views,
ask questions and network.
For industry events and conferences, see:
• The Financial Standard calendar of events, viewed 13 March 2017,Error! Hyperlink
reference not valid. <www.financialstandard.com.au/events>
• Australian Broker Online industry events, viewed 13 March 2017,
<www.brokernews.com.au/industry-events>.
1-3.66 CIVMB_IK_T1-3_v3
Professional associations
Joining a professional association that is relevant to your work in the financial services
industry is a great way to keep in touch with new market trends, new products or new
legislation and to network with colleagues. Some examples of relevant professional
associations include:
• Australian Bankers’ Association (ABA): <www.bankers.asn.au>
• Australian Equipment Lessors Association (AELA): <www.aela.asn.au>
• Association of Financial Advisers <www.afa.asn.au>
• Association of Superannuation Funds of Australia (ASFA)
<www.superannuation.asn.au>
• Finance Brokers Association of Australia (FBAA) <www.fbaa.com.au>
• Financial Planning Association (FPA) <www.fpa.asn.au>
• Mortgage & Finance Association of Australia (MFAA) <www.mfaa.com.au>
• National Insurance Brokers Association of Australia (NIBA) <www.niba.com.au>.
1-3
For more industry associations, see the Financial Standard list of industry associations:
<www.financialstandard.com.au/little_black_book/category/8358627/1>.
Other ways to get in touch with industry professionals include professional and social
networking sites such as:
• LinkedIn <www.linkedin.com>.
Sources of industry information

There are a number of financial information websites available including the following:
General business and financial news:
• Australian Financial Review (website or newspaper): <www.afr.com>
• Financial Standard online: <www.financialstandard.com.au>
• Bloomberg (website or pay TV channel): <www.bloomberg.com>
• Business Spectator: <www.businessspectator.com.au>
• Free-to-air TV channels news or specialist business programs such as The Business on
the ABC <www.iview.abc.net.au/programs/business>
• News radio programs or channels such as ABC News Radio <www.abc.net.au/radio>.
Government departments or agencies:
• Australian Bureau of Statistics: <www.abs.gov.au>
• Australian Prudential Regulation Authority (APRA): <www.apra.gov.au>
• ASIC: <www.asic.gov.au>
• Australian Taxation Office (ATO): <www.ato.gov.au>
• Australian Treasury: <www.treasury.gov.au>
• Reserve Bank of Australia: <www.rba.gov.au>.
Industry news, opinions and analysis websites or magazines:
• Australian Broker Online: <www.brokernews.com.au>
• Australian Broker fortnightly hard copy magazine and e-magazine:
<www.brokernews.com.au/e-magazines>.

Apply your knowledge 14: Review current trends

Using some of the websites listed above or of your own choice, answer the
following questions.
1. What do you think are the current trends and forces in the Australian
economy? What world events are affecting the economy? What is the
outlook for the Australian economy in the short, medium or long term?
2. What do you think are the current emerging trends in the financial
services industry in Australia? How does this affect financial products
and services?
3. Which financial products and services are currently in demand? Why?
1-3.68 CIVMB_IK_T1-3_v3
37.1 Systems to keep up to date

The information age and access to the internet makes a vast array of information
resources accessible within a keystroke or click. However the sheer volume of
information available makes it important to use systems to ensure you get access to
accurate, important and credible information in a timely manner.
Some of the suggestions for systems that assist you to keep up to date include:
• selection and regular reading of appropriate industry newsletters, websites, blogs,
industry publications, newspapers and magazines
• attendance at key industry conferences and seminars
• email reminders of important events or professional association meetings
• mobile phone technology and applications to stay in touch or receive selected
updates
• email and communications technology to stay in touch or receive selected updates.
1-3
Apply your knowledge 15: Systems to keep up to date
1. What are the tools, technologies or systems that you currently use to
keep up to date with current industry events?
2. Use the internet to investigate and note some new tools or technologies
that you might utilise and how they might help. A starting point is the
following article:
van Gemert, V 2012, ‘The art of staying up to date’, Smashing Magazine,
9 August, viewed 13 March 2017,
<http://www.smashingmagazine.com/2012/08/09/productivity-staying-
up-to-date>.

References
van Gemert, V 2012, ‘The art of staying up to date’, Smashing Magazine, 9 August,
<http://www.smashingmagazine.com/2012/08/09/productivity-staying-up-to-date>.
Moneysmart 2015, ‘Fees’, 12 August, viewed 13 March 2017,
<https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/fees#early>.
Moneysmart 2015, ‘Glossary’, 18 June, viewed 13 March 2017,
<https://www.moneysmart.gov.au/glossary/c/comparison-rate>.
Moneysmart 2015, ‘Reverse mortgages’, 24 August, viewed 13 March 2017,
<https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-
retirement/home-equity-release/reverse-mortgages>.
Moneysmart 2015, ‘Using a broker’, 24 August, viewed 13 March 2017,
<https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/using-a-
broker#Who>
Suggested answers
Apply your knowledge 1: Home loan features

Home loan feature Description Borrower appeal
Redraw facility A redraw facility gives a borrower access to any A convenient feature for
extra money they have deposited into their borrowers short of cash in an
home loan. emergency.
Portability Portability of a loan means the borrower is able Can save on mortgage stamp duty.
to take the loan with them when moving house.
This might mean a borrower could avoid having
to pay break costs for an old loan or
establishment fees for a new loan.
An offset account An offset account enables a borrower to put Savings interest is taxable,
any savings to work to reduce their loan but because an offset account
interest charge. balance is used instead to reduce
An offset account is a transaction account linked the loan interest, no tax is payable.
to the home loan account. The balance of the This can be tax effective.
offset account reduces the amount of the loan The interest rate on your offset
that attracts interest. account is the same as that applied
For example, where a borrower has a $250,000 to the loan account. This is usually
home loan and $10,000 in an offset account, much higher than could be earned
the borrower pays interest on just $240,000. on most savings accounts.
All-in-one package This is a loan account that acts as a combined Flexible

mortgage, savings and cheque account. Can be tax effective
The borrower has a central mortgage account Useful for disciplined savers
into which their salary and any other cash
payments are deposited. The extra cash in the
account reduces the principal amount owing
and thereby the amount of interest charged.
These accounts often have a credit card linked
to them, with the balance owing on the card at
the end of each month being drawn down from
the all-in-one account.
1-3.70 CIVMB_IK_T1-3_v3
Apply your knowledge 2: Variable rate home loans

This activity requires independent research, therefore, no suggested answers are provided.
Apply your knowledge 3: Fixed rate home loans

Apply your knowledge 4: Capped rate home loans

Apply your knowledge 5: Split or combination home loans

1-3
Apply your knowledge 6: Low-doc loans
1. Mainly for self-employed borrowers.
2. RAMS, Westpac and Commonwealth Bank.
3. Requirements differ for each credit provider, but a borrower may need to supply:
• signed borrower's income declaration
• registered business name
• ABN
• certificate of incorporation
• 12 months of business activity statements (BAS) verified by the ATO
• confirmation that income has been registered for GST for a minimum of
12 months
• six months worth of statements from a business or personal transaction account.
Apply your knowledge 7: Reverse mortgages

1. From September 2012, statutory ‘negative equity protection’ applies on all new
reverse mortgage contracts. This means reverse mortgage providers must guarantee
that when a customer’s reverse mortgage contract ends and the home is sold to
repay the loan, the customer will not have to pay back more than the value of
the home.
2. From 1 March 2013, a credit provider or credit assistance provider must go through
reverse mortgage projections with the customer in person before the customer takes
out a reverse mortgage.

Apply your knowledge 8: Personal loans

All credit providers and credit assistance providers (such as brokers) must be licensed
with ASIC or be an authorised representative of someone who is licensed. A credit
provider must lend money responsibly and not provide credit that is unsuitable for the
customer. To verify that a customer can meet the loan repayments without financial
hardship, the credit provider may assess the customer’s:
• credit report
• pay slips
• bank account statements
• copies of other credit contracts or bills.
Apply your knowledge 9: Overdrafts

1. An unarranged or accidental overdraft occurs when a person takes out more money
than they have in their account, creating a negative balance or a debt. Often a
financial institution will provide the money but charge a fee.
2. Customers can arrange an overdraft on personal bank accounts, home loan accounts
or for business purposes. Overdraft limits can range from around $500
(for a personal overdraft) to $10,000 or more (for a business overdraft).
To get a personal overdraft, a customer must prove to the credit provider that he or
she can pay back the overdraft.
Apply your knowledge 10: Credit card reforms from July 2012
The following reforms apply to all new credit cards from 1 July 2012:
Monthly statements will be a lot clearer, including:
• the time it will take to pay off your credit card if you pay the minimum amount
• an alternative with an amount that will allow the user to pay off the debt within
two years
• card providers cannot offer you unwanted credit limit increases
• standard layout for credit card fact sheets, comparing interest rates and fees making
it easier to compare cards.
The following reforms apply to all credit cards:
• Credit card providers will notify you when you exceed your credit limit.
• Any money paid off the credit card will reduce the most expensive debts first.
1-3.72 CIVMB_IK_T1-3_v3
Apply your knowledge 11: Consumer leases

1. If an item becomes damaged or is stolen or destroyed, the consumer still needs to
pay rent on it. Sometimes insurance on the item is a condition of signing up for the
lease agreement.
There may be account-keeping fees and penalties if the customer misses
repayments, breaks the agreement or pays it off early.
If a customer breaks a lease, he or she may still have to pay an amount equal to the
rental payments for the full term of the lease.
2. Generally not.
3. The lease provider must give the customer a statement every 12 months showing the
payments made.
Ninety days before the end of the lease, the lease provider must give the customer a
statement showing:
• the date when the lease is due to end
• when, where and how the customer must return the leased item
1-3
• what amount (fee or penalty) that must be paid if the item is not returned by the
due date
• whether the lease provider is prepared to sell the customer the item and, if so,
an estimate of how much it will cost, plus contact details of who to contact about
buying the leased item.
Apply your knowledge 12: Identify target markets


Apply your knowledge 13: ASIC RG 234

1. Advertisements for financial products and credit products should give a balanced
message about the returns, features, benefits and risks associated with the
product. Benefits should not be given undue prominence compared with risks.
2. Warnings, disclaimers and qualifications should be consistent with other content
in an advertisement, including any headline claims. Warnings, disclaimers and
qualifications should have sufficient prominence to effectively convey key
information to a reasonable member of the audience on first viewing the
advertisement. Consumers should not need to go to another website (or other
page of the website) or document to correct a misleading impression.
3. Where a fee or cost is referred to in an advertisement, it should give a realistic
impression of the overall level of fees and costs a consumer is likely to pay,
including any indirect fees or costs.
4. Comparisons should only be made between products that have sufficiently similar
features or, where an advertisement compares different products, the differences
should be made clear in the advertisement. Comparisons should only be made
about returns if the information used is current, complete and accurate. If an
advertisement discloses a rating, the rating used should be properly explained
either in the advertisement itself or by including details of where an investor can
obtain further information about the meaning of the rating and the rating scale.
5. Past performance information should be accompanied by a warning that past
performance is not indicative of future performance. Forecasts about the future
performance of a financial product should be based on reasonable assumptions
and also should state that the forecasts are not guaranteed to occur.
6. Terms and phrases should not be used by industry in a way where these are
not consistent with the ordinary meaning commonly recognised by consumers
(e.g. ‘free’, ‘secure’ and ‘guaranteed’). Industry concepts or jargon should be
avoided unless the promoter is confident these terms are understood by
the audience.
7. Advertisements should be capable of being clearly understood by the audience
that might reasonably be expected to see or hear the advertisements.
Advertisements should not state or imply that a product is suitable for particular
types of consumers unless the promoter has assessed that the product is suitable
for that class. Advertisements for complex products that are only appropriate for
a limited group of people should not be targeted at a wider audience.
8. Where an advertisement draws attention to specific product features,
the advertisement should be consistent with information contained in any
disclosure document (such as a PDS or prospectus) or contract.
9. Photographs and images should not contradict, detract from or reduce
the prominence of any warnings, disclaimers or qualifications.
Graphical presentations should not be ambiguous or overly complicated.
10. Advertisements for a financial advice service should not create unrealistic
expectations about what the service can achieve. Advertisements about credit
assistance should be clear about the scope of the service that will be provided to
the customer.
1-3.74 CIVMB_IK_T1-3_v3

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Industry Knowledge

Topic 1-3: Products and services

Certificate IV in Finance and Mortgage Broking

Part 1: Mortgage broker services .................................................................... 1-3.4

1 About brokers ..................................................................................... 1-3.4

Part 2: Mortgage broker products ................................................................... 1-3.6

3 Products overview ............................................................................... 1-3.8

Part 3: Property mortgage/home loan products ............................................ 1-3.13

4 About home loans ............................................................................. 1-3.13

5 Variable rate loans............................................................................. 1-3.17

6 Fixed rate loans ................................................................................. 1-3.19

7 Capped rate loans .............................................................................. 1-3.21

8 Discounted variable rate loans ........................................................... 1-3.22

9 Low start loans .................................................................................. 1-3.22

10 High start loans ................................................................................. 1-3.23

11 Split or combination loans ................................................................. 1-3.23

12 Home equity loans (line of credit) ...................................................... 1-3.24

13 Consolidation loans ........................................................................... 1-3.25

14 Low-doc and no-doc loans ................................................................. 1-3.25

15 Construction loans ............................................................................. 1-3.26

16 Equity release products ..................................................................... 1-3.27

17 Equity finance mortgages................................................................... 1-3.30

© Kaplan Education Pty Ltd 1-3.1

Part 4: Consumer lending products ............................................................... 1-3.31

18 Personal loans ................................................................................... 1-3.31

19 Personal overdrafts ........................................................................... 1-3.33

20 Credit and charge cards ..................................................................... 1-3.35

21 Consumer leases................................................................................ 1-3.38

Part 5: Commercial and business loans.......................................................... 1-3.41

22 Commercial and industrial finance ..................................................... 1-3.41

23 Development and construction finance .............................................. 1-3.43

24 Bank guarantee ................................................................................. 1-3.44

25 Commercial bill facility ...................................................................... 1-3.45

26 Debtor finance................................................................................... 1-3.46

27 Forward start loan agreement ........................................................... 1-3.47

28 Market rate commercial loans ........................................................... 1-3.48

29 Business overdraft facilities ............................................................... 1-3.49

30 Term loans ........................................................................................ 1-3.50

31 Trade finance .................................................................................... 1-3.51

Part 6: Equipment loans and leases ............................................................... 1-3.52

32 Leasing .............................................................................................. 1-3.52

33 Equipment finance facilities ............................................................... 1-3.52

34 Commercial hire purchase ................................................................. 1-3.53

Part 7: Marketing financial products and services .......................................... 1-3.54

35 Client sectors ..................................................................................... 1-3.54

36 Approaches to selling financial products ............................................ 1-3.58

Part 8: Keeping up to date with products and services ................................... 1-3.66

37 Following emerging industry trends ................................................... 1-3.66

References .................................................................................................... 1-3.70

Suggested answers........................................................................................ 1-3.70

Topic learning outcomes

© Kaplan Education Pty Ltd 1-3.3

Part 1: Mortgage broker services

Further resources: Credit licensing

Further resources: ASIC professional register

How brokers are paid

Who are the broker’s customers?

© Kaplan Education Pty Ltd 1-3.5

Part 2: Mortgage broker products

2.1 Loan term

2.2 Secured and unsecured lending

2.3 Credit regulation

© Kaplan Education Pty Ltd 1-3.7