Become an expert: Protecting your clients from risks

January 1st, 2018

Protecting your clients from risks

Changing regulations and lender policies, cooling off periods, escalations and settlement deadlines are stressful for your team and your clients. Follow these simple rules to protect your clients from risks and to enjoy your role as a mortgage broker!

The #1 rule – get unconditional approval before making a purchase!

You should always advise your clients not to commit to buying a property unless they have unconditional approval from a lender. If they don’t have it, they’re taking a huge risk in the current market. What could go wrong that may put your clients at risk?

• The property they want to buy may simply be unacceptable to a lender.
• Their situation or lender policy could change.
• The lender may not value the property as you might expect.

What about auctions?

Auctions can be a particularly risky situation, because your client is committing to buying a property without formal lender approval. The lender can’t issue formal approval before the auction (with some minor exceptions) because there is no agreed price and rarely a valuation.

At Home Loan Experts, we only recommend that customers consider buying at auction if they are in a very strong financial position with a deposit of more than 20% of the property value.

Auctions are particularly risky for first home buyers with only a 5% deposit. If anything goes wrong, your client has no financial buffer and there are fewer lenders that can help.

In some parts of Australia, such as Melbourne or the affluent suburbs of Sydney, almost all properties are sold at auction and so this poses a challenge for buyers in those areas. At the very least, as brokers we need to advise the client of the risks and then it’s their choice to go ahead and buy at auction or not.

Check the property value

If you’ve got your client pre-approved, that’s great. However, the lender still needs to approve and value the actual property they choose.

If it’s a standard residential property over 50m2 in a metro location, you should be ok. However, things could become risky if the property isn’t ‘standard’. For example, if the property is in a poor condition, located in a high-rise block of units or a remote location, near high tension power lines, or has other problems – then the lender may reject it.

To reduce the risk of a decline, you can perform some due diligence on the property yourself. Ask your client to email you with a link to the property on a real estate website. If you are a Connective broker, we recommend you subscribe to Connective Property Tools powered by CoreLogic, so you have an easy and cost-effective way to check it out.

Make sure you ask your client to send the property details through before they put a deposit down, so you can quickly determine whether the pre-approval they have will hold with the property they want to buy.

However, you must always advise your client that the lender has the final say, so there are no guarantees. If they want to put down a deposit before getting unconditional approval, you should advise them to speak to their conveyancer about a longer ‘cooling off period’ in case their formal approval falls through.

Cooling off period vs a finance clause

What’s the difference between a cooling off period and a finance clause?

• A cooling off period usually allows a purchaser to withdraw from the contract within a certain period, for any reason.
• A finance clause only allows borrowers to withdraw from the purchase if they’re unable to get a loan.

For example, a finance clause won’t work if:

• The valuation comes in lower than the purchase price, but the client still has enough funds to complete the purchase.
• The client changes their mind and doesn’t want to buy the property.
• The lender approves the home loan at a higher interest rate than your client would have liked.

We recommend that your client’s sales contract includes both a ‘subject to finance approval’ clause and a cooling off period as well, if possible.

Other than Tasmania and Western Australia, all states and territories have a standard cooling-off period for properties that are not sold at auction. This is usually somewhere between 2 and 5 days, but it differs from state to state.

In Tasmania and Western Australia, you must ask for a cooling off period to be included in the contract. In other states of Australia, a cooling-off period is mandatory, unless a buyer agrees to waive it, or the property is being sold at auction. It should also be noted that your client will forfeit a percentage of the sale price if they withdraw from the sale during the cooling off period.

What if the cooling off period is expiring?

Escalating a loan for a quick approval doesn’t always work. It’s much easier for your clients to ask for a longer cooling off period than to rely on the lender to move faster.

In New South Wales, it’s common to have a cooling off period of just five days. Five days is plenty of time if your client has a simple application including the required income evidence, a good deposit, a clear credit file and where no valuation is required.

For more complex situations, two weeks is needed. If that’s the case, you can advise your client to ask for a longer cooling off period than the standard when signing the sales contract.

However, it’s quite common for the cooling off period to be coming to an end before the formal approval has been issued. In these cases, ask your client to request an extension through their conveyancer.

Technically, it’s the job of the conveyancer to monitor the cooling off period and to extend the cooling off period if finance hasn’t been approved by the lender. However, you should be proactive in organising an extension because, ultimately, it’s your customer’s deposit at stake.

Educate your clients

The biggest roadblock to a fast approval tends to be not getting all the required documents from your clients up front and in full. According to the lenders, 60% of loan applications cannot be approved because the borrower or broker has not provided all the required documents.

It’s vital that you explain to your clients how important it is to get you the required documents ASAP so you can get them the loan approval in a timely manner.

Buying or building a new property?

New properties sometimes have valuations that come in below the agreed purchase price. This poses a big risk, particularly to home buyers who don’t have extra cash. The risk is that the lender may reduce the maximum amount they approve, leaving your clients unable to complete their purchase.

When you speak to a client about their plans, help them compare recent sale prices for properties outside of the development they’re planning to buy in to make sure the purchase price is fair.

As mentioned earlier, Connective Property Tools powered by CoreLogic allow you to provide comprehensive, accurate suburb and property reports as part of your service. The client can use them to compare recent sale prices of comparable properties to estimate the value of the property that they are considering buying, and ensure it is within budget.

Are they planning to build instead?

Few lenders can finance owner-builders, and nobody seems willing to finance a ‘split contract’, so warn your customers who intend to build to stay away from these options.

Buying off the plan is the riskiest type of purchase

Buying off the plan really is a speculative investment, yet most borrowers see it as no different to buying a standard home. Explain to your client these risks:

• They’re committing to buying a property at a certain price, but no lender will commit to approving their home loan application until the property is completed and valued by them.

• If something changes between when they put their deposit down and reaching settlement in one to two years’ time, the indicative pre-approval you gave them may not count for anything.

• Changes could include having children or changing careers, but it can also include changes outside of their control such as illness or unemployment, a slump in property values, or a change to bank lending policies.

Most people who buy off the plan are doing so because they get some kind government benefit, such as waived stamp duty, or a first home owner’s grant (FHOG). You should explain to your client that they can get the same benefits without the risks, by buying a new, completed property with a cooling off period.

Since it’s a speculative investment, I believe that buying off the plan should only be considered by people in a very strong financial position with more than a 20% deposit.

What if settlement is delayed?

A great mortgage broker prevents settlement delays rather than solving them. The biggest risk of a delayed settlement comes from complex loan applications. This includes borrowers who are overseas, those using a guarantor, those who are buying a property in a trust and those who are self-employed.

You can prevent settlement delays by warning the customer up front that their situation is complex, get a pre-approval and ask them to arrange a two-week longer settlement period if required.

Standard disclaimers, not legal advice

You can add these tips to your Preliminary Assessment and discuss them with everyone buying a home, which will prevent a lot of issues for your customers and your team. However, your clients should seek advice from a conveyancer, solicitor or settlement agent as they can give them advice on the sales contract and the relevant legislation for your state.

About Otto Dargan

Otto is the Managing Director of Home Loan Experts and has been a member of Connective for over 10 years. Home Loan Experts (Australian Credit Licence: 383528) has won Major Brokerage of the Year (Non-Franchise) and Otto has twice been named Australia’s Brightest Broker in The Adviser’s Broker IQ Competition. Home Loan Experts was also a finalist in the 2017 Connective Excellence Awards for Brokerage of the Year >5 Staff and Otto is a regular contributor to Connective Weekly, our newsletter that’s sent out to every Connective broker via email every Monday.