Forum Replies Created
Hi,
In regards to the IO loans you manage, what does your contract say in terms of how the following is determined;
– interest is calculated
– arrears are calculated
– extra payments are calculatedThese questions also apply to the honeymoon rates.
I would like to develop these features, however I first need to understand the user’s requirements. As I mentioned in the original post at the beginning of the thread. It is very feasible to develop a straight variable IO loan system. Although it may not be practical because payments would vary from month to month.
Do you use fixed or variable IO loans?
Michael
Hi,
Isnt the reason why the banks are restrictive with what they do becuase the buy money in a different way to lend to IO opposed to P+I?True, however this topic is to investigate how vendor financiers manage interest only loans. In nearly all cases their funds are either wrapped around an existing loan, or created as a second mortgage to sell deposit finance. In either case the restrictions are different than the banks, and in this topic, do not factor in how they are managed (in terms of collection of payments and handling of arrears).
So if I became a lender and I offered an IO loan I know the client will only pay interest which means all I need to do is purchase the principle wholesale at a lower rate for the first term. At the end of the first term my client can make a lump sum payment which means the next term I also purchase less money.See my comments below about variable and fixed interest loans. Your statement appears to describe fixed interest only loans, however my concern is about managing variable interest only loans.
I cannot see how you can add more flexibility to IOs? Or have I missed the point???There are a number of issues regarding flexibility, such as;
– extra payments – reducing of principal
– arrears – increase of principal
– penalties – possible increase of principal
– changes in interest rates (during the term of the loan – ie variable interest)I guess IO is part of risk management on the loan you cannot reduce P…It is my view that as long as all the variables are managed, in terms of properly managing the loan in compliance with the law, then that risk is covered, my main concern is ensuring that the likes of the Department of Fair Trading cannot indicate that the lender is not disadvantaging the borrower in anyway. See more about this below…
Based on this if you offer IO, you dont want extra payments made until end of the term as you are stuck with the purchased money anyway…Arrears I have seen managed as $$ in arrears charged at Interest Rate + Penalty Rate (2-4%) and accounted as a separate transaction. Incoming payments always pay down arrears first.
However extra payments is not the only thing that can alter the principal, it is common practice for extra charges to be applied to the loan balance. If a borrower misses an interest-only loan payment, then they interest, which should have been paid in full is normally applied to the loan balance, which would mean the principal is now larger, which means higher interest charges for every day that balance is larger, which means a larger interest only payment the next month. And if your payments are fixed (ie using EzyDebit, etc) then the borrower with be in arrears next month, etc, etc
On a side note, here’s some more thoughts…
What needs to be defined here is that there is at least 2 types of interest only loans, variable and fixed.
Variable interest only loans are easy to implement, just calculate the interest on the daily balance and compound monthly. Then charge the borrower whatever the interest amount is.
Very easy to calculate, harder to collect. The reason is the borrower never knows in advance what the interest charge will be. Which is why banks have it easy, they just take the necessary funds out of a linked deposit account.
Whereas fixed interest loans, are easier to run via a debit system like EzyDebit or payments via the borrowers’ employers paymaster.
These type of loans usuallly specify a period where the interest rate will be fixed. Ie 1year fixed interest. During that time, the payments are fixed also (loan balance multiplied by annual % divided by number of payments).
The downside for the borrower with these is that they are unable to make extra payments.
If extra payments were to be allowed, then they would be treated almost like a new loan with a new balance – and with some lenders they ensure that extra payments are made in specified lump sums ($1000, $5000, etc). Again, each lump sum payment would mean the balance and new payments are recalculated. And fees may be applied (to cover the cost of recalculating).
With fixed interest only loans, arrears would be handled like the offset account system, the arrears would sit in a separate system with interest compounding. However with such a system, where interest could be calculated to the cent on a daily basis, it would be too easy for the borrower to overpay (to over estimate the outstanding arrears) and as a result trigger a extra payment penalty. For if they were $95.73 in arrears and they paid $100 to “just fix things up”, how does the lender manage the extra $4.27?
How would you accomodate this $4.27 overcharge? Would you credit them and reduce the loan a $120,000 IO loan balance to $119,995.73 and then recalculate the monthly repayments to $999.96 ?
Or credit their savings account with the $4.27, and absorb the $7 (or more) direct debit charge as a cost, or charge the borrower the $7 direct debit fee, take it out of the $4.27 surplus, and end up with a $2.73 debit which ends up being an arrears of $2.73, which then triggers an arrears notice – and the subsequent arrears notice fee…and so on.
It can get quite silly, I admit, but when your dealing the transfer of small amounts. Sometimes the cost of transfer is larger than the amount being transferred itself.
So why bother transferring at all? Because you want to ensure that the Department of Fair Trading always see that you are always managing the funds correctly, and that means you only keep what you are owed, and any benefit to the borrower is maintained, and this means that if they paid just 1c extra, that 1c is helping to reduce their loan balance.
So how does everyone manage their interest only loans? fixed or variable? Do you charge penalties for over payments, or do accept them at all, what about arrears?
Regards
MichaelHi,
My name is Michael Gruber, co-producer of LoanAlert. I do apologise that the trial version that is on the website is version 1.
However the latest release is v1.03 which includes bug fixes as well as some features on the information panels to assist the user.
Our current method of supporting inquiries is, rather than issue the tradional trail version, we provide a download link for the full version which can be examined for a period of 14 days.
This permits the user to try out all the features of LoanAlert.
Regards
Michael GruberHi,
Section 26 of the Land Tax act for NSW is the part you need to read. It covers it all there.
In essence, the wrappee;
– must have possession of the property
– have purchased with a valid contract
– have the rights as if they were the owner (ie can rent property out etc)Regards
Michael GHi,
Check out section 13 of the FHOG act for qualifying and understand the meaning of “possession”; and
Check out section 26 of the Sale of Land act for examption of the land tax and again understand “possession”
You can find the acts at http://www.austlii.edu.au
Regards
Michael GHi,
To say wrapping is illegal in W.A. is to say that driving a car in W.A. is illegal – both are illegal when done unlicensed – this is the point of the Consumer Affairs article – their view is that wrapping is a legitimate form of credit providing and as such falls under the credit code – which in W.A. must be done with a credit providers license.
The only case they took to court was when 1 wrapper did 1 deal and they won because they were able to prove that the sale was done in a busines like manner.
As for fees – it is based on 0.1% of money lent a t the end of each financial year. Ie you only pay when you make the money.
The fact that they want you license can only be a good thing – it indicates they recognised wrapping officially.
Regards
Michael GHi,
Contact a business enterprise center (BEC) or BASI at Blacktown etc they are non-profit organisations which are run to help new and small businesses with free info and small business courses.
Regards
MichaelHi,
I understand – actually never can happen in a flash – what most media don’t understand is that the credit code offers a lot of options to consumers along with protection.
Which is why even default means the consumer has 30 days to recover it.
Alternatively they can request hardship allowance if in serious trouble (in this case they were on a different payment plan – one they wrote themselves)
And being a wrapper – you have the flexibility to help people whereas mainstream have to stick to policies, which is why in this case there was an effort to fix the loan arrears rather than collect fees first (name one mainstream that would do that!)
So under our laws it would be nigh impossible to “kick someone out” immediately.
Regards
MichaelHi,
What about telling people that people that someone sold a house who’s name is not even on the contract?
http://www.jenman.com.au/NewsNews1.php?id=314
The point is, didn’t buy it, didn’t sell it, didn’t advertise it. So if not defamation, what is it? And this is my real name
Or forget to mention a stack of other relevant details.
At this stage my complaint is with the Sydney Morning Herald on a (very) similar article and that is currently with the Press Council.
Once that is sorted I’ll see where to go from there.
Regards
MichaelHi,
Just a thought, why not speak with bank you have your accounts with. See if there is a way where you can set up a joint signatory account where the wrapper and wrappee jointly sign. Then arrange two direct debit facilities (which are also jointly signed);
#1 to pay for 1st mortgage
#2 to pay for wrapper’s marginThis way money cannot be taken (drained) from this account without wrappee authorisation.
Whenever the repayments change – just get a new authorisation to alter the direct debits from the wrappee.
When a default occurs, you top up the account to sustain the first mortgage (since you can deposit at anytime).
In the event of a termination of the contract – you have a limited power of attorney in the contract which allows you to take full control of the account and remove the wrappee as a signatory (i.e. limited power under specific conditions).
The contract would have clauses that say that insist the wrapper only makes payments to the first mortgage from a joint account (thus protect the wrappee).
With such a setup – the only way a wrapper can default on a first mortgage is if the wrappee fails to pay into the account – placing the responsibility on the wrappee.
The issue is the cost of administration of the joint account – however such bank fees would be listed on the statement of accounts and passed onto the wrappee (like banks do with account keeping fees).
Again, just a thought
Michael GruberHi,
If you do need to sell, another alternative – rather that wrap the whole lot – maybe offer to vendor finance just the deposit to a FHOG qualied borrower. This would mean your mortgage would be paid out on settlement.
and the deposit could have a monthly payment with a payout in 1-5years
Just a thought
Michael GruberRobert,
Now you will need to list the criteria of what defines an “average everyday mum and dad investor”.
Regards
Michael GruberRobert,
Could you please give us your definition of “spruiker”?
Having only recently completed my term as President of the VFA, I would like to know what you are implying about the time I have spent in charge of the VFA?
Regards
Michael GruberHi Terry,
Actually I’ve read that this threshold has been raised – I can’t remember the exact figure at the moment, but I think is has been approximately doubled.
Regards
Michael GHi Terry,
You are referring to Section 66 – Changes on grounds of hardship http://www.austlii.edu.au/au/legis/qld/consol_act/ccc176/s66.html
Regards
Michael GHi,
In Rick’s case you are correct, in my case is was – and yet a story was still published with facts incorrect. The point was that in both cases the media was looking for a specific angle – as you read from the transcripts the interviewer was fishing for particular sound bites to edited into their story.
Would you agree that the media wanted to write the story in a specific kind of light?
I also read your question regarding how is it possible to remove a caveat before one is written.
You do not require any special solicitor, what you need is to include additional clauses in your contract which would give you limited power of attorney under specific conditions. Once those conditions are met – the other party has the power to do specific things.
It’s not something that can be abused as it is created for specific purposes and must be agreed by both parties before the contract starts.
Regards
Michael GruberHi,
From personal experience, it might be because even when you cannot comment due to the Privacy Act, they will just write a story anyway – regardless of facts.
But that is just my personal opinion
Regards
Michael GruberHi,
Michael Chin – 02 9771 0557
Regards
MichaelGHi,
Unless the unit is the person’s principal place of resident then they can provide vendor finance without a license.
However if they are in the business of vendor financing and selling places in a business like manner then contact the Department of Consumer and Employee protection to verify it would be ok to sell the PPOR.
Do some research – find out if there are any no-doc loans etc that would lend – find out the LVR and consider providing vendor finance for the difference between your asking price and the loan’s LVR.
Regards
MichaelG
