Gidday Singer,

Actually, now the analogy fits even better.
 
It is quite difficult, often costly and sometimes impossible for the average person to know whether that renovation is a quality one or not. It's not unheard of for great tiles to cover up atrocious structural workmanship, a glossy bench which is a wafer thin veneer over an old dodgy one and so on.

Despite your cynicism, it is possible for smart renovators to deliver a quality renovation for less than others can deliver a good looking, but altogether dodgy one.

Likewise, the assumption that rebating commissions leads to less service or a lower level of expertise is unprovable

Over the years, I have interviewed a number of investors with extensive investment portfolios, strong positive cash flow and equally strong nett worth. They certainly don't agree with you.

They, much like myself, want the best ROI they can get, mitigating the risk of not knowing by learning.

If you know enough to truly know the advice you are getting on 'structure' is good advice, then you know enough to structure your own loan then go and ask for the commission.

Regardless, each to their own.

If you are willing to buy an unprovable idea for $32,000 then there will always be someone there to sell it to you.

Protect your interest!

Michael Lee

Sorry Hans,

There doesn't seem to be any information on your site about mortgage rebates paid to the borrower.

The thread was started on this topic and the most recent discussion was around finding the right words to explain the benefit of this over retail brokers (See my last post)

Protect your interest!

Michael Lee

Jazz77,

I could be wrong, however I thought if you are reporting on an Accrual basis it is taxed on Invoice date and if like many SME's you are reporting on a Cash basis, income is based on Paid date. 

I'm no tax attorney, however the concept of shifting this bookwork around sounds alarmingly illegal to me and you should seek professional taxation advice if you haven't done so already. Make sure you properly explain what you want to do and get it their response in writing to make sure they are the ones going to jail, not you.

Richard, I take it that by offering stated income amounts to Jazz77 you are okay with this / have recommended it before / have done it yourself?

StumpCam,

This doesn't answer the question to Kenny, however the ATO link also notes:

21. Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.

It is probably this statement that is causing the perception of 'locked' ratios because of the grey area on what 'notionally' means. I went back to my accountant on that and he then explained he had obtained a private ruling as Kenny suggested.
 
Sorry I didn't mention this prior, however I was unaware that he sought the ruling. I pay him to do the work so getting into the nitty gritty defeats the purpose of paying him to look after me in the first place.

Kenny's comment is spot on and you can take your question to the ATO where the buck stops. Based on the  information at hand and the ruling in my case, your situation is quite arguable and it will set your mind at ease.

The only one that can finalise it for you is the horse (ATO).

Thanks Kenny and StumpCam,

I appreciate feedback, support and challenges.

The GFC has touched most of us StumpCam, a small, but noteworthy consolation

Kenny – My answer comes in two parts. The first is that my accountant guided me out of a similar situation, so first hand experience over the last few years. It wasn't specifically in relation to an IP, however strictly investment debt mixed up with a smaller portion of O/O from a splash out.

I don't think there is a misalignment between what I've written/experienced and the bdo media release. I presume the reference is to common mistake 4 and the comment on apportioning on a reasonable basis.

As your response highlights, there is a grey area when it comes to the definition of reasonable, which as with most tax law, gives the Commissioner quite a bit of discretionary power, however that is seldom wielded 'unreasonably'.

So in the explanation I have given, the two areas likely to spark some concern are if the $100,000 came from the IP (wrap/sale etc) or in relation to arguably nominal interest savings from rental receipts.

Although the ATO is often vilified (ever had that feeling?) they are unlikely to be unreasonable unless you are pulling dodgies specifically designed to reduce or avoid the big T with no other arguable benefit. If the scheme is set up deliberately to achieve either of these two outcomes it would matter naught whether you had set up one loan account or twenty loan accounts.

I can't and won't argue against the bdo release – each to their own. My main point is it's not fatal or perhaps as doom and gloom as it might seem. To top that off, setting up separate accounts isn't the cure it might seem to be either. But KISS always applies.

Oh… I don't know if you searched the bdo release, but I failed to find tax contamination there either. I think tax contamination is a more like fact contamination, or as I like to call it, Faction – where a touch of fact is added to a fiction to make it sound credible.

Gidday Gibbo,

I'm not sure where you see the imbalance, although there seems to be some misunderstanding around my willingness to get this right. The moment a financial method was named, I embraced it, see above. It just needed the right name for me to get it.

I do apologise for not picking up on the conceptual references, however a specific reference to either NPV or DCF might have helped me catch it earlier. (I apologise again if there was one and I missed it). Let's face it, the anti mortgage rebate lobbyists have raised many issues to consider and I am just one person attempting to understand and respond to each of them along the way.

Nonetheless, the savings quoted are as close as we can get to objective data and this is what seems to be the major sticking point, as well as the rather bizarre concept that mortgage brokers offer a free service.

Importantly, I explored subjective measures such as quality of advice or service very early on and Alistair responded vigorously as have others, although to a lesser extent. My view arising from this input which supports other findings is that the ability for anyone to independently measure quality is difficult to say the least. However it should be noted that research has also included a secret shop arising from discussions with borrowers and brokers alike following my call for input.

Bottom line? I have not discovered or been offered any objective evidence that retail brokers offer better service or advice than rebate brokers. One of the few hard facts is that those unwilling to share their commissions grossly outnumber those who will, however as we all understand, it's about quality, not quantity.

This finding was supported in the secret shop, which actually found that of those shopped, the rebaters had a greater commitment to compliance than the retailers. Similarly, the structuring, comparison, lender panel and recommended solutions were as good and in some cases, arguably better.

In fact at least one of the mortgage rebaters has a dedicated, in-house loans processing and settlement team. They remain the only broker I know of that has taken the decision to separate sales from compliance and workflow.

So far, the only hard evidence offered by anyone in an attempt to support any theory  here (besides Dan42's very worthwhile input) was NAB's star rating, which is no use in supporting either side of the quality argument. Even then, there was an overtly misleading attempt to discredit this real information.

In addition to the information I have already posted in relation to this, it's worth noting that Rigoni is both experienced and a retail mortgage broker. I could reasonably argue a number of negative points about experienced, non rebating brokers with that case alone, however I haven't, because I am biased in favour of the borrower and they don't really need to know about it.

If you have objective data that can help clarify the situation, it would be more than welcomed. I extended the same offer to Alistair repeatedly in a bid to understand his calculations (to my knowledge, he never offered his solution). It turns out the confusion was simply one of nomenclature which was quickly resolved with the help of Dan42.

On statistics, I can't recall offering any, so perhaps you could quote them to me and I will check back through my notes where the information was sourced.

Remember, I am more than happy to receive new input, however they need to be independently verifiable and reasonably repeatable.

In the meantime, to help put the balance back in maybe something more like this?

Brokers that don't pay mortgage rebates say their service is worth the extra cost.

Borrowers will pay an extra $81,000 over 30 years in interest and fees for the identical loan through a broker who doesn't pay rebates over the broker who pays mortgage rebates.

Using discounted cash flow modelling, the $81,000 equates to around a $32,000 saving in today's terms. Which is still a nice saving.

Gidday StumpCam,

I'm not sure who is giving you your tax advice, but it seems a little ummm… off the mark.

The ATO's position is that you don't need to have a separate loan account so long as you clearly apportion the interest in the LoC (or any other loan account for that matter) based on what the principle balances were used for.

This of course means that your decision to move the $200K from shares to superannuation renders that component non-deductible, however it has no impact on the deductibility of the other $200K that has funded property.

You can get the principles of deductibility for the investment property from the horses mouth, here: http://www.ato.gov.au/individuals/content.asp?doc=/content/00113233.htm

The concept of some type of the mythical 'tax contamination' cured through clever loan structuring is a load of bollox. In fact, search the term 'tax contamination' whilst you're at the ATO site to help you understand what it really is. 

Whilst it's true that moving assets and liabilities between personal and investment purpose may have tax implications on CGT and income tax, the concept that you can mitigate or worsen this through loan splitting is false.

Having said that, it may make it a little easier for your accountant or book keeper to reconcile come tax time,but that's about it.

If your accountant had you believing otherwise, then it's a sure fire sign you should be looking for a better one. As for the decision to move money from shares to super, there could be a real case for complaint against your adviser there too.

Gidday Noisuf,

Rate type is a part of the structure conversation and fixed rates are about buying certainty, not saving in interest, so you have the tiger by the tail.The price of this insurance is currently a tad higher than 2.09% p.a. assuming you grab and lock the NAB-Homeside rate at 7.09% or add 0.10% for NAB Retail. Next stop is 7.29% with Heritage…

I had a quick look at your other post which seems a little chaotic. You probably should discuss your underlying strategy with your accountant before you structure your loan as your objectives are a bit hit an miss. i.e. negative gearing is usually a side effect of an investment strategy rather than the heart of it.

The easiest thing for you to do would be to just take the ANZ pre-approval, but it's unlikely to be the smartest thing. The deal you have with them is kind of okay (@0.7% off, you should be on 5.11%), but you probaly should at or below the 5% mark on variable for an effective rate.

Depending on a bunch of factors you haven't listed (i.e. a clear map of income/liabilties), there should be no issue taking the the new loan with a different lender to ANZ, but again, you are way short on detail and this is probably not the place to post it.

Gidday Gibbo,

Wow, dare to dream! Savings through those brokers could balloon well beyond the $81,000 (over 30 years) for that Homeside Loan.

Good questions and who knows the answer to the first one (how long). However, you could look toward the UK for your answer – having said that, they are different markets.

On question 2, I don't believe for even the briefest of moments that lenders would unilaterally pass commission 'savings' directly to borrowers in the form of rate cuts or fee concessions. There is only very limited evidence that this would occur (i.e. One Direct vs ANZ, however these offerings are not identical).

On question 3, borrowers THINK they are choosing cheapest fee now, which is why brokers are so keen to market their service as 'free' – $81,000 on $450,000 over 30 years – Yikes yes, free, no.

Perhaps some of your questions are best posed to borrowers such as Daniel who started this post. I believe he went with MyRate after arguably being driven, at least in part, by the disinformation and contempt lavished earlier in the post by you guessed it, non-rebate mortgage brokers. As a result, whether Daniel realises and/or wants to acknowledge it, he is paying a great deal more for less  (nobody wants to admit they have an ugly baby).

However that doesn't have to remain the case if borrowers are encouraged to consider the costs of their decisions more carefully; are armed with easier to understand information and of course, professionalisation of the mortgage advice sector is ever embraced. (i mean professional advice vs professional sales.)

As I posted earlier, I think there is room for a range of models and whilst that diversity exists, it is certainly much harder for lenders to go one way or the other.

Again, diversity coupled with honesty is the key.

This post is all about clearing the air on at least one point:

Would a borrower knowingly pay an extra 12.55% in interest and fees for the identical loan through one broker who doesn't pay rebates over the one which does?

Thanks Alistair,

The 18% saving on the $450,000 NAB/Homeside loan from mortgage rebate over retail has always been expressed as a percentage of the loan amount and calculated using real data. Although there has been plenty of allegation, nobody in this post has demonstrated the figure to be incorrect using real data.

When comments were added that this may be misleading, I then recalculated the savings on actual costs (i.e. interest and fees). The result is a 12.55% saving on retail broker costs by using a rebate broker.

The formula for this is pretty straight forward and universally accepted in other industries i.e:

(Retail Cost – Reduced Retail Cost)  / Retail Cost x 100

This is the same formula consumers would encounter everyday whenever they see a promotion offering 5% off, 10% off or in the case of the $450,000 homeside example, 12.55% off.

I again recalculated the results after you introduced an investment principle that I guessed to mean the Time Value of Money, which is quite well documented and which is also embedded into our own Mandatory Comparison Rate legislation and formula. I produced the savings for you on this basis including explanatory notes as to why this approach has some issues.

Once again, mortgage rebate brokers came out with a lower effective rate and a shorter loan term.

– Retail AAPR:                       7.22% for 30.0 Years
– Mortgage Rebate AAPR:      6.98% for 27.8 Years

These figures include the Time Value of Money using globally accepted methodologies and formula. Your approach, whilst interesting, does not. However, if you would like to email me your spreadsheet, I can arrange for it to be audited and documented. I would then be more than happy to include the results in my future posts and publications.

With respect to your claims surrounding the $1.1m figure, it is important to understand this amount includes the repayment of principle ($450,000) which is a cost of the investment rather than a cost of money.

Whilst professional investors include principle and capital costs in ROI calculations for a given investment, it is inappropriate to double dip them in the cost of money savings calculations. Principle is a fixed amount that must be paid regardless of financing decisions. 

It is important to recognise that I used actual, documented rates of commission/rebate to calculate a borrowers savings, rather than a guess at an average from a pool of brokers that seem steadfast against the idea of borrowers getting a share of commissions.

However I am reassured that you are thinking about ways to address the commission dilemma and it's probably no surprise that I disagree with your statement that there is only one way to do this.

If you are seeking a greater level of transparency and flexibility to set your own costs, their are a few other ways you can do that, at least two of which are gaining acceptance. I provide consultancy to a number of businesses implementing these exact models:

1. Agree your fee with the client and do not collect commissions (i.e become a Borrowers Agent rather than a broker).
2. Agree your fee with the client and refund 100% of whatever is left over from the commissions.
3. Agree your fee with the client, charge that to them and refund 100% of all commissions.

Each of these models is focused on delivering better results to the borrower. Anyhow, there's some food for thought and probably the subject for another post.

Putting all that aside and coming back to the original post, one of these models already available, really tackles some of the conflict of interest troubles that plague traditional mortgage brokers.

Of course it also delivers borrowers a 12.55% saving on retail broker costs by using a broker that pays borrowers mortgage rebates.