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Good question Richard,
So a couple of quick responses which I hope covers this off for you.
This is the first time in this rather interesting post about Trust lenders that nab has been raised, so it begs the question of how they are relevant even on credit policy let alone pricing.
Assuming they are (I also presume you are not talking about Homeside), then NAB, who doesn't pay trails should be taken with a single rebate payment, or SRP.
At least one of the ORP Brokers I shopped offers a choice. You would then pick up between 25% and 32% of the gross upfront commission (depending on which brokerage you use), so that money could then be parked against whichever debt works best for the borrower to extend it's value.
However Homeside (powered by NAB), generally offers lower priced products than retail NAB and have one of the most generous trail commission structures which would turbo charge the borrowers savings even further. i..e 0.35% p.a. at 6 years plus. This means that although it is an internally originated product, the borrower winds up with a NAB backed loan, at a lower retail cost and rebates to smash the effective rate even further. If the broker can't argue credit policy issues through, then stick with NAB and simply switch from ORP to SRP.
It is important to remember that NAB is just one of many lenders an ORP Broker might deal with and they are the only mainstream lender falling into the "no trails" category. Given they are expensive to start out with, the fact they don't pay trails for an ORP broker to pay you just ramps out how expensive NAB really is.
If you REALLY need a NAB solution, then it would make sense to deal with an ORP broker that offers you a rebate payment choice, take SRP on the NAB stuff, and ORP on anything else with trails. Then when you are ready to switch out of NAB, you have an existing relationship with your ORP Broker to smooth through the transition with ORP savings from the new lender (unless you prefer SRP).
I hope that helps, please let me know if you have any other questions.
Thanks Terry,
That MAY be a problem however fees and LMI etc is somewhat independent of whether it is an originated/managed product or not. Very few originated products suffer the mortgage insurance issues you have sighted nowadays.
In terms of exit fees, penalties are no more the domain of originated products than they are of credit unions and banks. And you need to risk analyse that as well. Would you rather pay a higher rate every day, or risk a DEF that you may never pay, in exchange for an every day low rate? Depends on the individual, their plan and view.
The real problem is how they advertise more than anything else.
But just to be clear, ORP Brokers offer exactly the same products you do, i.e. retail lender products, not originated products (although some may also broker originator stuff). So there is no difference in product, just cost.
Hello Daniel,
Thank you for the detailed response.
You need to watch out for infochoice and similar web sites because their information is often incorrect and is always incomplete. I'm actually working on a piece on these types of sites right now, which should be out mid August.
Infochoice was wrong on the lowest cost point of they stated MyRate. Especially given the likelihood of Mortgage Insurance based on your LVR. I looked at a scenario for a client a few months back whose LMI was about $4K dearer with MyRate than it was with a standard lenders. Granted the LVR was 90% and loan was $600,000, but still. If you're surprised by this, then let me know and I can get you a copy of the piece I wrote on LMI for Your Investment Property Magazine.
There are a bunch of inaccuracies in what you've been told re: MyRate, but here's a couple of majors:
One Direct is mortgage originator which is a wholly owned subsidiary of ANZ. That means is it covered by ANZ's banking licence etc.
MyRate has no such relationship with ING. They ARE a mortgage originator and their funds are sourced from ING (not ING Direct per se), so too are Resi's and number of other mortgage originators. They are a private company and are not backed by, or a part of ING Direct as far as I know (which by the way is a JV between ANZ and ING).
However you are now looped into dealing with a mortgage manager, so whilst ING may be the ultimate lender, that's about it. You can't deal with ING directly. Is this a big deal? Can be, but hopefully not for you. You did however, miss out in ING's self insured version of LMI called REF, which probably cost you because REF regularly kicks the pants off GE and PMI.
But to answer your question, ORP Brokers are as rare as the proverbial rocking horse poo and there are few different models out there. They are mortgage brokers in the true and regular sense (i..e standard lender panel, do the paperwork, manage the work-flow to settlement etc) however they pass up to 100% of trail over to you.
WARNING: Gratuitous plug coming up…
Ironically I came to this forum researching ORP and SRP for a Your Mortgage Magazine article I'm writing due out later this year (that was the plug), finding your post and Richard's response in google. I didn't look at the Your Share model as it was too new and needs some time in market to see how it settles in and holds up.
However the sharpest ORP Broker in market today, credits 100% of the trail commission to your loan account on a monthly basis. No restriction on lender or product and has been doing ORPs since 2004 (verified).
I have however, run into some problems with fake opinions on various mortgage rebate models in the market, so I shifted the story angle to secret shop instead. I know Richard was very keen to bag this style of broker, however they all ranked surprisingly well in both complex and simple scenarios and they beat the retail broker on cost, solution and compliance.
In fact the sharp ORP Broker also gave the shopper referees for two borrowers who spoke very highly of the skill and care they received and continue to receive.
One is a Sydney based real estate agent with a $6m commercial+resi portfolio at 50% gear with a mix of trust types with different partners + of course complex agency income, The other is a Singagpore based ex pat with a similar size portfolio, more basic structure, but expat complications. Anyhow, they were great to interview, but no use for the YMM demographic as their situation is way too complex. However stay tuned, I hope to get them into Investment Property Mag.
There are two standout things I noticed about that broker. Their website is disgusting and they do a really bad job of overcoming the 'too good to be true' stigma for some people. They told me their website is being overhauled, but they are doing just fine and want to take it slow and steady to 'maintain the standard'. Go figure.
So looking at your scenario, the LMI would probably have been cheaper, who knows by how much. Moreover, the ING 'genuine product' would be rebated to you at 0.15% paid monthly so that puts your ING Mortgage Simplifier at effective rate of around 5.09-.015 = 4.94%, or if you were eligible for smart pack then 5.03 – 0.15 = 4.88% vs. best MyRate of 4.99% for over 600K. Of course the broker would have done your paperwork too.
Not to mention that there are at least 3 other lenders that would kick the ING rate around the block by up to another 0.2% that you could also get with an ORP.
Anyhow, no use crying over spilt milk and on the bright side, you have a better tax deduction.
Sorry for the war and peace, however I was flamed elsewhere for not providing enough context up front. I hope this covers it.
Gidday Daniel,
Just out of curiosity, what made you go with a mortgage originated ING product vs taking the real deal ING loan through an ORP Broker at a lower rate than the MyRate version?
And Richard, here's a shock for you. I'm with you on 100% on the comparison based advertising. Why is it that MyRate compares a basic variable product with a peak reference rate product that lenders discount down from? It ought to be illegal.
If MyRate's product is so good, why don't they compare it more honestly?
And one final thought (for this comment), how on earth is it ethical to shout No Fees* then fine print lists costs that other lenders, and most of the English speaking nation would call fees?
Hmmm.
Gidday ksun1985,
For the most accurate and up to date information contact the Victorian State Revenue Office on 13 21 61, or email you question to them at [email protected].
Just a quick thought on legality and context.
This story should carry an author acknowledgement, even if it is almost two weeks old, written about Sweden from an American perspecitve. For the record, tt was written by Edward Harrison's US Blog site Credit Writedowns.
Out of respect for the author and thinker behind this work, the post should also include the authors important footnote out Richards copy and paste. It reads:
"Update 1300ET: Note – so as not to play too fast and lose with my terminology, I should clarify that the Riksbank is charging banks for holding deposits at the Riksbank. They are not lending at negative interest rates as the statement “Basically, you are giving people money to borrow” suggests. Also, regarding the lending by the Riksbank, they are not technically engaging in quantitative easing (buying government paper with new money). However, the net effect of the lending is to increase credit flow."Thanks Robrok,
If you think he/she fits the bill, by all means let them know the opportunity is there.
The hypothetical scenario will be a fairly basic one because of the amount of ground the article needs to cover.
I have already had a couple of broker responses and the calibre so far has been quite impressive.
Hello folks,
I am currently writing an article for Your Mortgage Magazine on retail vs. mortgage rebates, then as a subset of mortgage rebates, ORP vs SRP.
I need two inputs and hope you can help.
The first is from borrowers willing to share their experience with a Retail mortgage broker, an ORP mortgage broker or an SRP mortgage broker. You must be able to substantiate that you have dealt with one or the other and your contribution can be either anonymous or (preferably) with name attached.
The second input is from a mortgage broker that doesn't rebate, confident of their skillls and can show their superiority to the discount brokers using a hypothetical scenario. I'm hoping for a cover for this article, so it is a great opportunity for a leader to shine and will include a business profile and contact details. The mag runs nationally with 37,000 subscriptions (I think) and the article should, subject to editors discretion, run for Octobers edition which comes out in September. No commission, but some great free advertising.
I have until 20th July to find you all. Anyone interested please post a comment or contact me via my profile.
And what pray tell, do they do?
Gidday David,
Congratulations on what sounds like a bit of a steal. (which sets off a few alarm bells, so move carefully).
I presume from your post that the DA is fully approved and the final matters just need to be tidied up (i.e. payments of contributions, re-registration of title, and council compliance condiitons etc).
Putting aside some of the jargon confusion at the moment, the answer to your question is prettty straight forward.
If you borrow as much as you can at each stage (short of LMI thresholds), you will have the least amount of hassle when it comes to taking the next step.
By taking Interest Only and a facility such as a LoC, you can leave your Cash on Hand against the loan to mitigate interest costs of the additional borrowings, which is one of the differentials between your ideas. It ensures your cash stays liquid, circumventing time and money costs associated with a step-by-step approach when it comes time to use the money for construction or subdivision costs etc. But be careful. Make sure you budget carefully and think things though properly BEFORE you commit.
However where your post gets a little confusing is on the valuations and this is where you might be getting a little ahead of yourself.
I would be surprised if your lender would be willing to lend money now, based on value yet to be realised. (mind you, I get surprised at least once every day, so it wouldn't be a first!) i.e. If the title of the two blocks have not been finalised, most lenders will only ever lend on the single title valuation, even though the DA is approved and other numbers may be speculated on. Same too for the 4 bedder. If the plans aren't through council, the lender is unlikely to give you the nod on a valuation for that etc.
Terry's comments on the LoC are pretty fair. A LoC is just a Loan Type which is like a big, interest only credit card. Lenders have started to load their rates a little again (i.e. they are a bit dearer) which is an indicator that, like credit cards, people can get out of control on them. BE CAREFUL. Do your numbers, build your plan and stick to it.
Get to an accountant that is famililar with property deals as soon as you can. He or she can straighten out your 'tax free' confusion (which you need to do before you take the next step). You need to take independent taxation advice on structuring this deal including several important steps along the way to properly manage your CGT exposure. Just quickly though, there is no tax free, it's just that the tax you are focussed on is CGT and it only occurs on sale of the asset.
Given the number of changes you are likely to make with your borrowings, you would probably do well to find yourself a mortgage broker to do that run around and follow up for you, expecially if you get into multi-lender solutions. Don't ask the broker to choose the solution for you though, they have a massive conflict of interest. Just get them to do the legwork. Look for an ORP or SRP broker who is willing to offer mortgage rebates, then go with your conscience.
Hello Marwoto,
On checking interest and interest offset calculations there is some help out there from a group call mortgage watchdog. I have to tell you that I have no idea how good they are, whether you can rely on them, or whether they are a sales funnel for a mortgage broker or lender so be careful if you decide to use them.
However if you are moderately handy with excel, you should be able to check for yourself as you have an interest only loan which should be a no-brainer once you understand how. (although a bit of a pain to do because you need to enter daily balances for the offset and the loan account). Let me know if you have and can use excel and I'll hack out a 'how to' guide.
Your understanding of how a 100% offset facility should work is correct, except for the calculation would be on $260K.
In response to your ADI question, yes, there is a little bit of a risk, but I wouldn't be freaking out and taking it as a reason to run screaming from Ratebusters.
To put it in context, an ADI is and Authorised Deposit-taking Institution as defined and regulated by APRA. They are banks, building societies and credit unions. Regulation by APRA helps protect your deposits and loans. Helps, because in life, nothing is absolutely safe.
Money in ADI's are backed by the Federal Government Savings Guarantee, money in non-ADI's is not. Hence the run some non-ADI investment products in the last year or so which you may have heard about. But what does that all mean to you?
Well, if you have money deposited in a non-ADI, it has more risk and I believe, but am not 100% certain that the offset account is with a non-ADI institution. If this instutution gets into trouble it may swallow your offset balance with no guarantee of refund, but leaving your debt at full value. Worth thinking about if the deposit is $500, worth learning a LOT more about if you have the $100K there.
In the context of your example, even though the $100K reduces the loan balance for the purpose of interest calculations, it does not reduce the debt. So it could be bye-bye $100K and you still shoulder the burden of the $360K debt.
However, rather than running from Ratebusters, you can simply move the money out of the offset, into the loan account itself, which effectively reduces your debt, so if the institution falls over, you only owe the $260K. There are some other bits and bobs to consider, such as the lenders right to freeze funds etc that can be a risk but this post is already a little too long.
In terms of planners, start with Scott's book. He also writes for the Herald Sun (and some others), so if you want to shoot him an email after you've read the book, you can probably reach him via the paper. Read barefoot investor first though, so you can better work out what you need to know.
A final thought.
Be cynical, whether I have written it, Richard has written it, Scott has written it, or whoever. The trouble with writing and reporting for the media is that controversy which scares off advertisers is bad for business, so you may only ever be getting part of the story – and even some of it may be wrong.
You get a freedom in these types of forums that you can't get in mainstream media, but that also comes with a different problem.
Just in this thread, Richard has failed to retract or apologise for falsely declaring something illegal, which he either knows or ought to have known to be false. Richard has also failed to explain to you why he has slandered the Ratebusters product as 'not a true offset facility', however he has been quick to offer you a helping hand. Why?
Several other posters have offered advice to 'get out now'. Why?
You are only just starting to learn and even without a robust plan, you seem to have had some good luck and are doing okay. Be careful Marwoto. Stick to the facts, grow your own knowledge and take your time.
Gidday Yossarian,
I think the context was there, just not the complete detail you were after. Some people don't like detail, others do.
Those that do, ask for more information. Nos1 did and of course, so did you. (You could have done it without the flame, albeit a good one – I'd happily rate it a 4 out of 5 on the burn scale.)
I am on this forum because I have the deepest respect for those willing to ask for the detail, consider it for themselves and work out the implication it has on them. Even if that means they come back for clarification.
On the handle, I'll take your comments under advisement.
And one final thing for Richard. My name is Michael. I never have or intend to ever be known as Gerard, although it is a lovely name.
Gidday Yossarian,
I'm not promoting any strategy, especially one to lose money. You simply grabbed a snip out of context so I'll try to get it back into context.
Your snip was from a clarification of an earlier post where I outlined a general rule to "write down the value of offset features for investment based borrowings" because you are only reaping the spread.
To those who are unfamiliar with the term spread, I am referring to the difference between your cost of money and the return on that money. Now remember, I said write down, not write off, which means I agree offset still has some value regardless of individual circumstance, but how much varies to the individual.
Any investor worth their salt has a loan structure that matches their needs well and delivers an effective rate in the range of 4.75% and 5% in current terms. There's a swag full of options that include offset, portability, top ups, etc in this range, so if you want them you can get them pretty easily at 5% or less.
My point is not to get tricked into paying more than you should, simply for the lure of offset. I make that point because new investors often don't understand the severe dilution of the offset value proposition when switching from personal borrowings to investment borrowings. This is evidenced somewhat by Nos1 asking for clarification on the point.
Now I know that some investors may have trouble scratching up a 4.75% return and for those, then an offset probably has a little more value.
However a kid working at Mc Donalds for minimum wage can get 4% (4.5% short) on deposits with any number of government guaranteed banks, building societies and credit unions. So you really have to wonder why investors can't pass the 4.75% yield mark across a balanced portfolio, or even a property biased portfolio in this day and age. I mean crikey, even the ASX200 is pulling close to 5%.
So Richard, if your clients aren't realising 4.75% yield, or have, as Yossarian put it 'offered to pay' the lender a higher interest rate, then yes, you are right. An offset on investment debt probably does make a little more sense for them.
For the record, RP Data has released current rental yield data this week and the top yielding suburbs around the country are:
- Sydney houses: Forest Lodge (5.8 per cent);
- Sydney units: Ultimo (10.4 per cent)
- Melbourne houses: Collingwood (5.1 per cent)
- Melbourne units: Carlton (8.6 per cent)
- Brisbane houses: Hemmant (4.8 per cent)
- Brisbane units: Spring Hill (6.4 per cent)
- Adelaide houses: West Richmond (4.8 per cent)
- Adelaide units: Gilles Plains (6.6 per cent)
- Perth houses: Tuart Hill (5.1 per cent)
- Perth units: Glendalough (6.4 per cent)
- Hobart houses: Risdon Vale (6.5 per cent)
- Hobart units: West Hobart (6.3 per cent)
- Darwin houses: Alawa (6.0 per cent)
- Darwin units: Stuart Park (6.9 per cent)
- Canberra houses: Holder (5.8 per cent)
- Canberra units: Scullin (7.1 per cent)
Okay Richard, just a couple of quick corrections on your information.
Contrary to your assertion, It is not illegal for a mortgage broker to comment or even advise on any type of mortgage offset facility, provided they belong to an ASIC approved EDR (External Dispute Resolution) scheme such as COSL or FSO.
It's been that way since before brokers came about and was reaffirmed by ASIC in 2003 with the formalisation of the FSRA (except of course the FSO was the BFSO back then). The ASIC media release can be found here: http://www.asic.gov.au/asic/asic.nsf/byheadline/03-388+ASIC+grants+relief+in+relation+to+mortgage+offset+accounts?openDocumentIn terms of your offset references, you seem to have strayed from the original term that I thought of as misleading. That is 'true offset' or to put it in your words 'not a true offset facility'.
There are two offset facilities that Marwoto has available to him under his present structure and lender. The loan itself and the other, admittedly more mysterious offset account.
Both of these facilities offset as legally defined, which was one of my points. And both of these, according to Ratebusters offset daily balances (barring the system glitch I mentioned earlier – which may or may not have been fixed by now). So Marwoto should be able to feel okay about them, which was my other point.
Whilst I respect your experience, if you take enough issue with calculation ,methods, fees etc of the Ratebuster product as to put Marwoto's choice down so harshly, why not be specific so all readers can understand what you mean. Point out the facts, the detail that forms the basis of your assertion.
Why not explain how neither of these facilities qualify, in your opinion, as a 'true offset facility'.
Be a part of the solution, rather than a part of the generalisation problem and certainly don't just become another spruiker for 5 of the Countries top bank lenders. They're big enough and loaded enough to do that themselves.
And for the record, I'm pro-borrower before I'm anything. And I'm not a mortgage broker or a financial planner.
But enough about me, what exactly is the shortcoming that you see with Ratebusters offset facility?
Gidday Greg,
Conflict of interest caused by commission is a major driver in shafting stories like yours. If you want to get around that, you probably need to look into becoming a borrowers agent rather than a broker, but doing your cert iv is a starting point either way.
Gidday Garoopna… I think you need to post this in the Legal & Accounting forum as you're really dealing with cashflow advantages/disadvantages and CGT and PIT issues, rather than a financing question.
Thanks Richard, it was too late in the day when I responded, I kept getting stuck on Maxis.
Although I agree that the offset seems to be doing very little if anything for Marwoto, this a combination of his knowledge, lifestyle and investment choices rather than support for your blanket generalisation that it's not a 'true offset'. Not to mention that there is no legal definition of what a 'true offset is'. I think your comment is misleading and unnecessarily disheartening to Marwoto.
Same too for flaming mortgage originators, or even Ratebusters for that matter. Although I'm not their biggest fan, it's hard to deny that for the right borrower profile it would be one of the top 10 picks and probably in the top half of that small field. It's just that Marwoto isn' t 'that' borrower. Horses for courses.
So the problem isn't so much with Ratebusters or their product, it is with the way that Marwoto compared, chose and now utilises his solution. With so much contradictory information out there and wild generalisation, it is no wonder Marwoto and people like him turn to rate, perhaps taking some support from media awards and industry recognition. Quite simply, his approach fell well short of a considered and proper comparison process. Hence my recommendation that he get some real, professional advice before moving ahead.
A final thought on originators. Like mortgage brokers, originators have and continue to play an important role in maintaining and increasing competitive tension in the market. This drives both product innovation and pricing competition, which in the end benefits borrowers.
Figure out a way to get rid of originators and my guess is that mortgage brokers will be next on the list, followed closely by an end to the already limited pricing competition. I'm sure the big 4 are working on it.
Gidday Sprunk,
Just before you call a broker or lender for that matter, crunch your numbers for yourself. Remember, lenders and brokers will sell you as much debt as they think they can get away with, which has gotten a lot of people in trouble in the same area that you are thinking of buying in.
Buying property is an excellent dream and a solid investment providing you can live well too.
Stay mindful that over the last 15 years, good variable rates (SVR) have averaged at around 7.09%, but spiked at 9.9% and in the last 5 years they averaged around 7.17% and peaked at 9.02% and you are thinking about this move at a time when interest rates are at record lows.
So before you call anyone who might be just as keen to get you into debt as you are to own your own home, why not jump on a mortgage calculator, punch your numbers in based at different interest rates between 7 and 10% and do a reality check on how well you would when interest rates return to that level.
Gidday again Marwoto,
Ratebusters is a mortgage originator which, if it was in the UK, would be called a single tied mortgage broker. They are definitely an intermediary for the lender, not the actual lender. However the risks and benefits of how a mortgage originator operates are different to your run of the mill mortgage broker (no offence intended on the 'run of the mill' comment fellas).
I was going to guess you had the Fee Buster, but didn't want to get into brands here. I can't remember who that product went back to in 2007, but if you really want to find out who the actual lender is, just check your actual mortgage documents.
The bad news is you miscalculated on this loan, paid a hefty upfront fee to get in; have an okay headline rate, with shaggingly poor flexibility (or okay flexibility with shaggingly high per use fees). And for the moment you're probably a little locked in. If you wind up doing top ups, be wary on resetting the penalty clock.
Your headline rate of 4.87% hides the effective cost of your loan which is well higher that 5%.
For example, you're less than 3 years into the loan and you paid a 0.66% loading to set up (without mentioning the other massive setup costs).
This means using even the simplest of math, your effective rate is over 4.87% + (0.66% / 3) so 5.09%. Now I say over 5.09%, because you also paid that money upfront so when you add the time value of money, which I didn't do to keep the math simple, blergh.
Anyhow, spilt milk there I'm afraid, so let's keep moving forward.
I interviewed a fellow from RateBusters some time last year (his name escapes me). We were talking about the offset account, because it's operation intrigued me a little as the lender was not an ADI. Anyhow, to cut a long story short, what he told me is that the offset account can sometimes go out of whack and not offset properly.
That's the bad news. The good news is, if you pick up offset errors and let them know, they will fix it. Other than that, it's an offset account.
Nonetheless, I think it might be an idea to get some financial advice BEFORE you do anything else (and I don't mean from a commission based financial planner) because it doesn't seem you have a very robust plan in place, or the experience to put one together on your own. If you have managed to build your equity as you believe, then it would be a shame to blow it with a bad decision made with too little knowledge and too much dud information.
This is an interesting forum and offers valuable input, but it's not the place to use as foundation block for that type of knowledge.
If you have a spare $30, take a look at barefootinvestor.com and think about picking up Scott's book. His book is a best seller, has a nationally syndicated newspaper column etc. Most importantly, he's a good guy.
Tough first lesson on the first loan, but the upside is you've built some equity in spite of it, with very little money down. Make sure you get the next move right.
Gidday Marwoto,
The fact that your loan has an offset account (provided that's what it actually is) suggests you're on a pretty fair wicket,
The fact that your lender is going to slug you for the top up is a little disappointing.
The next step is up to you, if the val holds @ $550K, you can, as you pointed out, get $80K out which means you can purchase at $400K (less costs) without worrying about LMI.
So can you make your IP purchase for that amount? i.e.can you find the right property with the capital gain and yield returns etc.
More importantly, although you get rental income, make no mistake that you will be almost doubling your debt so make sure you have done your numbers right to avoid winding up in the toilet.
Stay mindful that over the last 15 years, good variable rates (SVR) have averaged at around 7.09%, but spiked at 9.9% and in the last 5 years they averaged around 7.17% and peaked at 9.02% and you are thinking about this move at a time when interest rates are at record lows.
Although not an exhaustive list, here is some food for thought:
1. Find out how much equity you really have and remember to allow plenty of buffer for rate increases.
2. Think about fixing rates on the investment for the medium term.
3. If you find yourself daring enough to wander into LMI territory again, do it on the investment property.
4. Think about shopping the investment loan to a different lender and even if you don't, make sure you don't cross-securitise (sometimes called cross-collateralising).
5. Make sure you declare your top up as 'investment purposes'.
6. Keep the 'top up' as a separate split.
