How it works.

Credit Contract and Consumer Finance Act 2003. Depending on the purpose of the loan and/or the borrower entity type, any loan will be classed as either “regulated” or “non-regulated” under this legislation.

This is a loan where the purpose of lending is for a personal reason (e.g. buying or refinancing an owner-occupied property or personal debt consolidation) and the borrower is a natural person. This type of lending comes with certain obligations from a lending perspective, among them the Responsible Lending Code. Some Non-Bank lenders do not do any regulated lending.

This is a loan where the purpose of lending is for a business or investment purpose (e.g. buying or refinancing an investment property or business debt consolidation) or the borrower is not a natural person (e.g. a company or trust). Please be aware that this type of lending may mean that the borrower loses part of their protection under the Credit Contract and Consumer Finance Act 2003.

Also known as a “table” loan, this type of loan has the same payment amount to be made every month (or week/fortnight) by the borrower. The payment is divided unequally between principal and interest. In the early years of a 30-year P&I loan, a higher portion of the payment amount goes toward payment of interest. As the loan is gradually repaid, an increasing portion of the payment amount is allocated to the payment of principal, until the principal is fully repaid.

This is a loan where the principal must be repaid at the end of the loan term in one lump sum and only interest is repaid during the term of the loan. These loans are usually short term, say 6 Months to 5 years.

The borrower is responsible for making the scheduled loan payments, for the term of the loan, in full.

Normally seen on an Interest Only loan, there are no payments of interest to be made by the borrower. Instead, the interest is added to the principal loan balance (usually on a monthly basis) and will need to be repaid at the end of the loan term in one lump sum. This results in a higher interest cost over the life of the loan when compared to serviced interest, because each month the principal loan amount is getting bigger and bigger with the interest being added on. See the below table for a comparison:

$600,000 loan at 7.95% for 12 months

Serviced / Total Interest Cost: $47,700
Fully Capitalised:  / Total Interest Cost: $49,488

Most lenders will calculate and disclose the estimated amount of capitalised interest for the term of the loan, often referred to as the “Capitalised Interest Allowance”. It’s important to understand that this type of loan will result in the borrower owing the lender more than they’ve actually borrowed, with the interest being added onto the principal loan amount every month.

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Exactly the same concept as fully capitalised interest, but with the borrower making fixed partial payments themselves towards the total interest cost of the loan.

Only available for non-regulated lending and sometimes referred to as “front-loading” the interest, this is where the lender will calculate the amount of interest required to service the loan, advance this amount in full on day 1 of the loan and keep hold of it inhouse or their solicitors trust account to be used to service the interest every month for the full term of the loan.

This results in a higher cost over the life of the loan when compared to capitalised interest, because the borrower is effectively paying interest on interest - confusing we know! See the below table for a comparison:

$600,000 loan at 7.95% for 12 months

Fully Capitalised / Total Interest Cost: $49,488
Retained  / Total Interest Cost: $51,846

Most often used for construction lending, this is where a lender will hold back some of the loan amount which can be advanced bit by bit (often referred to as a Tranche) when certain conditions are met (e.g. Earthworks completed and Slab Poured, Framing-up and Roof). Interest is normally only charged on the outstanding loan balance at any given time (except for a retained interest loan).

Anti-Money Laundering and Countering Financing of Terrorism Act 2009. Non-Bank lenders must follow the same AML/CFT rules as the main banks do. This mainly consists of varying degrees of customer due diligence (in general, this requires you, as the adviser, to supply certified identification and proof of address for all parties to the loan). When we receive a loan application, SOS will provide guidelines to the adviser regarding the type of information and documentation that a lender will likely need to satisfy AML/CFT regulations. This will help reduce the likelihood of requests for further information from the lender.

An additional piece of security that a lender may ask for. The GSA is usually taken over “all present and after acquired assets” of the borrower and is usually requested when the borrower is a company. GSA’s can be also taken over trusts and individuals. The GSA is recorded on a publicly available register called the Personal Property Securities Register (PPSR). The main benefit to the lender in taking a GSA is that it gives the lender the right to appoint a Receiver if the borrower defaults on the loan. The Receiver can then take control and take steps to pay the lender.

The same principle as with a GSA (see above) but with an SSA, the actual specific assets of the borrower are recorded on the PPSR (instead of all present and after acquired assets). Most commonly seen with development deals where the lender may wish to take an SSA over the build contract and consents for the development.