Your client has a preference for a fixed rate. What do you need to do?

July 24th, 2017

Fixed rate loans are very popular with clients who want to be able to anticipate exactly how much their repayments will be. In most mortgage broking businesses, it is quite common for a client to advise that they have a preference for a fixed rate loan in the Needs Analysis questionnaire or during the fact find process. So what do you need to do to ensure this choice is not unsuitable and meets your client’s needs and objectives? Here’s an outline of the best-practice procedure for fixed rate loans in three easy steps!

1. Identify and resolve any requirement conflicts

Review all of the client’s stated needs and objectives to ensure a fixed rate loan contract does not conflict with their other requirements. An example could be that the client expects to have the ability to make additional repayments to their loan. There is a potential conflict regarding the suitability of the loan in this case, as the additional repayments they intend to make may exceed what is allowed without penalty or cost, according to the lender’s contract.

Potential resolutions could include:

• Identifying a loan that allows the required level of additional repayments within lender contractual limits, or
• Recommending a split facility with a fixed and variable portion to facilitate the additional repayments through the variable portion, or
• Advising the client of potential lender costs for making additional repayments.

The client will be able to state their preferred choice of loan contract based on your discussion. You should confirm their stated preference and make detailed notes to document their decision. Best practice would be to confirm these discussions in an email to your client and to store this and a copy of your notes in Mercury.

2. Advise the advantages and disadvantages

In order to meet your Responsible Lending obligations, you must ensure your client fully understands all the advantages and disadvantages of their choice of loan.

Advantages of fixed rate loans include:

• Easier budgeting with the certainty of fixed repayments
• Protects against rising market interest rates for the length of the fixed rate period.

Disadvantages of fixed rate loans include:

• If market interest rates fall during the fixed rate period, the loan repayments will not fall.
• The overall loan costs may be higher than an alternative type of loan.
• There may be limits on extra repayments.
• Redraw facilities on any extra repayments may not be allowed.
• Break fees will apply if they wish to pay out or switch loans within the fixed rate period.

You should work closely with your client to assess whether or not a fixed rate loan is the most suitable choice of loan considering their personal financial circumstances and needs. For example, a fixed rate loan may not be suitable if the client is considering selling their home before the end of the fixed rate period, or if they may require flexibility of repayments.

3. Let your client decide if they still want to lock in their rate

It is acceptable to allow your client to choose whatever kind of loan they want, as long as you have fully explained all of their options. For example, if they still want to lock in a rate, you will need to explain the options available to your client for fixed rate pricing, in order to ensure they make a fully informed choice. This explanation will need to include:

• The period a lender will hold the fixed rate from approval, according to the eligibility of your particular client.
• The fee for a rate lock.
• Compare this to a pricing process without a rate lock.

The importance of notes and client communication

Carefully recording all of your discussions with your clients is necessary to meet your compliance obligations. All of these discussions and a record of the client’s decisions should be documented and saved as notes in Mercury. Again best practice is to confirm all of your discussions in an email to the client and save a copy of that too.

If you follow these steps you will ensure you are meeting your Responsible Lending obligations under NCCP and your client is making an informed decision. You can also be sure you are recommending a loan that fully meets their needs and requirements and are providing them with the very best customer service.

Contact the Compliance Team with any questions

If you have any questions about providing fixed rate loans, the Compliance Team will be happy to help. Get in touch by clicking your help icon in Mercury or simply email us directly at compliance@connective.com.au