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When it comes to structuring finance for wealth building clients, Stephen McClatchie has more than two decades of expertise to draw on. He says understanding where the client’s deposit will come from as well as working out how much they can borrow are key – but only after taking into account the long and short terms goals of the investor.
MPA spoke with the director of Loans Australia about the five things brokers should consider when helping wealth-building clients structure finance.
You can’t save your way to wealth
Not only does McClatchie have 25 years of experience as a broker, he also has two decades of property investing experience – something that gives him the competitive edge when it comes to helping clients.
Despite this, he steers clear of individual property selection, specialising purely in finance.
“At the end of the day I focus on how do you accumulate mortgages, I don’t focus on how do you accumulate property.”
“It’s all about how many mortgages you accumulate because you can’t save your way to wealth, that’s for sure. You can only leverage your way to wealth.”
Five factors to consider when structuring finance
He says there are several important factors for brokers to consider when helping investors structure the right finance for their wealth-building journey – the first being a solid foundation.
“They’ve got to consider firstly where they want to end up. A lot of people think about just the transaction they’re doing but not actually thinking about what the client wants to achieve.”
He says ownership structure is also an important consideration.
“There’s about six or seven main styles of owning a property, and all of those styles have different financing consequences, tax consequences and legal consequences.”
To ensure the client is covered on all bases, they need the right accountant, property lawyer and risk person on their side.
“If they want to maximise their position, investors ideally need to have a team of experts around them. They can’t just rely on one person – I can’t give them accounting advice and I can’t give them legal advice.”
Once the client has the right professionals around them, they can gain a better understanding of how the structure will affect them financially as well as the legal implications and risk involved.
“Once they understand the structures and how that affects them then they’ve got to understand where the deposit’s coming from.”
“A lot of people make the mistake of pulling the deposit out of a redraw in their home loan and then they mix up their tax-deductible debt with their non-tax-deductible debt.”
“Another silly mistake is they pull the deposit for an investment out of their offset and when they do that, they can’t claim a tax deduction on that money.”
The trouble with lender calculators
The next big consideration is how much the client can borrow. McClatchie says a lot of people assume they can borrow a certain amount based on the results from a lender’s borrowing power calculator only to find out they can’t borrow this much when it comes down to the nuance of different policies.
“Unfortunately, there’s not really one piece of software out there which accurately gives an assessment of someone’s borrowing capacity.”
“Aggregators have guiding software but then realistically if you want to maximise someone’s position you’ve got to go into the software itself.”
Understanding how this works is often easier said than done.
“You could give a calculator to 20 brokers and I reckon you might nearly get 20 results for a client’s position depending on how complicated it is.”
“It’s open to interpretation and it’s open to the expertise of the broker.”
“I think a lot of people don’t understand that there’s so many ways lenders could look at things and how loans could be presented and understood.”
He says with bests interests duty due to start early next year, the onus will more now than ever be on the broker to exercise due diligence and uncover the best finance options for their wealth-building clients.
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