New legal and regulatory requirements are slowing things down and costing people time and money, especially if they leave things to the last minute before involving their professional advisers. The following story illustrates.
Recently, a client faced the problem of failing to obtain bank funding from a registered bank. They did not contact us in advance of their settlement, attempting to deal with their finance problems by themselves. Consequently, they have been forced into using a non-bank lender, which comes at a very high finance and time cost. Had they communicated with us well in advance of the settlement, we may have been able to assist them in finding a finance solution via brokers we work with, resulting in reduced costs to the client. Additionally, because the client hadn’t factored in the extra time and paperwork involved in obtaining finance from a non-bank lender along with the new AML (anti-money laundering) requirements, settlement was delayed meaning they also had to pay penalty interest to the vendor.
During 2018 we saw many changes in the legal, regulatory and finance environments. The changes don’t seem to be abating either, with new tax laws due to be introduced next year.
In particular, AML legislation has imposed an increased compliance regime on accountants, professional trustees and clients in relation to transactions such as buying and selling real estate and obtaining finance. My previous blog comments on this in greater detail. The legislation now means parties spend greater time, along with higher fees, when undertaking relatively normal personal and business transactions. Next year real estate agents will also have to grapple with this legislative beast, complicating matters further.
Early and clear communication with your advisers is vital
Ultimately, the new compliance regime has meant more time than ever before is needed to complete the requisite paperwork to affect a transaction. As such, communicating early with all the different professional advisers involved, including your professional trustee, enables a transaction to be completed in a timely manner. Adequate and early communication also provides opportunities to achieve increased asset protection and to realise tax planning objectives.
As happened in the story at the start of this article, failure to communicate with your professional advisers at the start of a transaction, e.g. the purchase of a property, may mean you cannot settle the purchase by its due date. This is especially so when bank finance is involved. Many people think having pre-approval from a lender will automatically guarantee them finance. This is not so.
Understanding finance criteria
A pre-approval of finance is usually conditional, often on the property being an acceptable form of security to the lender, and on serviceability calculations completed by the lender at the time an application for finance is made. The property you may wish to buy may not be an acceptable form of security to the bank.
Furthermore, you may fail the bank’s benchmark calculations when you make your application for finance. Banks have historically assessed a borrower on a principal and interest basis, usually adding a 2% margin to the interest rate they intend to charge a borrower. This methodology is used even when the borrower is intending to borrow funds on an interest-only basis. That margin has recently increased from the 2% benchmark (and you can read more about this in Salesh Chand’s recent blog). Consequently, borrowers are failing to achieve finance and are often forced to resort to non-bank lenders. Involving a non-bank lender frequently means additional time must be spent by the professionals involved in the transaction, including the professional trustee.
Case study – getting organised in advance
A client a few months back took up the opportunity to communicate early with us, advising me of their intention to purchase a family home about 7 weeks in advance of their settlement. This enabled us to provide advice and structure their affairs so they could make their borrowings tax effective. A great outcome all round and the client was thrilled, as this will be the first year they will ever receive a tax refund through the tax structuring we were able to achieve.
In summary, the new compliance regime affects almost everyone involved in a transaction these days. To achieve the best outcomes, early communication with qualified advisers such as your accountants and professional trustees who are competent in structuring, finance and taxation matters is strongly recommended. Help us to help you by letting us know of your plans well in advance.
On a Christmas note, I want to personally wish you a very merry and safe Christmas. May you enjoy many moments of love, fun and friendship and may Santa be kind to you.