Prepare complex broking options. You are required to prepare a full report for Bill and John by outlining the application process and the risks (potential and real) of which they should be aware. This must be presented in a suitable format that would be sent to the client.

You will be required to outline to the directors the product options available to them and the process that will need to take place for them to complete the new property purchase and establish the loan. 

In preparation of researching the product options, you will need to understand the client's situation and what funds will be available between the purchase and the sale settlement as outlined in the case study.

The two (2) product options for the property purchase are as follows:

Option 1: A bridging loan with a term loan following bridging period (post sale settlement) 

Option 2: A variable rate term loan (to effect the purchase in 90 days time).

In developing your report, you should cover the following:

1.        Who are the parties to the loan, given the Trust involvement 

2.        What are your recommendations of the best loan structure option, including:

           •   the loan amount

           •   security/collateral including personal and company guarantees

           •   the loan term

           •   an explanation as to why the other option is not as suitable for the clients (include pros and cons and differences in fees and interest etc.)

3.        Outline the risks of which Bill and John should be made aware. Information should cover risks associated with the selected loan products and required security, including guarantees and forms of security required in addition to property.

Answer:

1. The parties were given with two options, OPTION 1 (A bridging loan with a term loan following bridging period (post sale settlement) and the OPTION 2 (A variable rate term loan (to effect the purchase in 90 days time). By observing the two options, BILL and JOHN must first examine which was more suitable to their financial status, whether to choose a BRIDGING LOAN or a VARIABLE TERM LOAN.

2. Based on my observation, John and Bill should consider the VARIABLE TERM LOAN not the BRIDGING LOAN.  

3. The risks that John and Bill should be aware is that Variable Term Loan may increase the interest rate without the creditors or loan lenders notifying them since it is based on the outstanding (variable cost) term. However, if they will settle on the Bridging Loan, they must be aware that it has a fixed high interest and collateral, therefore, they must have pay it quickly or else they will be indebt.

Explanation

1. BILL AND JOHN can consider option 1 because a bridging loan is classified as a short term loan that can be used by an individual or an  organization to secure a permanent finance. With this, it will allow BILL and JOHN to meet their certain obligations first while also meeting the loan by providing immediate cash flow. They must choose this if they are waiting for a money to repay their loan. But if they do not, they should not choose this because bridging loans imposes high interest rates and high collaterals. For example, if they are loaning this to buy a car while waiting for their land to be sold, then they can choose this loan because THEY are waiting for a cash inflow. 

With this, they can choose option 2 instead. Since OPTION 2 is a variable term loan, it has lower interest rates and lower collaterals. Since this type of loan only bases on the charge of outstanding  balances. So, if they can pay little by little, the rates will also decline compared to option 1 wherein the interest rates remain high. Simply, this rate and loan ADJUSTS and VARIES based on the amount that has been deducted from the original loan.

2.  Bill and John must consider the second option, variable term loan since this holds lower collateral and interest rate.  Also its pros and cons include:

• A variable rate loan may result in lower monthly payments in the short term, but the rate may rise over time, resulting in higher payments. 
• A variable rate may be a better option if you do not intend to hold the loan for an extended period of time. Furthermore, the credit is less than the bridging loan.
• This type of loan may allow you to borrow money.
• The disadvantage is that if interest rates rise, you may be unable to meet your payment obligations.

3. As we all know, taking loans are very high in risk; thus, BIll and John must be fully aware of the risks and disadvantages they might be facing.  First, Variable interest rates may increase to the point that the borrower becomes unable of repaying the debt. Thus, John and Bill's budgeting becomes more challenging as interest rates fluctuate just to pay their loan.

However, because the interest on a bridging loan is compounded monthly, the interest rate is higher. The longer you keep your home on the market, the more capitalised it becomes. Additionally, you must pay for two appraisals, not just for the original home but also for this loan. And, as previously said, the longer you take to repay this loan, the greater the interest rate will grow.