Wrap refinance and cashout

Hi Folks,

Have done a search and couldn't find the answer so hoping somebody can help.

Property details:

Original purchase price by investor is $50K.
The first mortgage is $40K.
The marked-up price to the end buyer is $60K.
5 years later the market value is $80K.

How does the end buyer get finance to buyout the investor without a 20%+ deposit? Where does the deposit come from?

With normal purchases the buyer will get a loan approval once they have established that they have enough funds to cover the deposit. Having secured the loan they proceed with the purchase. With a wrap, how does this work?

Loans are not assumable in Australia so the first mortgage can only be paid out by funds from the sale of the property. The sale cannot be to the end buyer because they cannot get other finance without a deposit. So how is it done?

Is there some deal stiched up in advance with the lender who agrees to refinance the property at market value to give the end-buyer a first mortgage of $40K as well as an equity loan of $10K to cashout the investor?

Will the first mortgage lender agree to do this whether the sale is by instalment contract or lease option?

Thanks in advance.

There are some lenders who wil look at the time frames involved betwen the contract being signed and the settlement. They will also see the up to date payment schedule you provide to prove your client has serviced the loan then they simply do a loan based on the new valuation.

I have found a lending officer at IMBS who is quite receptive.

Hi Mike

If the value is now 80 k, total lend at 80 % LVR is 64 000.

Providing that the installments have been kept up to date and the wrapper is willing to support the application with appropriate documentation many lenders are likley to look at this as a straight transaction.


Thanks Simon,

I wonder how many wrappers are operating on the basis that to be cashed out requires the property to be sold to a third party? In otherwords, the wrap buyer, doesn't get to keep their home if they want to end the wrap finance. The property gets sold to cash the wrapper out and the wrap buyer must look for a new home as well as a new mortgage.

If wrap friendly lenders can't be found this may be the only alternative.

Thanks Rolf,

How does the wrap buyer get a loan on a property he doesn't own until the wrapper is cashed out? The wrapper can't get cashed out until the buyer has a loan? You see the buyer doesn't get title to the property until the last payment is made. The last payment can't be made until the buyer gets the funds from the bank. The bank won't give funds to the buyer against a property which is not yet owned by the buyer. It's a classic catch 22 situation.

Back to my original question - how does it actually work?

Hi Mike

Same as any other loan.

When the loan is due to be settled and the title is transferred from wrapper to wrappee its a straight settlement transaction.

Money is advanced AT settlement in exchange for a clear title, where the wrappee gives a mortgage to the incoming lender.

It is likely that there is an existing mortgage on the property which is payed out and discharged at the same time the settlement takes place. A bunch of bank cheques out of the proceeds of the new loan go to, the outgoing lender, the wrapper, and a few other people involved in the transaction.



No one actually owns a house until its free and clear, ie there's no mortgage attached to it. Other than that, its all percentages. The only thing people really buy with property is a position on the title.

It you sign a contract of sale for land, you get to be position #1.

If you don't have enough money and need to borrow from a bank/lender, then they become position #2.

If your a wrappee and have signed an instalment contract, then your position #3.

Now if you're the wrappee and want to move to position #1, you have to pay the difference between the % the bank owns, and the value that was on the contract.

Ie vendor buys for $100k, borrows $90k and wraps for $120k.

Effectively the wrappee needs to come up with $30k.

The simple explanations to manage this are;

a) produce $30k (eg. retirement payout, for example)
b) market moves (have property revalued)
c) sweat equity (cosmetic renovation, self paint, garden, etc)

All a lender is concerned about is;

a) servicability, the wrappee can produce loan wrap statements to show that they can pay regularly.

b) sufficient equity, as long as the Loan to Value ratio is acceptable, the bank will cash out the vendor and take on the wrappee as the owner.

Michael G
Thanks everyone for helping me out.

I thought there might be a problem because normally banks loan on purchase price or valuation, whichever is the lower. In this case, the purchase price of $60,000 is lower than the valuation of $80K. If the bank loaned on purchase price the loan would be $48,000 which isn't enough to cashout the investor.

As far as serviceability is concerned there shouldn't be a problem because for five years the buyer has been paying approx 2% over the prevailing rate on $60,000 instead of $40,000. The new loan will be close to $60,000 which includes the investor's premium and the interest rate is going to be 2% less than the buyer was paying anyway. So the serviceability is easier.

So, if it is that simple, why aren't more lenders open to wraps? Do they have a problem with refinancing to market value? Or is there some other reason?

I've heard that a wrap should be disclosed to the first mortgage lender. Is that because you want to know upfront the likelihood of the lender refinancing to market value to allow the wrapper to be cashed out? If the first mortgage lender says they won't refinance at the end, do you still give them the first mortgage and then try and find another lender who will loan on market value to give the new first mortgage to?

I'm trying to establish why some lenders are called wrap friendly and why others are not. Even Simon suggested in his earlier post that finding a wrap-friendly lender appears to be the exception.

Regards, Mike

Off-topic: For Rolf's interest...At the Panel event I attended here in the UK on Saturday the Financial advisor/Mortgage broker there criticised the industry saying that 90% of brokers were no good and most of them will sell you the product with the highest fee instead of the most suitable product. She even said the borrower is better-off getting the loans themselves and could probably do a better job by doing the broker course themselves.
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Yes Mike it does work. I got a nice bank cheque for 18k from a wrapped house I bought 18 months ago, with the wrappee getting finance on the house directly. The house only cost 42k too! The wrappee did a bit of a reno and got 80% finance on a 75k valuation.

From my understanding of wraps, lenders aren't "wrap friendly" when they knock back a loan, when it is disclosed to them that the property will be onsold using vendor finance. The majority of them don't like it, and their loan documents don't allow for this type of condition so they simply refuse the loan straight out. Just over a year ago now, there were some B-grade lenders who were more flexible and willing to take on such loans (with disclosure) but most of those have now closed their doors as well.

The wrapper now has limited options- one of these being to obviously not disclose their intention to onsell (after all what's stopping you from changing your mind after signing the loan docs?). The other is to go with a lender who "closes their eyes" to what the intention of the loan is actually for. This usually comes at a higher interest rate, as most of these are marketed as lo doc products.

Wraps are here to stay, as there is obviously a market out there for them, so it will be interesting to see what lending institutions do if they want the business from wrappers in the future. Already, there is one non-bank lender out there who has recognised this and is offering a type of hybrid loan product for wrappers.
Hi Mike

The main reason major lenders are anti installment contract is that when it goes bad they fear they cant recover security.

A long term tennant has "rights" and so therefore does a wrappee, why should they be turfed because the wrapper has gone belly up ? At the moment there is plenty of easy biz for the banks, so why would they bother - longer term though ......

On the off topic I cant comment in the UK industry. In Oz I have seen only minimal evidence of the "push the client into higher comm products" . Youve pushed my button here Mike hehhe

Truth is in OZ that in Oz the spread in upfront commissions is between .40 and .75 % per 100 000 loan, with literally 95 % of lenders paying between .6 and .7. so the incentive for the broker to risk a sale by going "mono product" is minimal.

I have heard similar comments about the Oz industry and that it needs to be "cleaned up" . One Recent Large, Late entrant into the brokerage market has made lots of noise on this point for free media mileage, yet their own product while great 10 years ago just doesn not cut it anymore.

My experience of "other" brokers is that some work the way I do, where the structure is more important than the immediate cost in many cases with a view to the future.

Then there are those that focus on cost cost cost with no view to the future.

Then there are those that still charge a 1.5 % brokerage on top of commission received.

As for borrowers seeking their own loans, this has merit in some circumstances - as does people servicing their own motor car, doing their own tax rtns, and doing their own conveyancing work. If its simple it'll be fine. If its more complex, then the borrower can still do it themselves but at what time investment and to what end ?

Most of my savvy clients could easily find their own deals, but they cant be bothered and know that their time is better spent on core activities.


Thanks everyone for your input. Whatever reason banks give for turning down loans for wraps my gut feel is that they really don't want to be associated with anything which appears dodgy, even if it is workable. They have a public profile they don't want tarnished by what they perceive as a dubious scheme if it goes wrong and leads to a lot of negative publicity.

The only way to turn this attitude around is for the wrap industry to keep a clean record and for wrappers to act professionally and give good service like some mortgage brokers on this site. Also we can put pressure on banks by supporting wrap-friendly lenders. If the wrap-friendly lenders flourish as a result of growth in wrap loans then the banks will take notice. So I welcome the mortgage brokers on this forum to keep us informed about developments in this area. If you have a wrap-friendly lender then tell us.

Re mortgage brokers...thanks Rolf for that assessment. As consumers we are advised to shop around when choosing an advisor, however, I believe some brokers view these people as time-wasters and discourage this by charging a starting fee which is not refundable if the deal doesn't go through. If we can't shop around, what due diligence can we do on mortgage brokers? Is it a case of choosing one on the personal recommendation of a happy client; giving them a try and, if not satisfied, look again?

Regards, Mike
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Hi Mike

I have a simple motto which I ask my clients to consider:

Choose a broker not a product

Your point about how does a borrower know whats good and bad in my industry is a hugely valid one.

Below is a bit of a checklist that one should enquire about when considering the services of a broker.

List Of Lenders you can place business with ?

Qualifications, and not just finance related, many proffessions not allied to the finance industry can be useful in brokeing environment, for eg psychology qualifications.

Memberships, Mortgage Industry Association of Australiasia Membership I would regard as "almost" mandatory

Experience, again not neccesarily just broking related. Just because someone is green to the industry does not make them a bad broker, indeed there are some excellent business systems out there that can take a greenie and make them competent really quickly.

References, dont expect your potential broker to be giving you lots of telephone numbers of people to ring etc. Some written testimonials are good (you wont get to see the bad ones ). I will only give out numbers where the existing client has agreed, AND the new client has committed to using my services subject to the reference "check". I have found this is required so that your existing clients are not hassled by tyre kickers (lucky I dont get many of them anymore)

Insurances, look for professional indemnity as MANDATORY.

Commissions, your broker should have NO problem with letting you know who pays what. If its "too personal", then you might want to remind them that you have just laid your financial life bare in front of them !

Range of Products, this relates to lenders used. A good guide to find out about the product knowledge is to ask as to what the pros and cons of LOCs and offset accts are ( the Rolf special heheh)

Comparative Rates, how do they compare products, what methods are used. why is x better than y

Future, how can I make best use of my equity, how many Ips can I buy ? Where are my risks in terms of rates ?

Other Services, what else is on offer ? Property, SHares etc etc

The above is reasonable start.

I suggest that people DONT shop for a broker, BUT get a referral from a family member or friend. That way at least, you are sure there is some good history.


To summarise...

The wrap buyer has purchased a property (exchanged but not settled).

The wrap buyer has a "mortgage" or finance (the wrap mortgage).

The wrap buyer approaches a new lender and says I own this property and have made 12 months payments on the underlying loan. Can you give me a cheaper loan at an LVR of x%.

Therefore ability to service the new loan and equity in the property are the only variables. No cash deposit needed.

Sounds easy doesn't it.

I took a wrap refinance to ANZ and NAB the other day. ANZ wanted to see the 5% saved deposit. Even though the chap I dealt with understood the equity built up it was bank policy that 5% deposit as genuine savings was needed. We just couldn't get around that one! NAB have a policy of using the purchase price or the valuation whichever is the lower. So even though the purchase price was 12 months old we are still working on bending policy enough to allow the current valuation to be used.

Hiya Simon

ANZ has that sucky 5 % policy regardless of LVR down to 60 %, and not just for Mortgage Insured Deals.

Even if you have been given 20 % + costs they are still reluctant to do it.

But then again thats where me make our living isnt it Simon, to find the niches.