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NZ Level 5 Residential Property Lending study materials
NZ Level 5 Residential Property Lending study resources

NZ Level 5 Residential Property Lending practice questions

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Question 1Regulatory framework and conduct obligations for residential lending

Under the New Zealand regulatory framework, which body is responsible for licensing residential mortgage advisers and monitoring their conduct against the Code of Professional Conduct for Financial Advice Services?

  1. The Commerce Commission (Te Komihana Tauhokohoko)
  2. The Reserve Bank of New Zealand (Te Pūtea Matua)
  3. The Ministry of Business, Innovation and Employment (Hīkina Whakatutuki)
  4. The Financial Markets Authority (Te Mana Tātai Hokohoko) Correct answer.

Explanation

The Financial Markets Authority is the conduct regulator for financial advice, including residential mortgage advice, and it issues licences to financial advice providers and enforces the Code of Professional Conduct. The Reserve Bank focuses on prudential supervision of registered banks and licensed non-bank deposit takers rather than adviser conduct.

Question 2Regulatory framework and conduct obligations for residential lending

A mortgage adviser is providing regulated financial advice to a first-home buyer. Which standard of care does the Code of Professional Conduct require the adviser to meet when giving that advice?

  1. Achieve the lowest possible interest rate available in the market for the client
  2. Guarantee that the recommended loan will be approved by the lender
  3. Exercise the care, diligence, and skill that a reasonable adviser would exercise in the same circumstances Correct answer.
  4. Follow the lender's internal credit policy above the client's stated objectives

Explanation

The Code requires advisers to exercise the care, diligence, and skill of a reasonable adviser in the same circumstances, which is a professional negligence-style standard. It does not impose a guarantee of outcomes such as approval or the absolute lowest rate, and the client's interests must be prioritised over lender preferences.

Question 3Regulatory framework and conduct obligations for residential lending

Which piece of legislation is the primary statute governing the licensing and conduct of financial advice providers, including those giving residential mortgage advice in New Zealand?

  1. The Banking (Prudential Supervision) Act 1989
  2. The Financial Service Providers (Registration and Dispute Resolution) Act 2008
  3. The Financial Markets Conduct Act 2013 Correct answer.
  4. The Credit Contracts and Consumer Finance Act 2003

Explanation

The Financial Markets Conduct Act 2013 establishes the financial advice regime, including licensing of financial advice providers and the regulation-making power for the Code of Professional Conduct. The other statutes deal with credit contracts, registration and dispute resolution, and prudential supervision of banks respectively.

Question 4Regulatory framework and conduct obligations for residential lending

An adviser recommends a home loan product that pays the adviser a commission from the lender. Under the conduct obligations, what must the adviser do regarding this conflict of interest?

  1. Disclose the conflict and prioritise the client's interests when giving the recommendation Correct answer.
  2. Refer the client to the lender directly so the adviser holds no conflict
  3. Decline to recommend any product that pays commission to avoid the conflict entirely
  4. Recommend the product only if the client signs a waiver of the conflict

Explanation

The Code requires advisers to disclose conflicts of interest and to prioritise the client's interests, so commission-based remuneration is permitted provided it is disclosed and does not drive the recommendation. Avoiding all commission products or using waivers is not the regulatory approach.

Question 5Regulatory framework and conduct obligations for residential lending

Before providing regulated financial advice to a new client, what must a financial advice provider ensure is done under the financial advice regime?

  1. Provide the client with the prescribed disclosure information, including the nature and scope of the advice Correct answer.
  2. Have the client complete a lender pre-approval application
  3. Register the client's details with the Reserve Bank
  4. Obtain a credit report from a credit reporting agency

Explanation

The regime requires disclosure to the client before advice is given, covering matters such as the nature and scope of the service, fees, conflicts, and dispute resolution. Credit reports, pre-approvals, and Reserve Bank registration are not prerequisites to giving advice.

Question 6Regulatory framework and conduct obligations for residential lending

Under the Credit Contracts and Consumer Finance Act 2003, which duty applies to a lender when entering into a consumer credit contract for a residential home loan?

  1. The lender must on-lend the funds through a registered bank only
  2. The lender must act as a responsible lender, including making reasonable inquiries and ensuring the loan is likely to be affordable Correct answer.
  3. The lender must obtain the borrower's employer's written consent before lending
  4. The lender must guarantee the borrower a fixed interest rate for the full loan term

Explanation

The CCCFA imposes lender responsibility duties, including making reasonable inquiries into the borrower's circumstances and ensuring the credit is likely to be affordable without causing substantial hardship. Fixed-rate guarantees and employer consent are not statutory lending duties.

Question 7Regulatory framework and conduct obligations for residential lending

A financial advice provider must belong to a dispute resolution scheme. What is the purpose of this requirement for residential mortgage clients?

  1. To insure the provider against professional indemnity claims
  2. To set the maximum interest rate the provider may recommend
  3. To allow the provider to appeal licensing decisions to an independent panel
  4. To provide clients with an independent avenue to resolve complaints about the advice or service Correct answer.

Explanation

Membership of an approved dispute resolution scheme gives consumers an independent, free route to resolve complaints against a financial advice provider. It is not an appeal mechanism for licensing, an insurance product, or a rate-setting body.

Question 8Regulatory framework and conduct obligations for residential lending

Which of the following best describes the 'priority of client's interests' duty under the Code of Professional Conduct?

  1. The adviser must place the lender's credit risk assessment ahead of the client's goals
  2. The adviser must defer to the client's choice even where it is clearly unsuitable
  3. The adviser must place the client's interests ahead of the adviser's own interests and those of the provider Correct answer.
  4. The adviser must always recommend the product with the highest commission to ensure viability

Explanation

The priority of client's interests duty requires the adviser to put the client's interests first, ahead of the adviser's and provider's own interests. It does not mean following the lender's risk appetite, maximising commission, or endorsing an unsuitable choice.

Question 9Regulatory framework and conduct obligations for residential lending

A mortgage adviser is assessing whether a proposed home loan is suitable for a client. Which factor is central to the suitability assessment under the Code?

  1. The number of products the adviser's provider distributes
  2. The lender's marketing campaign for the product
  3. The adviser's target for new loan settlements this quarter
  4. The client's financial situation, goals, and risk tolerance relative to the recommended product Correct answer.

Explanation

Suitability requires matching the recommendation to the client's financial situation, goals, and risk tolerance. Adviser sales targets, lender marketing, and the provider's product range are not legitimate drivers of suitability.

Question 10Regulatory framework and conduct obligations for residential lending

An adviser recommends a loan structure that includes a revolving credit facility. To satisfy the duty to make the client understand the advice, what should the adviser do?

  1. Email the product disclosure statement and close the file
  2. Provide a copy of the lender's standard terms without further explanation
  3. Explain the key features and risks of the revolving credit in a way the client can understand, and confirm their understanding Correct answer.
  4. Rely on the client's prior experience with any type of borrowing

Explanation

The duty to make the client understand the advice requires clear explanation of key features and risks in a manner the client can comprehend, with confirmation of understanding. Merely supplying documents or assuming prior experience does not meet the standard.

Question 11Regulatory framework and conduct obligations for residential lending

A client tells an adviser they want to borrow at the maximum possible level to buy an investment property. The adviser believes the borrowing is likely to be unaffordable. What is the adviser's obligation?

  1. Advise against the unaffordable level and explain the risks, while respecting the client's objectives Correct answer.
  2. Refuse to deal with the client and close the file immediately
  3. Process the application exactly as instructed without comment
  4. Recommend a higher loan amount to improve the client's investment return

Explanation

The adviser must give advice that prioritises the client's interests and meets suitability and affordability standards, which includes warning against unaffordable borrowing and explaining risks. Blindly processing the request or escalating the loan breaches those duties.

Question 12Regulatory framework and conduct obligations for residential lending

Which statement correctly describes the role of the Financial Service Providers Register (FSPR) for a mortgage advice business?

  1. Registration on the FSPR replaces the need for a financial advice provider licence
  2. Registration on the FSPR is required for the provider to offer financial services, but registration alone does not authorise giving regulated advice Correct answer.
  3. Registration on the FSPR is optional for all financial advice providers
  4. Registration on the FSPR is only required for lenders, not advisers

Explanation

Providers must be registered on the FSPR to offer financial services, but registration is distinct from holding a financial advice provider licence, which is what authorises giving regulated advice. Registration does not substitute for licensing.

Question 13Regulatory framework and conduct obligations for residential lending

An adviser's provider holds a financial advice provider licence. The adviser gives advice on behalf of the provider. Who bears the primary regulatory responsibility for the advice given?

  1. The financial advice provider, which must ensure its advisers meet the Code and licensing conditions Correct answer.
  2. The lender whose product is recommended
  3. The individual adviser alone, with no provider accountability
  4. The dispute resolution scheme the provider belongs to

Explanation

Under the regime the licensed financial advice provider is accountable for ensuring advice is given in accordance with the Code and licence conditions, including by its nominated representatives and advisers. Lenders and dispute schemes do not carry that regulatory responsibility.

Question 14Regulatory framework and conduct obligations for residential lending

A client complains that an adviser failed to disclose a commission. The provider's internal complaints process has not resolved the matter. What is the client's next available step?

  1. Lodge the complaint with the Reserve Bank for a binding ruling
  2. Apply directly to the High Court for a conduct declaration
  3. Refer the matter to the lender's credit committee
  4. Take the complaint to the provider's approved dispute resolution scheme Correct answer.

Explanation

Unresolved complaints about financial advice can be escalated to the approved dispute resolution scheme to which the provider belongs, which can consider the complaint independently. The Reserve Bank, High Court, and lender committees are not the usual first escalation route.

Question 15Regulatory framework and conduct obligations for residential lending

Which of the following is a required element of the disclosure a financial advice provider must give a retail client about fees?

  1. The amount of fees the client will be charged, or how those fees will be calculated Correct answer.
  2. The adviser's personal income tax rate
  3. The provider's internal profit margin on each product
  4. The lender's funding cost for the loan

Explanation

Disclosure must inform the client of the fees they will be charged or how those fees are calculated, so the client can make an informed decision. Internal profit margins, personal tax rates, and lender funding costs are not part of the required fee disclosure.

Question 16Regulatory framework and conduct obligations for residential lending

An adviser is recommending a loan to refinance a client's existing mortgage. Which conduct obligation is most directly engaged when the adviser also receives a fee from the new lender?

  1. Delegating the recommendation to the lender's mobile banker
  2. Guaranteeing that refinancing will reduce the client's total interest cost
  3. Avoiding any comparison with the client's existing loan
  4. Managing and disclosing the conflict of interest arising from the lender-paid fee Correct answer.

Explanation

A lender-paid fee creates a conflict that the adviser must manage and disclose, ensuring the recommendation is still driven by the client's interests. Guaranteeing savings, avoiding comparison, or delegating the advice would undermine the adviser's duties.

Question 17Regulatory framework and conduct obligations for residential lending

Under the CCCFA, a lender must make reasonable inquiries before entering a consumer credit contract. Which inquiry best supports this duty for a residential mortgage?

  1. Assessing the borrower's income, expenses, and existing debts to determine likely affordability Correct answer.
  2. Reviewing the borrower's social media activity for lifestyle indicators
  3. Checking whether the borrower has previously used a mortgage adviser
  4. Confirming the borrower's preferred repayment day of the month

Explanation

Reasonable inquiries under the CCCFA focus on the borrower's financial circumstances, including income, expenses, and existing debts, to assess whether the credit is likely to be affordable. Preferences such as repayment day or unrelated personal data do not establish affordability.

Question 18Regulatory framework and conduct obligations for residential lending

Which statement best reflects the obligation on an adviser to keep records of the advice given to a residential mortgage client?

  1. Records are only needed if the client later complains
  2. Only the lender is required to keep records of the advice
  3. The provider must keep records that demonstrate the advice given and the basis for it, in accordance with licence conditions Correct answer.
  4. Records may be discarded once the loan settles

Explanation

Licensed providers must maintain records sufficient to demonstrate that advice was given in accordance with the Code and licence conditions, which supports supervision and complaint handling. Records are not contingent on complaints, cannot be discarded at settlement, and are not solely the lender's responsibility.

Question 19Regulatory framework and conduct obligations for residential lending

A client asks an adviser to recommend a loan for a property purchase in Australia. The adviser's licence covers advice on New Zealand residential property only. What is the appropriate response?

  1. Provide the advice but label it as informal guidance to avoid the licensing requirement
  2. Refer the client to the lender's Australian branch without any explanation
  3. Decline to give the advice and explain that it falls outside the scope of the provider's licence and competence Correct answer.
  4. Give the advice anyway because the client requested it

Explanation

Advisers must operate within the scope of their licence and their competence, so advice outside that scope should be declined with an explanation. Giving advice anyway, mislabelling it, or referring without explanation would breach those obligations.

Question 20Regulatory framework and conduct obligations for residential lending

Which of the following best describes the standard the Code sets for the advice an adviser must give about a recommended residential mortgage?

  1. The advice must produce the highest possible return for the client
  2. The advice must match the product most commonly sold by the provider
  3. The advice must be suitable for the client, having regard to the client's circumstances and objectives Correct answer.
  4. The advice must be identical to the advice given to the client's partner

Explanation

The Code requires advice to be suitable for the client based on their circumstances and objectives. Popularity of a product, maximum return, or identical advice to another person does not satisfy the suitability standard.

Question 21Regulatory framework and conduct obligations for residential lending

An adviser's provider changes its commission structure so that advisers receive a higher payment for recommending a particular lender's loans. What must the provider do to remain compliant?

  1. Remove the client's right to complain about the recommendation
  2. Update its conflict of interest disclosure and ensure advisers continue to prioritise clients' interests Correct answer.
  3. Stop disclosing commissions because the structure is now standardised
  4. Require advisers to recommend that lender to all clients

Explanation

Changes to remuneration that create or alter conflicts must be reflected in disclosure, and advisers must continue to prioritise clients' interests rather than steer business to the higher-paying lender. Suppressing disclosure, mandating recommendations, or removing complaint rights would breach the regime.

Question 22Regulatory framework and conduct obligations for residential lending

Which of the following statements about the Code of Professional Conduct for Financial Advice Services is correct?

  1. It replaces the Credit Contracts and Consumer Finance Act for mortgage lending
  2. It sets standards of ethical behaviour, client care, and competence that apply to those giving regulated financial advice Correct answer.
  3. It applies only to banks and not to mortgage advisers
  4. It sets the maximum interest rate lenders may charge on home loans

Explanation

The Code establishes standards of ethical behaviour, client care, and competence for those giving regulated financial advice, including mortgage advisers. It does not set interest rates, replace the CCCFA, or apply only to banks.

Question 23Regulatory framework and conduct obligations for residential lending

An adviser identifies that a client's stated objective is to minimise monthly repayments, but the adviser's analysis shows a shorter loan term better serves the client's long-term financial position. How should the adviser proceed?

  1. Base the advice on the client's stated objective while explaining the trade-offs, and document the discussion Correct answer.
  2. Override the client's objective and recommend the shorter term without discussion
  3. Refuse to advise until the client adopts the adviser's preferred objective
  4. Recommend the shortest possible term because it is generally best practice

Explanation

Advice must reflect the client's objectives and circumstances, so the adviser should address the stated objective, explain relevant trade-offs, and record the discussion. Overriding the objective or imposing a generic preference breaches the suitability and priority duties.

Question 24Regulatory framework and conduct obligations for residential lending

A provider discovers that one of its advisers has been giving mortgage advice without completing the required competence requirements. What is the provider's regulatory obligation?

  1. Take appropriate action to ensure the adviser meets competence standards and the advice complies, and notify the FMA where required Correct answer.
  2. Wait for a client complaint before addressing the issue
  3. Transfer the adviser to a non-advice role without any record
  4. Take no action because the adviser is an independent contractor

Explanation

The licensed provider must ensure its advisers meet competence standards and that advice complies with the Code and licence conditions, taking remedial action and notifying the FMA where required. Contractor status, waiting for complaints, or silent transfers do not discharge that obligation.

Question 25Regulatory framework and conduct obligations for residential lending

Which situation most clearly indicates a breach of the duty to prioritise the client's interests in a residential lending context?

  1. The adviser recommends a higher-commission loan that is more expensive for the client without any client benefit Correct answer.
  2. The adviser discloses a commission and explains why the recommended loan suits the client
  3. The adviser recommends a loan that meets the client's objectives but pays no commission
  4. The adviser compares two lenders' products and documents the reasons for the recommendation

Explanation

Recommending a more expensive, higher-commission product with no client benefit shows the adviser's interest overriding the client's, which breaches the priority duty. Recommending a suitable no-commission loan, disclosing and justifying a commission, or documenting a comparison are consistent with the duty.

Question 26Regulatory framework and conduct obligations for residential lending

A residential mortgage lender is deciding whether a proposed loan to a first-home buyer is a consumer credit contract under the Credit Contracts and Consumer Finance Act 2003. Which characteristic determines that the contract is a consumer credit contract?

  1. The credit is secured by a mortgage over residential property regardless of the borrower's purpose.
  2. The lender is a registered bank or licensed non-bank deposit taker under the Reserve Bank framework.
  3. The loan amount is below the lender's internal threshold for retail lending approval.
  4. The credit is provided primarily for personal, domestic, or household purposes and the debtor is a natural person. Correct answer.

Explanation

Under the CCCFA, a consumer credit contract requires that the creditor provide credit to a natural person and that the credit is intended primarily for personal, domestic, or household purposes. Security over a home and the lender's institutional status are not the defining tests, although they may affect other obligations. The purpose test and the natural-person debtor test must both be met.

Question 27Regulatory framework and conduct obligations for residential lending

A mortgage adviser is giving regulated financial advice to a retail client about a home loan. Which statement correctly describes the standard of care and competence the adviser must meet under the Code of Professional Conduct for Financial Advice Services?

  1. The adviser must disclose all personal conflicts only if the client specifically asks about them.
  2. The adviser must follow the client's instructions exactly, even if the adviser believes the instruction is unsuitable.
  3. The adviser must guarantee that the recommended loan will be the lowest-cost option available in the market.
  4. The adviser must exercise the care, diligence, and skill that a reasonable adviser would exercise in the same circumstances. Correct answer.

Explanation

The Code requires advisers to exercise the care, diligence, and skill that a reasonable adviser would exercise in the same circumstances. This is an objective professional standard, not a guarantee of outcomes. Following instructions that are unsuitable or withholding conflicts would breach other duties under the Code.

Question 28Regulatory framework and conduct obligations for residential lending

A lender is assessing affordability for a consumer credit contract under the Credit Contracts and Consumer Finance Act 2003. Which approach best meets the lender's obligation to make reasonable inquiries and ensure the loan is likely to be repaid without causing substantial hardship?

  1. Base the assessment on the borrower's credit score alone, since it reflects their repayment history.
  2. Approve the loan if the loan-to-value ratio is below 80 percent, because that ratio alone establishes affordability.
  3. Verify income and expenses using reliable evidence and assess the borrower's ability to meet repayments under plausible adverse changes. Correct answer.
  4. Rely on the borrower's self-reported income and expenses without independent verification.

Explanation

The CCCFA requires lenders to make reasonable inquiries into the borrower's income, expenses, and financial circumstances and to assess affordability. Reliable verification and stress-testing against plausible adverse changes are central to that duty. Relying on self-reporting, a single ratio, or a credit score alone does not satisfy the reasonable-inquiry standard.

Question 29Regulatory framework and conduct obligations for residential lending

A financial advice provider's internal complaints process has not resolved a client's complaint about residential mortgage advice within the required timeframe. What is the correct next step for the client under the dispute resolution framework?

  1. The client must complain to the Financial Markets Authority, which will investigate and award compensation directly.
  2. The client may refer the complaint to the provider's approved dispute resolution scheme, which can consider the complaint independently. Correct answer.
  3. The client has no further avenue once the internal process is exhausted, because the provider's decision is final.
  4. The client must file proceedings in the District Court, because internal processes are the only alternative to litigation.

Explanation

Financial advice providers must belong to an approved dispute resolution scheme, and clients can refer unresolved complaints to that scheme. The scheme can consider the complaint independently and may make recommendations or binding decisions depending on its rules. The FMA is a regulator and does not award compensation to individual clients through a complaints process.

Question 30Regulatory framework and conduct obligations for residential lending

An adviser recommends a home loan that includes a low introductory fixed rate for twelve months, after which the rate reverts to a higher floating rate. The client's stated objective is stable, predictable repayments. Which conduct obligation is most directly engaged when the adviser decides whether to recommend this structure?

  1. The obligation to recommend the product that pays the adviser the lowest commission.
  2. The obligation to disclose the lender's prudential capital position to the client.
  3. The obligation to ensure the recommendation is suitable for the client's objectives and circumstances, including the effect of the rate revert. Correct answer.
  4. The obligation to complete the lender's application forms accurately and on time.

Explanation

The suitability duty requires the adviser to match the recommendation to the client's objectives and circumstances. Where the client wants stable repayments, the adviser must assess and explain the impact of the revert rate before recommending the structure. Commission minimisation, form completion, and prudential disclosure are not the primary duties engaged by this decision.

Question 31Responsible lending and affordability assessment

Under the New Zealand responsible lending requirements for residential mortgage advisers, which document records the borrower's income, expenses, assets and liabilities and forms the basis of the affordability assessment?

  1. A statement of position or financial information form completed with the borrower Correct answer.
  2. The lender's product disclosure statement
  3. The property valuation report
  4. The loan application form only

Explanation

The affordability assessment is built on a documented statement of the borrower's financial position, capturing income, living expenses, assets and liabilities. This record is what the adviser and lender rely on to test whether the loan is affordable and suitable.

Question 32Responsible lending and affordability assessment

Which measure best reflects a borrower's genuine ability to service a new residential mortgage?

  1. Gross household income before tax
  2. Total value of the security property
  3. Net surplus income after existing commitments and realistic living expenses Correct answer.
  4. The borrower's credit score alone

Explanation

Serviceability depends on the money actually available after tax, existing debts and realistic living costs, which is the surplus available to meet the new repayment. Income, security value or a score in isolation do not show whether repayments can be met.

Question 33Responsible lending and affordability assessment

A lender assesses affordability using a test interest rate that is higher than the current advertised rate. What is the main purpose of this buffer?

  1. To comply with the deposit requirement
  2. To increase the lender's interest margin on the loan
  3. To test whether the borrower could still repay if rates rise Correct answer.
  4. To shorten the loan term

Explanation

An assessment rate above the actual rate creates a buffer so that the borrower's affordability is tested against plausible future rate increases. This protects both borrower and lender from payment shock when rates move.

Question 34Responsible lending and affordability assessment

In a responsible lending file, which item is most important to verify independently rather than accept at face value from the borrower?

  1. The borrower's stated preference for a fixed rate
  2. The borrower's choice of solicitor
  3. The borrower's declared income Correct answer.
  4. The borrower's preferred repayment frequency

Explanation

Declared income is the foundation of the affordability calculation, so it should be evidenced with payslips, bank statements, tax records or accountant confirmation. Preferences and professional advisers do not drive the repayment calculation.

Question 35Responsible lending and affordability assessment

Why must a residential mortgage adviser use realistic living expense figures rather than a token minimum when completing an affordability assessment?

  1. Because expense figures determine the property valuation
  2. Because lenders receive a government subsidy for higher expense figures
  3. Because understated expenses overstate surplus income and can lead to unsuitable lending Correct answer.
  4. Because higher expenses reduce the lender's legal obligations

Explanation

If living costs are understated, the calculated surplus looks larger than reality and the loan may be approved even though the borrower cannot comfortably repay. Realistic expense benchmarks protect against unsuitable outcomes.

Question 36Responsible lending and affordability assessment

A borrower has a credit card with a $10,000 limit and a nil balance. How should a prudent affordability assessment generally treat this facility?

  1. Ignore it because the balance is zero
  2. Include a commitment based on the limit, since the facility could be drawn Correct answer.
  3. Treat it as income
  4. Count only the annual fee

Explanation

An available credit limit represents potential debt that could be drawn at any time, so prudent assessments include a commitment based on the limit. Ignoring it understates the borrower's potential obligations.

Question 37Responsible lending and affordability assessment

What does the loan-to-value ratio (LVR) of a residential mortgage measure?

  1. The loan amount as a percentage of the property's value Correct answer.
  2. The borrower's income as a percentage of expenses
  3. The term of the loan as a percentage of the borrower's age
  4. The interest rate as a percentage of the loan

Explanation

LVR expresses the loan amount relative to the value of the security property, so a $480,000 loan on a $600,000 property is 80% LVR. It is a key measure of equity and lender risk.

Question 38Responsible lending and affordability assessment

When a borrower's income includes regular overtime and bonuses, what is the most appropriate approach in an affordability assessment?

  1. Count the full maximum amount ever received
  2. Count only the most recent single payment
  3. Use a conservative average supported by evidence of consistency Correct answer.
  4. Exclude all variable income entirely

Explanation

Variable income should be assessed conservatively using an average of evidenced, consistent earnings rather than a peak figure. This avoids overstating capacity based on irregular windfalls.

Question 39Responsible lending and affordability assessment

A self-employed borrower provides two years of financial statements and a recent accountant's confirmation of income. Why is this evidence important for the affordability assessment?

  1. It provides independent evidence of sustainable income where payslips are unavailable Correct answer.
  2. It sets the maximum loan the lender may approve
  3. It replaces the need for any expense assessment
  4. It guarantees the business will remain profitable

Explanation

Self-employed income is not evidenced by payslips, so financial statements and accountant confirmation provide independent support for a sustainable income figure. The assessment still requires expenses and commitments to be considered.

Question 40Responsible lending and affordability assessment

A borrower's only income is a Work and Income benefit. How should an adviser approach the affordability assessment?

  1. Assess the benefit as income but apply realistic expense and buffer testing to confirm sustainability Correct answer.
  2. Automatically decline because beneficiaries cannot hold mortgages
  3. Multiply the benefit by twelve and approve without further checks
  4. Assume benefit income is too unstable to be considered at all

Explanation

Benefit income can be considered, but it should be verified and tested against realistic expenses and an assessment rate buffer to confirm the loan is sustainable. A blanket refusal or an unchecked approval both fail responsible lending principles.

Question 41Responsible lending and affordability assessment

A borrower wants a loan where the minimum repayment barely leaves any surplus after living costs. What is the most appropriate responsible lending response?

  1. Increase the loan term indefinitely to reduce repayments
  2. Approve because the minimum repayment is technically met
  3. Recommend a smaller loan or a different structure so a reasonable surplus remains Correct answer.
  4. Ignore living costs because the borrower signed a declaration

Explanation

Meeting the minimum repayment with no margin suggests the loan may be unaffordable, so reducing the loan size or restructuring to leave a reasonable surplus is the responsible approach. A signed declaration does not override a poor affordability outcome.

Question 42Responsible lending and affordability assessment

Which of the following best describes the purpose of a lender's responsible lending obligations when assessing a residential mortgage application?

  1. To guarantee the property will increase in value
  2. To maximise the lender's loan book growth
  3. To remove the need for a written loan agreement
  4. To ensure the loan is suitable and affordable for the borrower before it is advanced Correct answer.

Explanation

Responsible lending obligations require the lender to satisfy itself that the loan is affordable and suitable for the borrower's circumstances before advancing funds. They are consumer-protection requirements, not growth targets.

Question 43Responsible lending and affordability assessment

A borrower discloses a dependant and childcare costs of $350 per week. How should these be treated in the affordability assessment?

  1. Deduct them from the deposit
  2. Exclude them because childcare is discretionary
  3. Count them as a one-off cost only
  4. Include them as an ongoing living expense Correct answer.

Explanation

Childcare for a dependant is a recurring commitment and must be included in ongoing living expenses. Excluding it would overstate the borrower's available surplus.

Question 44Responsible lending and affordability assessment

An adviser is comparing two borrowers with identical incomes. Borrower A has a $600 per month personal loan with 18 months remaining; Borrower B has no other debt. How does this affect the assessment?

  1. Both must be declined
  2. No effect, because incomes are identical
  3. Borrower B must borrow more to compensate
  4. Borrower A has a lower surplus and reduced capacity for a new mortgage Correct answer.

Explanation

Existing debt repayments reduce the surplus available to service a new mortgage, so Borrower A has less capacity than Borrower B despite equal income. The assessment must account for those commitments.

Question 45Responsible lending and affordability assessment

Which of these best explains why a lender may stress-test affordability at a higher assessment rate for a fixed-rate loan?

  1. Because the stress test replaces the need for a deposit
  2. Because the borrower may face a higher rate when the fixed term expires Correct answer.
  3. Because fixed rates never change
  4. Because the fixed rate is always higher than the floating rate

Explanation

When a fixed term ends the loan usually reverts to a floating or refixed rate that may be higher, so testing at an elevated assessment rate checks whether the borrower could cope. The stress test is about future resilience, not the current fixed rate itself.

Question 46Responsible lending and affordability assessment

A borrower's business income is highly seasonal, with strong summer months and weak winter months. What is the most prudent way to assess income?

  1. Use an annualised average that captures the full seasonal cycle Correct answer.
  2. Exclude business income and use only any part-time wages
  3. Use the weakest winter month and ignore the rest
  4. Use the peak summer month as the ongoing figure

Explanation

An annualised average across the full seasonal cycle smooths out peaks and troughs and better reflects sustainable income. Using only a peak month overstates capacity, while using only the trough may understate it.

Question 47Responsible lending and affordability assessment

Which document is most directly used to verify a PAYE employee's ongoing income for a mortgage application?

  1. The borrower's passport
  2. The property's LIM report
  3. Recent payslips and bank statements showing salary credits Correct answer.
  4. The lender's terms and conditions booklet

Explanation

Payslips and bank statements showing regular salary deposits are the standard evidence of PAYE income. Other documents relate to the property, identity or product terms rather than income.

Question 48Responsible lending and affordability assessment

A lender's affordability policy requires that after all commitments the borrower retains a minimum surplus. Why is a minimum surplus requirement used?

  1. To reduce the property valuation
  2. To increase the lender's fee income
  3. To satisfy the borrower's solicitor
  4. To ensure the borrower has a buffer for unexpected costs and rate movements Correct answer.

Explanation

A minimum surplus leaves room for unexpected expenses and rate increases, reducing the risk of hardship. It is a resilience measure rather than a fee or valuation mechanism.

Question 49Responsible lending and affordability assessment

An adviser discovers that a borrower omitted a $25,000 car loan from the initial statement of position. What is the correct course of action?

  1. Update the statement of position and reassess affordability before proceeding Correct answer.
  2. Proceed, because the borrower signed the original statement
  3. Ignore the omission if the car loan is nearly repaid
  4. Reduce the loan term to hide the debt

Explanation

The statement of position must accurately reflect all commitments, so the omission should be corrected and affordability reassessed. Proceeding on inaccurate information undermines the responsible lending decision.

Question 50Responsible lending and affordability assessment

A borrower applies for a loan at 85% LVR. What does this indicate about the borrower's equity position?

  1. The borrower has no equity in the property
  2. The borrower has 85% equity in the property
  3. The borrower has 15% equity in the property Correct answer.
  4. The borrower's equity cannot be determined from LVR

Explanation

LVR is the loan as a percentage of value, so an 85% LVR means the loan is 85% of value and the borrower's equity is the remaining 15%. Equity is the inverse of the LVR.