Central Office Instruction
Instruction No. 21
Date of Effect: 1 January 1993
AMENDMENTS TO THE DEFENCE SERVICE HOMES ACT
IMPLEMENTATION OF SECOND SUPPLEMENTARY AGREEMENT
Purpose
The purpose of this Instruction is to advise and explain the legislation changes to the DSH Act as a result of passage of the Veterans' Affairs Legislation Amendment Act (No. 2) 1992. Royal Assent was given on 24 December 1992 and the amendments are to commence on 1 January 1993.
Background
The changes to the Act were necessary as a result of the 1992 Budget. The changes relate to:
- provision of loans for modifications and/or repairs; and
- removal of restrictions relating to loans for discharging a mortgage, charge or encumbrance or, in relation to a retirement village, a debt.
As a result of these changes, an agreement, known as the Second Supplementary Agreement, was reached with Westpac on 4 November 1992. This agreement provides that:
- a Commission of 1.25% of the total DSH borrowings will replace the Unit Fee on 1 January 1993;
- the Commission is payable on Initial and Further Advances for the following purposes;
- initial entry to a retirement village;
- first use of portability for those loans outstanding on 9 December 1987;
- modifications and repairs; and
- discharges of mortgages or debts where the mortgage or debt was raised using finance from a source other than Westpac;
- the Commission will be payable for any future changes to the Scheme; and
- DSH clients will receive a 50% discount on Establishment Fees.
The agreement is subject to a 12 monthly review, with the first review to take place in January 1994. Any changes to the Second Supplementary Agreement resulting from this review cannot be implemented unless both the Commonwealth and Westpac agree in writing to those changes.
Definition Of Modifications And Repairs
As the Commission is not payable on loans granted for enlarging a house or retirement village, and some proposals could include both an enlargement and a modification to the house or retirement village, the following definitions have been agreed with the Bank:
Enlarge Under this term the predominant purpose of the loan and the bulk of the cost must be associated with increasing the internal floor space of the house. In circumstances where there are renovations or repairs associated with the enlargement but the renovations or repairs are not the main cost factor, the purpose shown on the Certificate of Entitlement is to be "enlarge a dwelling house". This is consistent with previous policy.
Modify This term is to be used where the predominant purpose of the loan does not involve increasing the internal floor space of the home. However, incidental increases to the size of the home, such as the enclosure of existing sleepouts or installing a bay window, would come into this definition. They are modifications in that they change the purpose for which an existing area is used.
Repair This term covers making good something which is in a state of disrepair. This includes replacing something which is defective.
Delegates will need to decide which definition closest fits the circumstances of each case. The correct code is then to be entered into CELS and the Certificate of Entitlement will reflect the appropriate purpose.
These definitions have not been incorporated into the Act but will be reflected in the General Orders.
Modifications
What may be accepted as a modification to a dwelling-house is restricted only by the above definition of modification and the definition of "dwelling-house" in section 4 of the Act.
However, one specific exclusion is the purchase of land to increase the size of the holding. The definition of "dwelling-house" does not include any land. Therefore, the purchase of any adjoining land, easement or right of way cannot be regarded as a modification to a dwelling-house.
Westpac has advised that it is happy to lend where the modification improves, or at least maintains, the security value of the property. Therefore, there may be certain proposals on which the Bank will not be able to lend. However, no advice has yet been received from the Bank in this regard. State Offices will be advised as soon as a response is received.
It would be poor client service to knowingly issue a Certificate of Entitlement for a particular modification (or repair) proposal which will be rejected by Westpac. Where it is known that Westpac cannot lend for a particular proposal, delegates should advise the client of this obstacle before issuing the certificate. Every effort should be made to assist the client in his/her dealings with the relevant branch of the Bank in such circumstances. Delegates should be aware, however, that knowing the Bank will refuse to lend for a particular proposal is insufficient grounds for refusing to issue a certificate.
Discharge Of Mortgage
Subsections 18(4) to 18(5E) of the Act have been removed. This means that clients will now be able to obtain a DSH loan to discharge a mortgage or, in relation to retirement village accommodation, a debt without having to meet any hardship guidelines. The reason why the mortgage or the debt was originally raised is irrelevant.
However, hardship guidelines will still apply to Widow/Widower Advances, Essential Repairs Advances and Instalment Relief.
Security
Loans for the new purposes will be secured by a first mortgage, except in relation to loans relating to a person's retirement village accommodation. However, clients are to be advised of the costs associated with entering into a mortgage, particularly where the cost of the proposal is low.
Additional Advances
The Commission is not payable on any Additional Advance. This is because an Additional Advance does not represent new business to the Bank.
Paragraph 18(3)(a) of the Act has been amended to remove reference to essential extra sleeping accommodation and essential utility services. The paragraph now states:
"(a) to enlarge, modify or repair:
(i) a dwelling-house on a holding owned by the person; or
(ii) a person's retirement village accommodation; or"
Additional Advances can still be made to install utility services. This is to be regarded as a modification to the property.
Also, Additional Advances are no longer restricted to enlargements only for essential extra sleeping accommodation. An Additional Advance can be approved for any enlargement to the property.
Paragraphs 18(3)(c) and (d) have also been removed from the Act, as both of these purposes fall within the meaning of a modification to the property.
Further Advance
Some clients may have already discharged their DSH loan and have retained the property. If they have an entitlement to portability, these people will be able to use their entitlement to enlarge, modify or repair their home or to discharge another mortgage on the property.
It is expected that those clients who discharged their loan after 9 December 1987 and before 8 January 1991, and have bought another house, may take up their portability entitlement now that the restrictions on discharging a mortgage have been removed.
Widow/Widower Advances
There are several options available to widows and widowers in relation to loans for modifications and/or repairs:
- They can obtain an Additional Advance;
- They can obtain a Widow/Widower Advance;
- They may be able to obtain an Initial Advance if they have not yet used their entitlement;
- They may be entitled to a Further Advance; or
- Assistance to carry out repairs arising from an insurable event may be available through the Insurance Scheme or another insurer, if the home is insured.
The option which best suits an individual would depend on many factors, for example:
- the remaining term of the loan;
- the interest rate applicable to the account;
- the entitlement(s) available to the person;
- the effect of portability, if entitled; or
- whether the repairs can be paid for by insurance;
Delegates will need to advise the applicant of his/her entitlements, and the possible consequences associated with each option, before issuing a Certificate of Entitlement.
Advances For Essential Repairs
With the introduction of initial loans for repairs, it is envisaged that an Advance for Essential Repairs would only be necessary if the applicant has already borrowed $25,000. If this is the case, the test of Serious Financial Hardship would still apply.
Payment Of Unit Fee And Commission
The Unit Fee is payable on:
- initial entry to a retirement village; and
- the first use of portability of loans outstanding on 9 December 1987.
This Fee is still payable by the Bank on all of these types of loans granted up to and including 31 December 1992. From 1 January 1993 the Commission will replace the Unit Fee.
Invoices for the Unit Fee and the Commission will be provided to the Bank on 1 May of each year. This function will be performed by Central Office and the Bank's payment will be made to the RPM NSW Office. New FAS/Finance codes will be advised as soon as possible.
Systems Changes
Specifications have been provided to the Director (Technology) to provide for these changes to the Act. The systems changes are in place and ready for use on 1 January 1993.
There have been two major changes to CELS:
1. New indicators are to be included on the Certificate of Entitlement for the new purposes;
- "M" for modifications and/or repairs; and
- "D" for discharges of non-Westpac mortgages or debts;
2. Application Purpose codes have changed as a result of the new loan purposes and the removal of some Additional Advance purposes.
CELS Coding
The importance of correct coding cannot be overemphasised. The production of the invoice depends entirely on:
- correct use of Application Type and Purpose codes; and
- timely entry of the details of returned Certificates of Entitlement.
If there are any problems in this regard the Director (Subsidy) should be advised immediately.
The Bank has also been requested to ensure that Certificates of Entitlement are returned quickly.
Insurance
As with all DSH loans, clients will be able to avail themselves of both buildings and contents insurance.
There will be occasions when a client lodges an insurance claim for some damage which may not result from an insured risk. In these cases Insurance staff should seek advice from, or refer the case to, the Subsidy Section prior to advising the client of the outcome of the claim. It is possible that the client could be assisted with an Additional or Further Advance to repair the property.
Of course the opposite also applies. Should an application for repairs be received, delegates must ensure that the damage is not covered by insurance, either DSH or otherwise. Clearly, the applicant will be better off if the repairs can be effected without the need to repay the cost of them.
General Orders
These changes have been incorporated in the new General Orders which are expected to be issued during January 1993.
GERALD VENABLES
ACTING GENERAL MANAGER
30 December 1992