Non-bank lenders presently make up about 5% of Australia's credit market, but this figure is set to grow as Australia inches ever closer to the likes of the mature short term and bridging loan markets in the UK and USA.
Unfortunately, increased demand brings more competition among non-bank lenders and some lenders will be already feeling the pinch. So how can lenders stay competitive? Clearly, one option is reducing interest rates, but there are other ways to stand out and carve a point of difference.
Most short-term and bridging loan documents and products are similar and there is a great deal of commonality which is good for comparison, based on interest rate. However, this is a major drawback if interest rates are not a lender's key point of difference and only serves to drive down profit margins.
Diversification of loan products, even by making subtle changes to what might be considered standard practice, could set lenders apart from the competition and make loan products more attractive to borrowers, without the need to lower the rate of return for the lender.
As the increase in demand in the non-bank sector comes primarily from borrowers moving away from traditional bank finance, it will be no surprise that some of the suggestions below come straight out of the bank finance book.
No fee or one fee establishment
Non-bank loan offers traditionally demand an establishment fee, together with several other fees depending on the type of deal. These include legal, due diligence, valuation and other up-front fees. The diversification in fee structures between non-bank lenders makes it difficult for brokers and borrowers to accurately compare loan options.
A no fee or single fee option wraps up all the establishment costs in a single up-front or built in (no fee) option, making this an attractively simple system. The variety of terms and due diligence required in non-bank lending may make this challenging at first, but a no fee or single fee option should be able to be accurately priced and offered for the more straight-forward facilities.
Limited recourse loans
Limited recourse loan facilities are predominantly used for self-managed superannuation fund borrowing where it is mandatory. They are a facility under which the lender limits its rights to the proceeds of sale of the mortgage security and will not sue the borrower for the difference.
Nothing prevents these loan terms being offered for any other loan facility. For example, one which would ordinarily have a low LVR. Such a failsafe offer would be an attractive offer to borrowers that could set lenders apart from competitors.
When property is in a falling market, an LRB option sounds like the last thing a lender might want to offer, but remember that borrowers are equally aware of a falling market. So, if lenders can appropriately safeguard and price this option by taking adequate security, it could be what secures the deal.
No hidden charges option
Any loan will attract additional fees and charges, particularly when a default arises. However, but for default scenarios, there is usually no pressing need to charge ongoing account keeping fees and minor, but annoying, charges that make no real difference to the lender's bottom line. They should be able to be priced into the cost of the loan. In this way, a 'no ongoing fees' or 'no hidden fees' guarantee could differentiate the lender from the competition.
Getting interest rates right
Non-bank lenders can structure their interest in various ways. There is simple interest, monthly compound, default rates, concessional interest and rebates. Additionally, unregulated business lenders are not required to show a comparison rate. This can be an advantage, but it can also be a hinderance.
Take for example a small non-bank lender that charges 10% p/a (simple interest), as it is easier for them to calculate and apply. On a $500,000 loan for one year, this amounts to $50,000. Another lender will advertise an interest rate of 9.5% p/a (monthly compound). This also amounts to approximately $50,000 for one year but might appear as a lower rate to the borrower. However, on a longer-term loan, it will result in more interest. A third lender will advertise a 'comparison rate' or 'total cost of loan rate' of 10% p/a (monthly compound). However, this rate includes fees and charges that, when omitted, results in a base rate of 8% p/a (monthly compound).
The last thing a lender wants to do, is force their brokers to get out the calculator! Bennett and Philp have experienced at least one lender who routinely lost deals because of the way interest was described.
Lenders should have regard to what their competitors are doing in calculating and describing interest, and structure their loans and advertising in such way as is most attractive. If a lender's rates are lower than the competition, it pays to use the same system and or show comparisons. It certainly doesn't pay to price one-self out of competition by displaying rates in such a way that make them appear higher.
Electronic signing and other time saving technology
Time is the name of the game in finance. It is one of the primary reasons why borrowers are moving away from traditional bank finance, the time frames of which seem to be ever growing due to increased regulatory pressure.
Many non-bank lenders are exploring the use of technology to help fast track their approval and settlement times, which clearly makes their service more attractive. Top of the list are automated approval and loan generation software, and electronic signing.
Despite confusion around the legality of electronic signatures, the reality is that it is possible to sign electronically most loan documents, including land mortgages in most States and Territories – and they are legally binding. In addition, verification of identity and legal advice can also be just as successfully performed via video conference. This means that some lenders should be able to offer wholly electronic loan options.
There are some things to note. For example, not all electronic signing and VOI platforms will meet land title requirements. Secondly, the order in which documents are signed, legal advice is obtained, and verification of identity is conducted, is very important. It can make the difference between a recoverable loan and a non-recoverable loan. Consequently, implementation of electronic signing and loan generation software should be done in consultation with a legal practitioner.
A legal practitioner can ensure that the IT solution that you have chosen is not only legally acceptable in the relevant State or Territory, but also ensure that it is suitable for the lender's own risk profile and loan facility options.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.