Non-bank lenders

Question for all of you experience brokers here. What do you guys think of Non-bank lenders. If anybody has hit serviceability wall, is it worth going with Non-bank lenders. I heard they put rates up and then there is no where to go and one get stuck. In your experience, is it worth going with these lenders or not.

 

It can be, if you have a decent exit strategy.

For eg, I used one recently where my client knew he'd get a large windfall in a couple of years due to the sale of an asset. This would be used to reduce the loan so it could then be moved to a less risky lender.

If it's to buy and hold a property long term, I generally wouldn't advise it - it's a high-risk strategy as it locks your whole portfolio in place.

There's a video about this on my facebook page.

 

Try RAMs they are backed by Westpac...

 

Well...they might be well kept Herr Rolf...

 

For some that wish to continue borrowing - it may be the only option they have.

The rates aren't always terrible unless you're at the mercy of Liberty and have 3+ properties :-(

Cheers

Jamie

 

Non-bank lenders have their place. I think Jess hit the nail on the head. Look ahead & have a plan in place. Don't get trapped long term due to poor planning. Unless your income will be or is (constantly) increasing in the near future (or policy changes in your favor - unlikely as of lately) chances are you won't be able to refinance out which leaves you in between a hard place and a furious river...

 

Have an exit strategy in place as they know they have a "captive" audience and apply appropriate strategies to maximise profits.

Its a bit like gearing, works well when things are rising and hurts hard when things are dropping.

 

The advice repeatedly stated (in this thread and elsewhere), is to have an equity strategy from these lenders.

The problem is when there's no alternate lenders, very few people are in a position to have an exit strategy, other than to sell the property.

Long term their financial position may improve, but by my estimate if you're using Liberty, it's going to be years before income increases enough to refinance to a mainstream lender. In the meantime borrowers are exposed.

I can certainly appreciate peoples frustration at being pulled short at one or two properties, especially when they read about people here having much larger portfolios. That's a discussion I have several times a week.

I've also seen what happens with these lenders when the finance market really tightens. During the GFC you really didn't want to have a loan with a non-bank lender. Things got a bit nasty all round, but when things started to improve, these guys took a lot longer (think in terms of years).

If you're thinking of using a non-bank simply for serviceability purposes, make sure you understand that there probably isn't a good exit strategy and make sure you've got a strong equity position. Ask yourself if there really aren't alternatives available.

 

Sorry, might be a dumb question, but why wouldn't you be able to refinance out from a non bank lender vs a normal bank?

 

Assumption is you have gone to the non bank because you cant service with a normal bank. Therefore you won't service for a refinance from the non bank to a normal bank

 

Agree with Jamie that Liberty are a pain in the backside and make people pay an extortionate interest rate. As an example, once my broker moves a Liberty loan, going to save $600 to 650 per month in repayments.

 

What if after a few years, the value of the property goes up, would it then be possible to refinance to a normal bank?

 

If servicing was the reason you went to that lender in the first place (usually is), then the value of the property is irrelevant. The issue is income.. rather the lack of. The property value doesn't change this. The only thing it changes is LVR which isn't the reason (usually) another lender will reject a refinance application in this context.

 

Personally i have jumped between banks and non banks for the last 15 years and not had an issue, although times are of course different now with APRA etc. I believe you have to do what you have to to move forward. I found myself in this position now with my current lender NAB not able to lend me another dollar so i am looking to re-finance to a non bank lender so i can start my renovations. This non bank lender is offering resonable terms as far as interest rate goes and other options. If you can find a lender with ok terms that will lend you money to do what you need to then i say go for it, better this than being stuck for years waiting for it to improve with your current lender.

 

I would disagree that applies to all non bank lenders.... I worked at Firstmac - a genuine non bank lender , not a mortgage manager- I think that's an important distinction - at that time and rates certainly didn't increase out of step with the market , post GFC. In fact, FirstMac maintained variable rates in line with the average rate of the Big 4.

They also launched a killer deal called FightBack at that time. It was a 2.99% fixed for 1 year , that reverted to SVR thereafter. The comparison rate didn't look great because it reverted to SVR, so brokers rejected the product ( as they did with all non bank products after the GFC...they wrote almost everything with the Big 4 and then wondered why the got their pants pulled down with massive reductions to comms 12 months later.... )

But the broker industry missed the point. At that time, the cash rate was 3% and SVR's were @ 5.7% - 5.9% With pro pack discounting you may have been paying very high 4%'s to low 5's...... So a 2.99% 1 year rate was phenomenal... especially because it had an offset on it so you could make unlimited extra repayments and get years ahead on your mortgage. if you'd paid 5% onto the loan - like you would have been paying elsewhere , amortisation modelling at the time showed that it would take a little over 8 years for a 0.7% pro pack to catch up....

I'm sorry... I just get frustrated with the one size fits all comments about non banks....... Just saying..... there were non banks who were rock solid and excellent during the GFC, and non banks who were not. There were horrible banks at the time too, lets not forget. Macquarie dudded everyone- badly. RAMS dudded everyone- even worse... GE ... well, calamity for Wizard.... ( remember them?) And lets not forget how badly the majors behaved when they failed to pass on multiple rate cuts and then increased rates multiple times when the RBA did not.

Without non bank lenders , brokers wouldnt exist- literally. They wouldnt have an industry - literally. They are the only reason brokers have a job. I think its fair to expect that comments about non bank lenders not be quite so generic

 

That's true but also short sighted - you're painting yourself into a corner where you literally can't do anything with any of your loans, unless you want to move them to the non-bank also. There is no moving back, and most people don't understand the implications of that.

This conversation is not about all non-banks, just the super generous ones that people use when they're stuck for servicing.

 

I don't agree with that. I have moved from Bank to non bank and back again in the last 15 years. You are talking about the current environment I assume?, this will change again in the future when APRA relaxes it's rules as the investors reduce and no one is providing housing. You say I am short sighted but you are not considering long term. How long have you been in this industry, I've been doing this for 18 years now.

 

From a pragmatic perspective, your taking money from a lender & they have the ability to charge higher rates onto you under the terms of their loan contract.

If whatever you plan on purchasing can't stand up to a +/- 1% premium to market additional funding cost, is it really worth doing it?

At a point, there'll be a number where you may be inclined to sell/default on your loan. Realistically, no non bank lender want this. Their business model wouldn't stack up if borrowers don't repay (it'll be hard to get access to funding with a high default loan book and a bunch of non performing assets (your loans) on the book). Also there are competitive pressures on them too. There's quite a few non bank lenders competing for the investment lending space.

When going down the non-bank route for servicing, key questions to ask before proceeding:
- What is the cash flow impact of your property portfolio under P&I terms. This is key, as it likely indicates greater likelihood of future P&I rollovers.
- What is the cash flow impact of your property portfolio under P&I terms + 1.5%.
- What are your buffer sizes
- What will you do if indeed they double their rates and finance world flips upside down.
- Do you need short/medium term flexibility with additional personal funding (e.g. OO upgrades, etc). If so, how do you plan on funding this as most mainstreams will be off the table.

My take? Be prudent and be prepared to cover your basis and additional finance risks. If you believe in the underlying investments your purchasing, than the benefits should outweigh the costs/risks.

 

@lawrencebarnes That's fine - all I'm saying is it's wise to have an exit strategy in case you're wrong. Strong buffers, increasing income, for eg. There's a point where moving forward 'might' not be the wisest thing.

If it's only $45k that's stopping you going back to a normal lender, that's pretty workable. When it's $500k it's a completely different issue.

In reality, what we often see at this end of the market are aggressive investors leveraging to 100% with minimal cash buffers looking to push the envelope as far as they can.