Tier #2/#3 Lenders - Risk Exposure

does anyone know of any online resources (perhaps like a Choice.com.au or similar?) That indexes the stability of all lenders in AU in some kind of ranked order?

I am curious to learn just how stable the La Trobes, Peppers, IMB's, RAMS' et al of this world really are (and how much exposure to bad debts be it non-residents, low incomes etc.) They really have. I personally have not yet entered the murkey world of tier 2/3 lenders in a very long time now (previous experience with the likes of Gateway CU and Loans.com.au / First Mac weren't that pleasant).

I guess in 2017 the financial world is changing so rapidly that I find myself caring more about the financial stability of lenders for property loans than I have previously.

 

This is about as close as you will get to an online resource.
Going back to the gfc give you a pretty good idea of the possible risks to smaller lenders.


It's also worth doing your own modelling, if there is an economic downturn, rents and prices fall, you lose your job and the tentants give notice. Refinancing with any lender is impossible, what's your strategy?

 

Hi @C-mac, can you elaborate on what wasn't pleasant on lower tier lenders you worked with?
Have some loans and offset savings with Liberty and haven't considered the risk area until your post. Keen to find about stability too.

 

Talk to brokers who have been around since prior to the GFC. Honestly after that experience, I feel that the third tier lenders are best avoided if you can help it. The problem is for many people there really isn't an option these days if they want to get ahead. Over the past year I've written a lot of loans with lenders that I really didn't want to use.

Put simply, almost all lenders got rather expensive during this period. Rates eventually came down, but for the higher risk lenders, many borrowers found the money they'd borrowed didn't get cheaper as rates dropped due to the way it was funded.

Given that a lot of policies virtually disappeared (no doc loans for example), some people simply weren't able to refinance. My concern in todays market is that lending is far more restricted. People using the third tier lenders are often doing so because of serviceability issues and we already know they can't refinance elsewhere. If these lenders increase rates, many borrowers options will be to either suck it up or sell.

 

I got caught up in the Wizard->Aussie->GE Finance->Pepper debacle. My loans ended up around 9.5%. I refinanced the lot to AMP for 6.39%. I was one of the lucky ones.

So @C-mac imagine someone on a million dollars of debt paying 9.5% ($95k) when the market rate is closer to 6% ($639k). That's a difference of more than $31k. I am lucky I didn't have a million dollars of debt! Anyway, not saying it will happen again, just pointing out an obvious risk.

 

Thanks for sharing that @Perthguy - great intel and example of how bad it can get.

Realistically their balance sheets aren't as strong and hold a riskier portfolio of debt. This means their more likely to have to sell their debt in tough times, and the likelihood of future rate rises is higher than mainstream lenders who have anchors in place (gov't guarantees, community pressure, etc).

With many of the loans we've written, we've modelled out what it may look like on a higher repayment term and noted that a clear exit plan on these properties are a good idea. Its difficult to input a 3% rate differential, as that will blow out most investments before they start. In most cases, we work with a 1% rate rise and assume thats the base case in running risk assessments.

 

mind to say how u get out, because u had variable loans with them or ??

 

I didn't have any loans with AMP. The loans with Wizard were low doc because I was a low income earner when I got them. AMP took over the whole lot at full doc because I met servicing (just). In the mix was an existing IP, a new purchase and a PPoR. The interest rate was a little higher than the prevailing rate because I was coming from Pepper and a condition of the loan was that I fix the lot for 3 years. I didn't even think about it 6.39% vs 9.5% was a no brainer. Interest rates were dropping at the time but I think when the fixed period ended they were still around 5.5%. All up a very good deal from my perspective

 

Thanks folks.

My master spreadsheet does calcs at 2% higher rates on all current loans which helps forecast how long I could hold on in such a scenario.

Maybe I should run a row of data at 3% too.

All other mitigation strategies are in place. Income protection insurance policy, lined offset accounts (across multiple lenders) and also taking advantage of some good 1yr ficed rate deals on offer currently too.

 

I don't think its neccesarily just a case of bad loans. The smaller lenders are going to find it very hard to recapitalise/role their debt over. In a capital constrained market they have to pay a lot more

Other issues to consider as an individual are, it's going to be hard to refinance in general, wouldn't be suprised going forward if you find yourself being stuck on P&I if an IO prriod finishes.

 

Try and spread them out even if using smaller lenders, same as you would have done with other lenders.

Re Firstmac, what issue did you have, I really like them.

Careful with the Liberty "offset", I believe they will be classed as a re draw.

 

Thanks Dabbler. Do you know if its normal part of redraws that you have to call up the lender to recalculate the repayments after funds are deposited? Liberty seem to do this- smaller lender, less tech perhaps

 

What happens if you have a construction loan with fixed loan term, then you go over the term because building is not finished yet and obviously cannot refinance, do you just pay extra interest penalty until you complete the build? do you get hit with a default record on credit file (because technically you werent able to pay at loan maturity), will they take unfinished property?

 

Very few lenders allow a fixed rate with a construction loan. a construction loan is drawn down over time, instead of all at once which doesn't suit a fixed rate.

But yes, it's very difficult almost impossible to refinance a half built house. The new lender wants a saleable security, not a half built house.

 

@Oshawott construction loans are variable loans (at least until the final draw-down is made). The loan term is usually 25-30 years. I can't say that I've ever heard of the scenario you've described. I can't say that I've ever seen the scenario you've described.

You may be referring to a commercial construction loan? That's outside of APRAs scope and a completely different scenario.

I've seen people buy off the plan properties where they didn't qualify for the loan when they were finally required to settle. That's a risk you take with any extended settlement.

 

No, it is not normal, it is so not normal I think it is useless

 

Useless if I'm calling them up to recalculate my interest on a $300 deposit- "sir your repayment is $1.75 less per week kthnxbye hang up".

but it does have an impact for a meatier transfers.

 

So was I. My wizard loan was sold direct to GE who up up up on the rate, then when GFC came along and everyone dropped their rates, GE were still up up up! I ended up selling.

I will never use any GE finance facility again (even interest free deals etc) as a matter of principle.

 

Those interest free things they charge like 25 or 29 % + other fees......

 

Pfft.

Wallet Wizard and Nimble loans are 4%......per month. (Comparison rates inclusive of fees = 66%).

Fees & Costs | Wallet Wizard
Nimble | How much does it cost?

pinkboy