Understanding Non-Bank Lenders & How they Can Push Your Portfolio Further

Discussion in 'Loans & Mortgage Brokers' started by Phantom, 24th Aug, 2018.

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  1. Phantom

    Phantom Well-Known Member

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    What are Non-Bank Lenders?

    A non-bank lender is a financial institution that offers home loans and other types of loans, but which doesn’t hold a banking licence.

    Some of the better known ones are Liberty Financial, Pepper Money, Virgin Money, Bluestone & La Trobe Financial to name a few. Australia has many non-bank lenders. Unlike banks, credit unions & building societies, non-banks cannot accept deposits therefore they are not ADIs (authorised deposit taking institutions).

    Because of the fact that they cannot accept deposits and then loan those funds out to customers, they need to source their funds from elsewhere. These funds are wholesale funds usually from Australian Banks or overseas institutions. They then sell this money to customers at a higher rate which is how they generate their profit. Another way non-bank lenders source money is through ‘securitisation’, which involves bundling together a group of mortgages and selling this as an asset to investors.

    Governance is another thing that separates non-bank lenders from mainstream lenders. ADIs are largely regulated by APRA (the Australian Prudential Regulatory Authority), while non-bank lenders are mostly regulated by ASIC (the Australian Securities & Investments Commission). Although we have seen recently APRA being involved with non-bank lenders also, albeit in a more advisory role rather than strictly a regulatory one.


    Why Consider a Non-Bank Lender?

    Non-banks have particular advantages over traditional banks in a few ways.

    1. Their flexibility in niche scenarios: There are specialist non-banks who have made a space for themselves for example, by being providers of loans for those who are credit impaired. Years ago, lenders wouldn’t touch credit impaired customers due to their high risk nature and perceived increased chance of default. Today, there are products specifically created for this niche and these lenders have been able to grow and appeal to the wider market also with mainstream products. Niche products can come at a price though, whether it’s full price valuation fees, higher application fees & increased interest rates.

    2. The way they assess repayments: Due to the different regulation of non-banks to traditional banks as mentioned earlier, some non-banks have different methods of assessing existing debt & new debt compared to banks. As an example, I have used a major bank and one of the better known non-banks to show the differences in how they assess debt.

    Liberty use 1.05% of actual repayments for existing debt. If your actual repayment on an existing loan is $2,500 per month, Liberty will assess this as $2,625.

    They also use a 2% buffer on actual rate for new loans. If the rate is 4.69%, Liberty will assess this at 6.69%. On a $500,000 loan, whilst the actual repayment would be $2,590, Liberty would take the repayment as $3,223. (Assuming a 30 year loan with P&I repayments)

    As a comparison, CBA will put a buffer of 30% on top of actual repayments with other financial institution debt. So, if the actual repayment on an existing loan is $2,500 per month, CBA will assess this as $3,250. (Assuming a 30 year loan with P&I repayments)

    New loans with CBA are assessed at 7.25% (or the loan rate plus 2.25% - whichever is higher). If the rate was 4.69% on a $500,000 loan, the actual repayment would be $2,590 but CBA would assess this at 7.25% which would make the repayment $3,410. A significant increase compared to the actual repayment.

    There is a significant assessment difference between the two lenders as the above example shows in regards to existing debt from other financial institutions. This is where a lot of Liberty’s ‘generosity’ comes from. Granted, there is some difference in way new loans are assessed too, but the main point of difference is how existing debt is assessed.


    What Does it Mean in the Real World?

    Below we will illustrate using a graph the difference in maximum capacity to borrow funds for a second investment property when the applicants have the following basic hypothetical financial position:

    1. Applicants (couple with 2 dependants) have a PPOR ($500,000 value & $200,000 loan with a rate of 4.00%), one investment property ($300,000 value & $240,000 loan with a rate of 4.50%) & are proposing to purchase a second IP at 80% LVR. For simplicity, all loans are 30 year terms, repayment terms are P&I and all existing loans are with other financial institutions.

    2. Both PAYG applicants earn $60,000 gross per annum.

    3. Two credit cards with total limits equalling $10,000.

    4. Household living expenses are $3,400 per month.

    5. Rental yields from the existing & proposed investment properties are 4.00% respectively.


    [​IMG]
    Graph: CBA vs Liberty Financial maximum borrowing capacity.



    As can be seen in the graph above, there is quite a significant difference between the two maximum borrowing capacities. Liberty is able to generously offer $375,000 more to the applicants than what CBA can & this is largely due to the way existing debt is assessed.


    So, Should I Use a Non-Bank?

    A non-bank may be a viable option for you provided that you consider the following points -

    1. Make sure you have a sound exit strategy.

    Due to the typically generous servicing calculators of non-bank lenders, it can be easy to be leveraged to the maximum. But just because it is possible, it doesn’t mean it should be done without further risk analysis & mitigation. Consideration must be given to an exit strategy such as selling off within a specified time or being able to refinance the loan elsewhere where income is expected to increase or overall debt is expected to be reduced to strengthen servicing position once again.

    Failure to have a sound exit strategy could leave you at the mercy of the non-bank. This means potentially much higher interest rates over time, fees & also the psychological strain caused by knowing you have been snookered into a corner with no foreseeable escape route.


    2. Should not be used for long term buy & hold scenarios.

    Non-banks can predominately be used as a way to push your portfolio further where servicing is an issue with the bank lenders. Especially if an opportunity has arisen where there is a likely shorter-term gain. An example might be a red-hot market where you need to get in now or may lose capital gain opportunities. But as mentioned above, have an exit strategy or a plan in place to get out when the benefit of using the non-bank is no longer apparent.


    3. Avoid higher than 80% LVR as it can become expensive.

    Non-banks are usually a little more expensive up until about 80% then become much more expensive after that. Fees can be quite significant for things such as valuations and also establishment & applicant fees not to mention LMI. Where possible try and keep the LVR to 80% maximum.

    Here is the link for the original article:

    Understanding Non-Bank Lenders & How they Can Push Your Portfolio Further
     
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  2. Brady

    Brady Well-Known Member

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    Great info. Good to see live comparison on the capacity.
    Even better that you're providing the 'should I'...
    Exit strategy and shorter-term big musts
    Well done.
     
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  3. Phantom

    Phantom Well-Known Member

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    Thank you Brady!
     
  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    APRA and the Royal Commission have been a major kick in the pants for borrowing capacity. The difference between mainstream lenders and non-conforming lenders is massive.

    Whilst Liberty will lend a lot more than others, George's last 3 points can't be understated. Very few people actually do have a viable exit strategy from these types of loans and many get into them with a buy and hold expectation.

    Liberty knows that if people come to them, it's because there aren't any alternatives. Therefore they know that they can charge whatever they like. Over the past year we've seen mainstream lenders start to compete with each other in the investment space again and rates have come down a little. Liberty's rates have only increased and they've increased a lot.
     
    Last edited: 24th Aug, 2018
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  5. ChrisDim

    ChrisDim Well-Known Member

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    Thank you for sharing George. Good post. I am using La Trobe and AFG and whilst I am unhappy with their rates, I know there are steep exit fees if I wanted to leave.
     
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  6. Lacrim

    Lacrim Well-Known Member

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    I'd rather not borrow than borrow from the likes of Liberty...unless you were flipping or planning to buy and sell within 12-24 months.
     
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  7. Kar

    Kar Member

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    Great info George. Will Liberty add 2% buffer on actual rate or 1.05% of actual repayments on existing debt but with different lender?
     
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  8. Harry30

    Harry30 Well-Known Member

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    Good post. Regarding CBA, I see you said a 30% buffer on ACTUAL repayments. So, if you are paying more than minimum P&I, they assess the actual repayment (with 30% uplift) and not the minimum repayments (with 30% uplift). I had some experience recently with CBA applying this policy. Which I found quite unusual, as banks have always traditionally taken the minimum repayments (not actual) in making assessments. This is easily fixed, as you can drop back to minimum, but nonetheless found the policy quite perplexing.
     
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  9. kr11

    kr11 Well-Known Member

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    great post
    Regarding virgin, are they available through the broker channel, and how do they assess other financial institution debt

    thanks in advance
     
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  10. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    They are available through brokers. I don't recall their servicing policy, but they're one of the most conservative lenders I've encountered.
     
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  11. Phantom

    Phantom Well-Known Member

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    They assess existing debt at 1.05%. The 2% buffer is only for new debt.
     
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  12. Eric Wu

    Eric Wu Well-Known Member Business Member

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    same can be said about Pepper ( and Homeloans), they have increased rates on their existing customers.

    "rate prison" :(
     
  13. Sydney_gal16

    Sydney_gal16 Active Member

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    Cleared so many things up for me!!! Great post
     
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  14. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    We do a bit with them

    Slooooooooooooowly

    Their servicing is average, and the vetting quite meticulous.

    But can still be a good product for those with the patience and no need to debt recycle.

    Once set up pretty painless.

    decent IO investment rates, 10 year IO periods from the Get go ( still) and A chunk of velocity points.

    > 95 % LVRs for strong owner occ. apps, and longish settlement times :)

    ta
    rolf
     
    Last edited: 25th Aug, 2018
  15. Harry30

    Harry30 Well-Known Member

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    I note the CBA apply a 30% margin to actual repayments for debt held with other banks. Is this common among lenders or particular to CBA? I thought the more common practice was to take the client’s other debt and assume an interest rate +~2.5% above current rates. The approach of just adding 30% to the ACTUAL repayments makes then very unfriendly to investors with large portfolios.
     
  16. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    In many cases, it makes the CBA servicing better than the lenders that use 7.25%. The policy is a bit more complicated than how you've described it.

    There is also more too it than just assessment rates. Don't make general assumptions based on a few comments, get a proper comparative assessment done.
     
  17. Harry30

    Harry30 Well-Known Member

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    Peter, I was largely relaying on the description in the first post. If I apply 7.25% to existing loans, I get a higher repayment amount than using 3.99% (actual) and applying a 30% margin to repayments, although the difference is in the range of 0-10% when assuming a 30 year period. Regarding CBA in particular, what else am I missing?
     
    Last edited: 25th Aug, 2018
  18. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    @Harry it also makes a difference if the loan is P&I or I/O and what the loan terms is. There's more parameters to it than just the interest rate.
     
  19. Harry30

    Harry30 Well-Known Member

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    Indeed it does Peter. I was just trying to better understand the CBA approach re existing debt as I had a recent experience with them. There were a number of reasons why I needed to use the CBA which I will not go into, but that is the background to my interest in understanding them better. On existing debt, they appeared to take the ACTUAL repayments and apply a margin. So, if minimum repayments was $1000 per month, and you were paying $1500 say (as you wanted to pay off sooner), they took the $1500 and apply the 30% margin. In the past, banks have always taken minimum repayments and not actual repayments. This problem is easily fixed of course, as you just reduce the amount you pay back to the minimum. All my loans are P&I. Maybe they have a slightly different approach if some of your existing debt is IO. Anyway, was not seeking to do a comprehensive comparison between lenders but really just get some better insights from those who know the CBA approach much better than me.
     
  20. Redom

    Redom Mortgage Broker Business Plus Member

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    Great post @George Poullos.

    CBA apply 30% buffers on debt size at P&I repayments over remaining loan term after the interest only period expires.

    So therefore, if you have a $600,000 loan @ a 5% interest rate with an OFI with 5 years to go on your IO repayment, your actual repayment is $2500.
    • Liberty will assess this at 1.05*$2500 = $2,625
    • CBA will assess this at $600,000 P&I 25 years = $3507 and then apply the 30% loading = $4,559
    • Other lenders will just apply this debt at 7.25% P&I= $4,337
    In the above case, with a higher interest rate, CBA are actually marginally worse at the repayment than other lenders. This is because of the 5% interest rate.

    In some cases, CBA work out better than other lenders, e.g. in George's post. This is usually when other debts are at P&I terms already, lower rates, etc.

    Liberty are the clear winners here (the general gist of the post).
     
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