A few years ago, Pepper Home Loans was practically synonymous with low-docs. The lender has made a name for itself helping self-employed or credit impaired borrowers to secure home finance. A few years ago, of course, low-docs were something entirely different.
But now, Pepper COO David Holmes believes specialist lending has changed. And specialist borrowers may be a larger market segment than many brokers believe.
Holmes said specialist lenders have moved far beyond low-doc, and that the average specialist borrower looks very different from what many may anticipate.
“In terms of the customers Pepper is helping, our average customer would be a PAYG who has had maybe two jobs, or a self-employed person who has been self-employed for maybe three years. Our average loan-tovalue is probably around 70%, and only 30% of our customers would have had any impaired credit. The vast majority of those who have had impaired credit, it would be over two years ago, and would have been a significant, one-time life event. Pepper believes these are people who do deserve a second chance,” he said.
Much of this, Holmes said, is because Australians’ employment profiles are changing. Many people no longer work standard 38-hour weeks, casual employment is on the rise, temporary contracts are more prevalent and many more Australians are looking to make a go of self-employment. But as the average borrower has moved away from traditional employment profiles, Holmes said the average bank has moved away from borrowers.
“Obtaining credit is considerably more difficult than in past years. Customers who were prime borrowers before are now unable to obtain home loans, and are almost disenfranchised. It’s up to lenders like Pepper to educate brokers and give them the tools to help obtain finance for this ever-widening group of borrowers,” he said.
“Brokers are starting to recognise that if banks can’t help, there are a lot of specialist lenders who can. The rates are now down in the 6% range, so they’re affordable to borrowers, and it helps them get the start they want.”
FILLING A NICHE
Holmes said the goal of Pepper, in addition to educating brokers, is analysing the market itself to find segments of borrowers who have been left behind by the big lenders.
“The thought process for us is to look at opportunities where banks’ credit policies have tightened, and now people are falling outside the bank and mortgage insurer guidelines. It has nothing to do with low-doc or impaired credit. They’ve fallen outside of that scorecard, commoditised approach to mortgages.”
And this niche has expanded beyond mortgages, Holmes said. The lender last year picked up a $150m auto and equipment finance book from Suncorp, and earlier this year acquired a $250m small balance commercial portfolio from Citibank. Holmes said both moves were part of Pepper’s strategy to expand its offering and fill new niches.
“We bought some leases and equipment finance books, and we continue to service those, but we’ve also launched our own auto product in April and that’s going well. We also bought a commercial loan book off Citibank, and we’ll be looking to find a niche in the commercial space where Pepper can fit and serve the community, so hopefully later this year we’ll look to come to market in the commercial mortgage space,” he said.
The search for new niches left open by the departure of major lenders has also led the company abroad, as it has also acquired servicing businesses in Ireland and Spain. Holmes said Pepper has found a welcome reception in those markets, hard hit by the GFC and spiralling arrears.
“Pepper has really been welcomed in those markets for what we’ve done in Australia, bringing our quality underwriting and servicing technology to those markets. From the regulators’ side, we’re really welcomed into those jurisdictions for providing what they see as the gold standard in servicing.”
Holmes said the company would continue to push into new areas and new markets, expanding its reputation beyond low-doc, and he urged brokers to follow, saying specialist lenders fulfilled a vital role in providing options for brokers’ clients.
“Pepper is about learning the market, analysing it and finding the niche where we can fit. We look for a space that’s underserviced today, but perhaps was serviced well a few years ago. We then step into that space and fulfill that need.”
