As traditional banks continue to tighten their lending criteria, the need for near-prime lending in Australia is growing.
This type of specialty lending is for people who don't meet the criteria for bank loans. Many of them are self-employed or independent contractors. And with the rise of the gig economy, more and more Australians are finding themselves underserved by traditional banks.
"There's certainly a need for near-prime lending; it's certainly growing," Tony MacRae (pictured above left), chief commercial officer of non-bank lender Bluestone Home Loans, told Australian Broker. "While our overall lending has grown, as a proportion, we've seen that near-prime lending grow quicker than some of our other forms [of lending.] So it's certainly a space that is important to us, and it's a space that the banks just don't play in and it gives us a niche to go out into the market with."
Increased regulatory scrutiny has caused many traditional banks in Australia to heighten their lending criteria. That means borrowers falling outside of the "norm" – including self-employed, non-residents and those with less-than-stellar credit scores – may find themselves with limited borrowing options.
And while banks, which receive money from deposits, have to answer to regulators, alternative lenders are playing a bigger game of risk versus reward.
"Banks largely depend on credit scoring and have really strict policies in place. Whereas, we take the time to really look beyond just the numbers," MacRae said.
"I say to brokers, 'Tell me the story here, warts and all,'" MacRae said. "'Tell me what's wrong here.' But then [also], 'What are you going to do to mitigate it?' So we have a more forward-looking view of the customer, than a backward-looking view, [because] maybe they had some problems in the past."
Chris Wyke (pictured above right), co-founder and co-chief executive officer of MA Financial, added that for many banks, near-prime lending just isn't worth their time.
"The banks have to process in bulk," Wyke said. "The volume that they do means they don't have the ability to micromanage exceptions, or consider alternatives, or think about individuals. It's just not sensible for them, because they are doing billions of dollars a month of lending."
His firm, a Sydney-headquartered global alternative asset manager, also includes non-bank lender MA Money, which works in both residential and commercial loans; Middle, an online home loan application platform; and aggregator Finsure.
"[For example] if you had a house, but you had someone who had just started their business and had been operating for a year, or two years, or may have had a bad credit event in the past, the bank would look at that and go, 'oh, that's a different loan [than a prime mortgage]. I need to put more regulatory capital against that loan and the return on making all that regulatory capital is a lot less.' So I don't really want to do that," Wyke said. "And you get these products – which I think from a risk-return basis are really quite attractive for a non-bank lender – but from a bank lender, when the regulator is looking at what they're doing and moving the goalpost on them, they don't want to do them. Banks are not incentivized, because of their regulatory change, and the regulator has an agenda there, which they're trying to achieve."
Alternative lenders have moved in to fill the void and offer borrowers more options. But brokers can benefit too.
While near-prime loans typically have higher interest rates, they also often come with less paperwork.
Instead, borrowers can provide an income declaration, which is supported by an accountant's verification, or an accountant's letter, confirming that they're on track to earn a certain amount, Paterson said.
In addition, since near-prime lending is primarily done through non-banks, the loans often have faster processing times.
"The majors are taking 20 to 30 days to turn around a home loan application," Wyke said. "If you're in the residential lending market, and you see the pace at which property moves and you want to get your dream home, that's a really long time. The importance of quick turnaround times and the broker giving certainty to their client becomes really important."
At Bluestone, MacRae said the non-bank is continuously educating brokers about the benefits of near-prime lending, by way of webinars and workshops.
In the end, he said, brokers need to know that near-prime lending is an option.
"For customers who have had issues, they're not locked out of the lending space,"MacRae said. "We're willing to look at what got them into trouble. And as long as there are mitigants there. And there are mitigants in the future to cover that, we're able to find a solution for them."
