A senior fintech executive has urged the mortgage industry to embrace dynamic lending amid a surge in refinancing activity and customers facing a mortgage cliff.
“Major lenders may be stopping cashbacks and lowering serviceability buffers, but they’re clearly conservative about taking new customers on board and only looking for quality customers,” according to Darren Liu (pictured above), chief strategy officer at FINSTREET Group.
Liu said the mortgage manager fintech platform, which equips brokers with non-bank options along with training and resources, has found that brokers and customers think of the term ‘non-bank’ as a “dirty word”.
“The perception is that it means only low-doc or non-conforming and something you only want to go for in a very bad situation when this is not the case in most situations,” he said.
But with PEXA data showing an estimated 800,000 fixed-rate loans are due to expire at a higher cost throughout the year, Liu said the major banks won’t have the capacity to take all these mortgage holders if they get into arrears or stress.
“The non-banks must come into play to take over more risk and service these people for the next few years until they actually can go back to a major lender. This is why we call non-banks dynamic lending because it offers more wider solutions to customers and brokers when they need it most in a broader, dynamic way,” Liu said.
Often beating traditional banks in terms of loan turnaround times and service levels, non-bank lending has experienced rapid growth in recent years.
Since 2015, non-bank mortgage growth has consistently averaged nearly 15% on a six-month annualised basis – more than twice the rate recorded by banks, according to RBA data.
However, the point of difference for non-banks has also been its downfall, with non-bank lenders operating with fewer regulatory constraints and thus being perceived as riskier.
This perception issue came to the fore during the global financial crisis (GFC) where the lack of regulation around the non-bank sector “amplified financial market stress”, the RBA found.
This subsequently halved the non-bank sector’s market to around 5% today.
But in an environment of rapidly rising rates, it is often these same regulations that trap homeowners in mortgage prison, unable to refinance because their profile is now perceived as too risky.
Liu said traditional banks find it challenging to keep up with the changing market, creating a “dissonance” between the new average Australian profile and the products and services being offered.
“Australia’s workforce has changed their working profile and therefore their credit profile irreparably post-COVID. People are working multiple jobs across different occupations and our traditional lending practices haven’t kept pace with the constant change,” said Liu.
“It doesn’t match the market’s current need, whereas in the dynamic lending space, there’s a depth of products and options available right now for borrowers.”
One example of this in practice is that unlike banks, non-bank lenders don’t have the debt-to-income ratio requirement.
“Say for example, an investor goes to a major lender for another investment loan. They may only be able to borrow about $200,000. However, with the same income and same application details, they can borrow actually $450,000 from a non-bank lender. That’s the level of difference it can be,” Liu said.
Liu said while it’s a “viable solution for many Australians”, many lack the education on dynamic lending.
“With more education on dynamic lending, people will begin to think that it’s the norm. That it’s just another option and a good one at that,” he said.
Liu said he hopes the lending space in general becomes more dynamic, with all parties coming together to take care of the current group of customers.
“The dynamic lending space doesn’t have to be one where we all compete with each other. It’s one where we’re building a better industry, because we are working alongside other lenders together with the different products and processes to support mortgage customers, but it's still about the customers and products of choice,” Liu said.
“It’s about working with governments and with our industry bodies, with lenders large and small because we’re all part of that similar value chain. If we can achieve this, it will be very impactful and it will create many positive outcomes and opportunities throughout the whole industry.”
