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With lending criteria shifting in the wake of the royal commission and as a result of the wider hardening market, near prime loans are gaining traction among borrowers and brokers alike. MPA talks to some of the experts in the field
As 2020 gets underway, it’s evident that brokers are facing a harder market. Many Australians who might have previously been able to access a loan, either for their own home or for an investment property, are finding themselves being declined by traditional lenders. It’s an issue that’s particularly prevalent among those borrowers who don’t fit the usual mould, and it’s unlikely to shift soon.
The scrutiny of lenders by the royal commission and its subsequent report has understandably resulted in tightened regulations. Protecting the vulnerable from predatory loaning practices is undoubtedly positive, but it has also meant that others are missing out on the opportunity to buy property. The shift in bank acceptance criteria has caused considerable confusion and uncertainty for many consumer segments, driving more business to brokers.
Accordingly, the need for a near prime solution in the market today has never been greater, says Aaron Milburn, general manager, mortgages and commercial lending, at Pepper Money. Mainstream lenders tend to gravitate towards clean-credit vanilla customers that sit within a predefined box. But that’s not always reality, he explains.
“Unfortunately, more Australians who can afford to get a loan will find themselves needing to look for other options as credit policies tighten and comprehensive credit reporting is fully rolled out,” says Milburn.
“That’s why we’ve seen more non-bank lenders move to offer a solution in this space. Near prime products help bridge the gap caused by traditional lenders tightening their lending criteria in all aspects of prime lending.”
It’s a situation that’s been particularly exacerbated by the growing number of selfemployed people over the last 20 years, notes Cory Bannister, chief lending officer at La Trobe Financial. They don’t necessarily have a straightforward credit standing; this, combined with the credit tightening and product simplification strategies of major banks, means a large number of borrowers have moved outside the banks’ acceptance criteria, making them ‘near prime’ by definition.
“As a consequence of these macro changes, the near prime market has grown substantially,” says Bannister.
Aiding near prime borrowers
Assisting near prime borrowers should be a significant priority for both brokers and lenders, but many are daunted or unsure about how to best approach the topic.
However, by liaising with lenders, brokers can do more to educate themselves – and in turn their clients – about the prospective benefits.
Near prime also represents an opportunity for brokers to diversify their offerings and branch out into new territory. Given the overall hardening market at the moment, having a broader portfolio is one possible way to insulate against tougher times.
Near prime borrowers are a market Milburn describes as “underserved” by the major banks, and as a consequence many people are unsure about how they can best leverage loans to improve their financial position.
“Generally, we find that customers who fit a near prime profile are looking to do one of three things,” says Milburn. “They’re looking to refinance or consolidate debts, access cash-out for business expansion, or increase their investment portfolio.”
But it’s a common misconception that near prime borrowers have some level of impaired credit, notes Bannister, and this is not always the case.
“Factors now resulting in a borrower being graded near prime include unforeseen changes in employment, variability of income, or simply seeking a product that is no longer being offered by the major banks, such as SMSF loans,” says Bannister.
“So, typically, near prime loans require a higher level of manual credit assessment to appropriately assess and ultimately approve the application under applicable legislation.”
When it comes to educating borrowers about their options, brokers have a key role to play in the process, notes John Mohnacheff , national sales manager at Liberty. Brokers can aid borrowers in understanding the sort of criteria lenders assess when they look at risk and determine whether a customer is prime or near prime. But there are other factors that support a successful loan application.
“Near prime products help bridge the gap caused by traditional lenders tightening their lending criteria in all aspects of prime lending” Aaron Milburn, Pepper Money
“If a borrower is considered near prime, the most important question brokers should ask is: ‘Have I got all of the information to help explain the borrower’s story?’” says Mohnacheff. “If brokers take the time to work with the customer and really understand the fi ner details of their situation, they’ll be best placed to get the deal across the line.”
The challenge for brokers, explains Milburn, often comes from recommending a near prime product to the client when they may have never needed to consider an alternative lender in the past.
“At Pepper, we have a 5 Step Process,” he says. “Brokers can use this as a guide to how to successfully offer an alternative lending solution, as well as get some tips for navigating the emotional aspect of the customer’s lending experience.”
Near prime loans can also be useful for helping people re-establish themselves after difficult periods, notes Mohnacheff. The banks haven’t been the only ones affected by the credit crunch; it’s a wider societal phenomenon that’s very much filtered down to individuals.
“At Liberty, we understand that everyone’s circumstances are different and that they change over time,” says Mohnacheff . “Because of this, we help customers get a fresh start even when their past circumstances have held them back. Similarly, we can review the circumstances of existing borrowers on a case-by-case basis.”
“Our experience tells us that people never forget those that help them, or stand by them in a time of need, and near prime borrowers fi t that mould” Cory Bannister, La Trobe Financial
From a broker perspective, it’s also simply good business, says Bannister.
“Our experience tells us that people never forget those that help them, or stand by them in a time of need, and near prime borrowers fit that mould,” he says.
“The key is to understand the borrower’s situation in detail and be able to communicate it clearly to us as the lender. The more information we have upfront, the quicker and easier we can provide a solution.”
Managing successful applications
Of course, having the right tools in place is essential to entering the near prime marketplace. Familiarising your brokerage with the relevant assets and having detailed conversations with lenders and borrowers alike around the requirements for a successful application is crucial.
There’s no point in recommending a client for a near prime product if the groundwork hasn’t been done successfully – it’ll just mean they’re turned away from another form of fi nance and will lead to further consumer confusion.
“Successful near prime applications require a conversation and manual underwriting, which is precisely why non-banks are a perfect fit,” says Bannister. “We take the time to listen and understand the individual’s situation in order to assess the challenge they face.”
Looking to the rest of 2020 and beyond, it seems clear that near prime loans are likely to become a staple part of the mortgage landscape. Alternative lenders and non-banks are expected to continue to grow in popularity, both out of necessity and as a result of brokers making borrowers more aware of their services.
Of course, for some lenders this will essentially mean business as usual – there have always been borrowers who don’t quite fit the traditional mould, and they will always need the services of brokers and alternative lenders.
“If brokers take the time to work with the customer and really understand the finer details of their situation, they’ll be best placed to get the deal across the line” John Mohnacheff , Liberty
“Helping near prime borrowers is a great way for the non-bank sector to help restore loyalty and trust in the fi nance industry, as well as being our core mission,” says Bannister.
Maintaining these skill sets and client relationships throughout the ups and downs of the market means your brokerage will be more effectively equipped to take customers on a ‘come as you are’ basis, while also generating additional income.
“Being able to approve deals that banks can’t isn’t new to us,” says Mohnacheff. “For over two decades we’ve operated to help as many customers as we can and have always looked at an applicant’s full story when assessing their eligibility for a loan.”
And of course, there’s the distinct possibility that many current borrowers in the near prime category won’t remain that way forever. Building business with them now will enable positive relationships further down the track. Brokers should remember that borrowers are priced for risk upfront, and risk can decrease over time as the borrower demonstrates their ability to pay the loan back.
“We’ve always said that prime is a moment in time,” says Milburn. “The same can be said for near prime. Borrowers who find themselves in need of a near prime product may well have a different set of circumstances months or years down the track. If the customer’s situation improves over time, brokers should be able to work with them to find an alternative solution to meet their needs.”