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Non-banks are gaining dominance and favour with brokers as they grow the near prime space
Low interest rates have been the norm in Australia over the last few years, and the RBA looks unlikely to raise them again in the foreseeable future. While this seems to have been done primarily to stave o a recession, one of the secondary intents is also to enable greater ease of access to finance and loans for those who might need them.
But this hasn’t necessarily translated into a more accessible property market for everyone. Though property prices around the country are currently undergoing something of a slump, they remain considerably inflated in comparison to previous decades, even when allowing for inflation.
As a result of the impact of minimal wage increases, the royal commission and changing credit policies, many Australians have effectively been shut out from access to prime rate mortgages through traditional loan outlets. Additionally, lenders’ risk appetite may become even more conservative in 2019, which will further affect consumers’ ability to access the best possible interest rates.
Why near prime?
The interest rate that a borrower can access at any given time is highly dependent on individual circumstances as well as broader market movements. On the surface, this is an understandable approach: financial institutions want to minimise their risk, particularly at a time when they are under heavy scrutiny for the mistakes of the past. But to exclude many borrowers altogether is overly simplistic and reductionist.
“No borrower is a static entity, and their risk profile will change as they change jobs, grow their family, pay down their debts, make investment decisions and evolve their spending habits,” says Royden D’Vaz, head of sales and marketing at Bluestone. “All of these events have the potential to impact the rates they qualify for when seeking credit.”
Nonetheless, the shifting policies of the major lenders have created opportunities for non-bank institutions to provide a service to Australians who need it in the form of near prime mortgages.
“There is always a strong need for credit among all borrowers, irrespective of what category of the market they are in,” says Liberty group sales manager John Mohnacheff. “Custom borrowers have always been a good market segment for brokers to service, regardless of if they are near prime or require a more tailored solution.”
Historically, near prime deals have tended to come with a certain stigma. But with more self-employed individuals, SMEs and people with unconventional streams of income seeking loans, that stigma is starting to dissipate, and near prime is increasingly emerging as a viable alternative.
“I see a real shift in thinking from brokers and borrowers alike,” says Aaron Milburn, director of sales, mortgages and personal loans at Pepper Money. “The way borrowers are making a living is changing, with more self-employed people and more people earning income from multiple sources. Near prime is increasingly the ideal solution for those earning a non-standard income.”
Near prime has also grown to encompass a far bigger market than many in the industry would have predicted just a few years ago.
“We estimated two years ago that the total non-bank near prime market was in the vicinity of $10bn to $20bn annually,” says Cory Bannister, vice president and chief lending officer at La Trobe Financial. “Today we estimate that market to have increased to circa $70bn to $90bn annually.”
Where do brokers fit in?
According to Milburn, near prime borrowers are often those most underserved by the big banks. While they may have been previously financed by a bank, circumstances have since shifted. For a variety of reasons, they no longer fi t the standard profile that might make them desirable to mainline financial institutions.
“These are people with one too many credit cards that they are finding difficult to repay, the self-employed, those who don’t hold standard full-time employment, or have supplementary income,” Milburn says. “These are people who have overcome a credit event and want to move forward.”
Brokers also have an important educational role to play as part of the process. Many prospective brokers are simply unaware that there are other options available outside of the mainstream banking system. Reaching out to potential clients and making them aware of their options is crucial.
“Most brokers live on their referrals, so they should make sure their referral partners and existing customers know that they’re ready to help those people who are suddenly finding it hard to obtain credit,” D’Vaz says.
Indeed, the willingness to engage with customers who don’t fi t the traditional mould is often a boon to prospective borrowers in and of itself. In turn, this can help build better customer loyalty to the broker.
“The purpose of non-banks and brokers is to provide more choice and increase competition,” Mohnacheff says. “By offering brokers and customers a wider range of solutions, we’re able to help more people get finance. This naturally helps establish and improve trust, because helping someone who has been turned away somewhere else provides a more positive experience.”
An additional benefit of utilising non-banks is that many of them do not use automatic credit scoring but instead evaluate applications on an individual basis. Bannister highlights that it’s crucial for brokers to find a lender they can work with effectively.
“A broker should partner with lenders that are both willing and able to work with them on these types of loans,” Bannister says. “Good preparation is key to a fast approval.”
However, brokers also need to ensure they’re taking the necessary steps to aid their clients throughout the process. The best thing brokers can do to achieve a smooth application process, says D’Vaz, is to make sure they send in a fully packaged application with all the required documents on the checklist.
“Make sure you include all the documents we need to verify income and expenditure, and if there’s anything unusual you need our credit team to be aware of, make sure you explain this up front.” Mohnacheff echoes this sentiment, citing some of the complexities that can emerge when dealing with customised loans.
“Even though the borrower is considered ‘near prime’, the reality is custom deals may require different information to be provided,” he says. “The most important question brokers should ask is: ‘Have I got all of the information that helps explain the borrower’s story?’ 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.”
Navigating the future near prime landscape
There is no doubt that near prime loans are set to remain part of the broking landscape for the foreseeable future. Brokers who work closely with lenders have a significant opportunity to expand their client base and can see this as a form of community service – after all, helping people get finance for their needs is a crucial part of the business.
With this in mind, it is important to maintain open channels with clients; for brokers, communication is more important than ever today. The public nature of a royal commission, combined with the staggering amount of media coverage on the less-than-ideal findings unearthed during the public hearings, means that consumer trust has been eroded and confusion sits at an all-time high.
“The only way this trust will be rebuilt is by providing genuine solutions to the credit issues our customers are facing and doing so with superior customer service and complete transparency along the way,” D’Vaz says.
Part of this, too, is aiding clients with near prime loans whose financial circumstances have taken a positive turn. Bannister is a staunch advocate of assisting those who don’t necessarily fit the standard lending profile, and is adamant that near prime borrowers should not have to stay on a higher rate for the long term.
“Near prime is a point-in-time assessment that can be improved over time,” he says. “Borrowers are priced for risk up front, and as time passes the perceived risk reduces – often so do their interest rates. 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.”
Similarly, Milburn notes that prime is a moment in time, and the same can also 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,” Milburn says. “If the customer’s situation improves over time, then we can work with them and their broker to find an alternative solution to meet their needs.”
There is also real hope among non-banks that the attitudes towards near prime will shift from outmoded stereotypes. When used correctly, near prime mortgages can be a powerful tool for helping Australians secure their financial future.
“If there’s a negative stigma it’s unfortunate, because the big banks turn away a lot of customers that deserve an opportunity to get finance,” Mohnacheff says. “Life isn’t straightforward, and sometimes little things can happen that are out of our control.”