Special report -- Boutique funding

The closer those bonds, he says, the stronger his relationship will be with his own clients. And while Jigsaw has a spread of funding sources, it’s the relationship with its boutique funder that’s helping the mortgage manager gain a competitive edge.

“You liaise directly with the lender,” he says, adding that being closely involved in the loan approval process means he’s better able to manage his clients’ expectations. “Security is also less onerous with boutique lenders when compared to banks, which is very appealing to some clients.”

Laird’s not alone. A growing number of mortgage managers and originators are turning to boutique funders as they look to improve their customer service proposition.

Jigsaw Finance, which includes commercial mortgages as part of its product offering, has chosen to white label through wholesale funder Sintex in preference to working with bigger funders.

Jigsaw’s Laird agrees that flexibility is a key advantage with boutique funders. Major funders, for example, often require commercial borrowers to cross-collateralise using their residential property. “A lot of borrowers are in financial stress and are often looking to move to a product that doesn’t jeopardise the family home. This is where boutique lenders are particularly helpful.”

Small and nimble

As the non-bank sector matures, the realisation that price alone is not a sustainable competitive advantage is finally dawning.

As mortgage businesses look to diversify their revenue streams it’s more common nowadays to see them engaged in direct consumer distribution, third party distribution and wholesale funds packaging. Many of the banks now fall into this category, as do many larger wholesale funders who also operate as lenders in their own right.

While funders stand to benefit from having a variety of channels through which to take products to market, the potential for channel conflict is a growing concern, and one that’s hard to ignore.

Against this background, boutique funders are rising in prominence – and arguably preference – with some mortgage managers and originators.

“Boutique lenders have the ability to offer a superior level of care, expertise and open door policies to their clients,” says Richard Smart, NSW sales manager at boutique wholesale funder Paladin.

“With our smaller size, we have the ability to shift quickly with the market, enabling us to tend to the needs of mortgage managers instantly.”

Tapping into opportunities

Over 39 per cent of the Australian workforce is either self-employed or a contract or casual worker, and a substantial number of these potential borrowers are still overlooked by the mainstream banks.

This growing demographic represents a potentially lucrative market for funders that are prepared to take individual cases on their merit.

“We don’t put up obstacles and then ask our partners to jump through hoops,” says Cathy Dimarchos, national manager of operations and business development at commercial wholesale funder Sintex. “We discuss and reason with them about the best way forward. A good relationship is one that has both sides being heard.”

Speed is a significant advantage with boutique funders. It means they can react quickly to changing market conditions, bringing products to market that mortgage managers and their clients need.

Says Jo Parkinson, director of boutique funder Seiza Capital: “We look for niches in the residential and commercial mortgage landscape [and] we then seek to provide intelligent solutions to suit them.”

Parkinson says a good example is Seiza’s specialisation in residential property investors with multiple properties, or those looking to build a portfolio of properties.

“As we came to understand borrowers better, it became clear to us that lenders’ capacity calculators currently used to assess incomes and commitments generally penalise borrowers unduly,” he says, adding that borrowers are frequently forced into lo doc declarations as a result.

But for Dimarchos, it’s in personal service that boutique funders have a real advantage over larger funders, with their layered management structure.

“The layers also create a barrier in that senior management doesn’t have the opportunity to get around and speak to the people at ground level, so are not as quick on the pulse when it comes to knowing what is really happening and what the ‘end user’ needs,” she says.

Dimarchos says boutique funders have the edge in “listening and truly not [being] about undercutting and getting caught up in a price war with the banks, who lead customers to believe that they will provide and deliver all, and once they are locked in, will forget what they promised.”

Bespoke solutions

Boutique funders may have many advantages over their larger competitors, but ultimately it’s about meeting customers’ needs, as Jenna Ford, partner and director with mortgage manager Chan and Naylor Finance, points out.

“The main priority for us is to find a funder that can deliver a solution for our clients, whether they be mainstream or boutique,” Ford says.

“Boutique funders are an important alternative source for leading and high-volume products.”

Chan and Naylor’s clients are mostly looking for finance to invest, says Ford, so the structure of the product is essential. “Often our clients have assets held in trust so the right approach needs to be taken to ensure that they can access money in the most effective way.”

Ford says the advantages of boutique funders go beyond product range to include mortgage insurance requirements, for example.

“This gives the consumer more choice,” she says. “The advantage of using a boutique lender [is that] they can take a more business-orientated approach by looking at the strength of the deal.”

The future

So how much room is there for growth in this sector? And can boutique funders maintain their service advantage?

The answer would seem to be a resounding yes, particularly given the growth in niche markets across a number of sectors as the way Australians are employed and earn an income continues to change.

Dimarchos certainly sees a bright future for specialised funding in the commercial sector.

“For many years the non-bank sector has steadily cemented its presence in the marketplace with their innovative home loans. However as competition has grown and as clients’ needs have changed, it has become evident that there was a hole in the availability of other funding – particularly straightforward commercial lending,” she says.

Boutique funders are now filling this gap as mortgage managers add commercial lending to their product range.

“Our mortgage managers have learned the art of diversification and have been able to actively incorporate their own commercial loan products in amongst their residential products to provide more choice and flexibility to their clients,” Dimarchos says.

And with more mortgage managers choosing boutique funders – for both residential and commercial transactions – their future seems assured.

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BUILDING A BUFFER

Mortgage manager: Jigsaw Finance
Managing director: Ian Laird
Profile: Specialists in financial services and lending solutions for businesses, entrepreneurs, directors, as well as transactions, activities and operations of a commercial or business nature.

On boutique funders
Adding a boutique funder creates a healthy and strategic buffer zone. The credit squeeze heralds difficult times ahead and having a variety of funders gives us greater choice. For our customers it’s about providing the right financial solutions.

Boutique benefits
Although the cheapest rate is not guaranteed through a boutique funder you can’t just focus on cost alone. Our clients are often under pressure and need to refinance without throwing their home into the mix [cross-collateralising].

FLEXIBILITY FOR INVESTORS

Mortgage manager: Chan and Naylor Finance
Director: Jenna Ford
Profile: A branch of Chan and Naylor Accountants, Chan and Naylor Finance help clients use their assets to invest, making the most of structured accounts and trusts.

On funding
Tightening credit standards present a serious concern for our clients, who often need products specially structured to make the most of their assets.

On boutique funders
Boutique funders are an important alternative source for leading edge and high-volume products. They also take a more business-like approach to lending and have more latitude outside LMI terms – giving the client more options.

Boutique benefits
Getting a competitive price generally appears about fourth or fifth on our clients’ lists. If they can’t structure the product properly then there is no opportunity for wealth creation.