Non-bank lenders are renowned for giving brokers fast turnarounds, flexible loan assessments and access to decision-makers. Little wonder the sector is on its way up
Mortgage brokers and non-bank lenders are a perfect fit. Both pride themselves on customer service and delivering options to their clients. That’s how both parties differentiate themselves from banks.
That’s not to say banks are bad; they perform a valuable role in the mortgage market and rightfully attract a lot of business from brokers. But banks are not without weaknesses. They’re also the first to admit they lack the capacity to meet every borrower’s needs.
That’s where non-banks come in and why it makes sense for brokers to have at least one non-bank lender on their panel. Still, a lot of brokers either remain unconvinced by non-bank lenders or feel uncomfortable venturing beyond vanilla home loans. Here are eight reasons why they should reconsider.
1: No channel conflict
Sintex general manager Cathy Dimarchos says non-bank lenders have always been committed to the third-party channel. “We understand the importance of maintaining a relationship and not stepping on anyone’s toes to get business. The client always remains the broker’s referral and they are not marketed to or targeted,” she says.
2: More flexibility
Sick of banks and their box-ticking approach? Then Bluestone national sales manager Royden D’Vaz has good news for you. Non-banks don’t do credit scoring, so they assess deals on their merits, not historical data. “They offer solutions to the customer that can’t be met by a major or a second-tier bank. They also help customers enter the market so they can eventually qualify for a prime loan with a bank,” he says.
3: Access to decision‑makers
Brokers who use non-banks can access credit managers, according to Simon Podger from Your Future Strategy. “The banks, due to their size, have a lot of tiers and gatekeepers in between you and the person making the decision. One of the great things about non‑banking is that those tiers are reduced or not even there, and the person who is in front of the vault has got the keys and can make the decision,” he says.
4: Speed and service
David Seager from Seager Financial Services loves how fast the non-banks move. “We just did a loan where the client was rejected by a major bank and they had to get an approval within four days. Things happen a bit quicker because you get to valuations straightaway and get to talk to a credit manager, which makes you look pretty good in front of your client,” he says.
5: Size and strength
Non-banks have a bigger market share than some brokers may realise. Advantedge distribution general manager Brett Halliwell says the sector would represent about 15 per cent of mortgages once you include mortgage managers, building societies and credit unions. They also have secure funding lines.
6: Pricing and commissions
Simplify Your Mortgage managing director Nathan Daniell says non-banks have become smarter, more efficient and better funded since the GFC. “In many cases, they have been getting funds from the big four to repackage, which means brokers can get a cheaper interest rate and better commission than the banks pay,” he says.
7: Tick for technology
Banks may have better technology, but that superiority can be misleading, explains Murray Cowan, managing director of Better Mortgage Management. “Non-banks may not be on the same levels as the banks but that does not mean non-banks are lagging behind. Non‑banks operate differently to banks so the technology has to meet the non-banks’ needs, as generally their product solutions require a more hands-on assessment and approach,” he says.
8: Better for business
Pearl Financial Services managing director Nathan Keating believes non-bank lenders make better partners for commercial lending. “The non-banks just have a better understanding of the risks that they specialise in and as such have a much more sensible view of the appropriateness of the product to the client and the client to the product. They are usually much quicker as well,” he says.
Features, benefits, objections
Mr Keating uses Scottish Pacific, Octet Finance, Bibby Financial Services and Liberty Financial. He says the staff who work at these lenders are generally more experienced and knowledgeable than their bank equivalents.
“When you’re dealing with a niche product, it’s possible to become quite an expert at it, whereas when I’m dealing with a relationship manager in a bank, they’ve got to spread themselves wider with their experience, so you don’t get the same level of expertise around credit knowledge and risk and all the things that might trip up a deal,” he says.
Mr Podger sends about 20 per cent of his volumes through non-banks, mainly Liberty Financial. In his experience, non-banks offer better service than banks.
“Most times, I think they are a lot better in terms of turnarounds, and if there are issues, they can be resolved a lot quicker, because there are fewer people in the mix,” he says.
Mr Podger says that non-banks offer competitive interest rates as well as good service.
“Their rates – especially at lower loan amounts – are very competitive. Because they don’t have branches, they can keep their costs low, which they can pass on to borrowers. When you get into lower loan amounts where package fees and package discounts don’t start kicking in, they’re very competitive,” he says.
Still, there’s no denying that some borrowers perceive the non-banks to be less secure than authorised deposit‑taking institutions (ADIs).
Yet Finstra director David Cowen says he has no trouble convincing clients about the benefits of La Trobe Financial, which handles about 80 per cent of his non-bank volumes.
“I’ve been doing a lot of business with La Trobe for the last five or six years. I’m really familiar with their process and comfortable recommending them to clients because I know La Trobe will deliver and I understand what sort of things they’re going to look for,” he says.
“The thing you have to explain to your clients is that they’re [non-banks] not a long-term solution. La Trobe or any non-conforming lender is a transition back to a bank or an exit strategy, which may be selling the property.”
Another problem the non-bank sector has to confront is that some borrowers are reluctant to use an unknown lender.
However, Milton Price Financial Solutions director Derrick Gray says non-conforming clients can be easy to convince.
“You explain to the clients that this is the only way forward, that it might only be a temporary fix where you clean up your backyard, demonstrate good payment conduct and you can revisit a prime lender 12 months down the track,” he says.
Mr Gray sends about 20-25 per cent of his volumes through non-banks, mainly Australian First Mortgage and RedZed Lending Solutions.
“The mainstream lenders don’t like to help out. They’re less flexible and don’t have the products [to fit niches]. When criteria doesn’t meet their expectations, you have to go to the next step. The non‑bank lenders are a lot more liberal and willing to help. Obviously they charge you more, but they’re happy to support you,” he says.
Mr Seager sends about half his volumes through non-banks, with Australian First Mortgage and Liberty Financial being his preferred options.
He believes people are becoming open-minded about using non-banks, especially if they’ve already been rejected by banks.
He also says that using a non-bank to find a solution for a non-conforming borrower is a great way for a broker to look good and build client loyalty.
Mr Seager knows of brokers who have become wary of doing non-conforming loans since the NCCP was introduced, despite getting the green light from the corporate watchdog.
“That’s why some brokers prefer to use major banks and just write straightforward deals, but there are genuine cases out there with people who do need finance and who need to use a non-bank lender,” he says.
Mr Daniell sends all his loans through non-bank lenders, principally Resimac. It all comes down to one thing, he says – service.
“My best turnaround time from submission to formal approval is 4.5 business hours,” he says.
“Resimac is a non-bank lender and mortgage manager, so if the client has a problem after settlement they can call Resimac direct, or call me and I can contact Resimac on their behalf.”
Mr Daniell says although he admires the profit-making skills of the banks, they don’t respect the third-party channel as much as non-banks.
“Every mortgage broker will have a story where a bank’s lending officer has churned a client by switching products at branch level or overriding bank policy to steal the client,” he says.
“Banks are meant to be my business partners, and yet their actions speak the real truth: they are in full competition with mortgage brokers. Why would you ever want your client to be exposed to commission-driven bank staff? I cannot understand why any mortgage brokers would want to use their services, fuelling their dominance and profit‑driven tactics.”
Where to for the non-bank sector?
Mr Cowan believes non-bank lenders will increasingly play in the prime space in the years ahead. He also thinks the sector will increase its market share. Both developments would be good news for brokers.
“More competition with the major banks gives brokers more solutions for their applicants and helps build long-term relationships and repeat business,” he says. “The sector will expand based on brokers becoming more open and educated in what non‑banks can offer and what business they may be missing out on.”
Ms Dimarchos says growth in the non-bank sector will inevitably be accompanied by consolidation. However, she believes building large non-bank lender groups will provide a great platform to compete with the banks in respect to media and publicity and awakening the consumer to wider options.
Mr D’Vaz is also convinced the sector will expand, as brokers and borrowers increasingly come to value the flexibility of non-banks. However, unlike Ms Dimarchos, he thinks consolidation is unlikely, because the lenders operate in their own niches.
Mr D’Vaz thinks new lenders will emerge over the coming years, although not many, because the sector is already highly competitive. The key for any new player will be to identify a new niche, he says. “I don’t see too many voids, so they’d have to come up with something quite innovative to make an impact.”
Mr Halliwell is another optimist. “I think that as brokers look to broaden the number of lenders they’re using, they will increasingly look to include non-banks within their consideration set, in terms of the kinds of lenders they present to their customers,” he says.
“From a lender perspective, I think there are great opportunities for existing lenders to be getting a bigger share of the market, and then possibly going beyond the mortgage manager sector and into the white-label sector.”
Points of difference
The non-bank sector offers a credible alternative to the major banks, explains Advantedge's general manager of distribution, Brett Halliwell
Non bank lenders are in a market thriving with opportunity as interest rates remain at historic lows and the mortgage industry continues to go from strength to strength. In this environment, the main opportunity for non-bank lenders remains their relatively small and nimble size.
Non-banks provide clients with a genuine and credible alternative to major banks, and are able to differentiate themselves in the market through flexibility, innovation and tailored service. This approach allows them to work more closely with the broker and client throughout the loan process, and provide a more personalised and attentive service to loan customers.
Over the past 12 months we've seen a number of mergers and up-scaling of capabilities in the non-bank sector, as manufacturers and distributors of non-bank mortgage products join together to streamline the supply chain and create more robust economies of scale. This increased activity presents an opportunity for non-bank lending to head in a bold new direction, and as Australia's leading funder of mortgage managers, Advantedge is optimistic on the future prospects of the sector.
Advantedge provides its non-bank lender partners with a flexible platform and continues to deliver ongoing support to the non bank sector by remaining a proactive voice in the industry. This support enables non-banks to deliver innovative and competitive loan products that are able to be tailored to their own strategy.
We are pleased to be able to support this year's non-bank report, and expect great things from our partners and the sector as a whole in 2015.
The customers have their say
Getting rejected by a bank doesn't mean you can't qualify for finance, as two happy borrowers discovered
Lisa Daillidis had been with the same major bank for about 20 years when it declined her loan. The problem was a default on her husband's credit history from three years earlier.
That's how she ended up with Pepper. She has nothing but praise for the lender and her account manager, Christian Petrovski.
"They didn't make you feel like it was just about the dollars; they made you feel like a customer and that they were there to help you. They were more than happy to explain everything to you every single step of the way," she says.
Mr Petrovski consolidated three credit cards, one personal loan and one home loan into a $330,000 mortgage, according to Ms Daillidis.
"I was always raised in the European way and was told you had to go to a bank. But now, because the banks haven't helped me in any way, I will never go back to another major bank. I don't think I will be moving from Pepper at all," she says.
Like Ms Daillidis, Michael Curren had never used a non-bank when he took out a $200,000 loan with DJ Capital, a short-term lender.
"I borrowed from DJ Capital because my bank thought I was already over-extended, even though I was only looking for bridging finance while I was waiting to settle on my house. The bank refused to play with me so I had to look elsewhere," he says.
"They were good on their follow up and their paperwork and the cost on their legal side was reasonable – I know because I've purchased quite a lot of property through banks in the past."
Time to spread the word
Should the non-bank sector conduct a national campaign to sell itself to the public?
It's a common objection: mortgage clients are reluctant to make a big financial commitment through an unknown lender. But most brokers can overcome this objection.
Sintex general manager Cathy Dimarchos thinks a national awareness campaign would help. "This was something that was embraced several years ago. It is called the Council of Mortgage Lenders. I would love to see us rejuvenate this stance as a collective and united front as this will inevitably give us broader coverage to the consumer," she says.
Bluestone national sales manager Royden D'Vaz also likes the idea of a national campaign. "I think non-banks have to be sold, rather than the customer actually buying something. With a major lender, they'll say their father is with, say, NAB and so they'll take the loan. But they don't say their family has been banking with, say, Liberty," he notes.
Simplify Your Mortgage managing director Nathan Daniell believes the non-bank sector should conduct another national campaign – aimed at brokers.
"Unfortunately, many mortgage brokers when they first get into the business are bombarded by the big banks," he says.
"Banks know that mortgage brokers on an average will only use up to six lenders on a regular basis. So the extra support to new mortgage brokers is paramount.
"Non-banks not only have to tell a compelling story to the consumer but they also need to teach mortgage brokers why a non-bank product is as good as a bank product."
Simplify Your Mortgage managing director Nathan Daniell explains why he sends 100 per cent of his home loans through non bank lenders
Non-bank lenders do not have branches, do not have a mobile workforce, do not employ mortgage brokers and do not have the resources to advertise and promote their products to the general public. Instead, to remain competitive, they rely on mortgage brokers to promote and sell their products.
Non-banks are able to compete on rates and products because they don't have the overheads a bank has like staff, building maintenance, ATM networks and internet banking platforms. More importantly, from my experience, non-banks provide exceptional service – before, during and after settlement. This is the main reason why I use non banks, because they are my true business partners. I submit a deal and they work their hardest to get the deal over the line.
Non-banks are focused on one thing, and that is property loans. They don't offer clients unneeded credit cards. They don't try to sell mortgage protection insurance, superannuation funds or financial planning services. They are focused on what the client wants, and that is a property loan.
I could write an extra-long essay on the amount of times a bank has structured a loan in their favour, and not the client's. When you understand the bank's motives, you realise that they will always structure a deal to minimise their risk, again aligning their strategy to maximise profit. The perfect example is the family guarantee, which sounds like they are assisting first home buyers into the market but be warned. If the children default, the parents are now at risk of losing their property. Banks will always try to cross-collateralise properties, which is potentially dangerous to their uneducated customers. This in my view is why consumers should never go directly to a bank.
The emerging force in non-banking
Mortgage and wealth group Yellow Brick Road is asserting itself as an increasingly powerful non-bank lender
Who is Australia's number one non bank lender? Some may be surprised to learn that Mark Bouris wants Yellow Brick Road to be the answer to that question.
The group's executive chairman has said several times that Yellow Brick Road is aiming to be a "leader in the non-bank segment".
Yellow Brick Road has taken several impressive strides towards that goal during the 2014 calendar year.
The most important came in August, when the group announced that it was on track to post its first ever profit in 2014/2015, following $29 million of losses over seven years.
In an interview with The Adviser, chief executive Matt Lawler said Yellow Brick Road as a standalone business had already been "tracking towards" a profit. However, the combined $53.6 million acquisitions of "profitable" businesses Vow Financial and Resi Mortgage Corporation earlier in the year had accelerated that move.
Yellow Brick Road said the $17.6 million acquisition of aggregator Vow would provide it with a new national distribution channel and a growing loan book.
The $36 million acquisition of mortgage manager Resi was designed to access a "complementary business model in mortgage origination and management" and "significant opportunities for growth" of Yellow Brick Road products through the Resi network.
Yellow Brick Road grew its branch numbers from 177 to 215 during the 12 months to 30 September 2014, which represented an increase of 21.5 per cent.
That gave it 995 'distribution points' – its 215 branches as well as 742 Vow brokers and 38 Resi franchisees with branded shopfronts.
The strategy is now to "drive new revenue opportunities" through this expanded footprint, with September marking the launch of the first Resi product in the network.
Yellow Brick Road has a loan book of $25.5 billion.
Strong foundations, bright future
It's wrong to say the non bank sector isn't secure, explains Advantedge's general manager of distribution, Brett Halliwell
There are three different funding sources. One is from an authorised deposit-taking institution (ADI). They can be the likes of NAB, which has an AA minus-rated balance sheet, which is among the very top banks in the world. Advantedge is backed by NAB, so there is an awful lot of security for borrowers. All ADIs have the benefit of regulation by APRA.
The next tier would be building societies and credit unions, and again they have the benefit of their own balance sheet and oversight by a regulator. The final category is securitised funders, who operate independently or through mortgage managers.
I think it's fair to say the funding landscape for securitisation has opened up enormously post-GFC and we're starting to see wholesale funding rates, within the wholesale capital markets more broadly, come down. That increases the supply of funding and means there is more available for lenders. I think the broadening of that sector can give borrowers security that it is now a much more stable sector than it was.
We're really looking at a level of maturity within the industry. We're looking quite stable now. I think the funders – such as Advantedge backed by NAB – are really making the most of offering different alternatives to customers. While we are the wholesale funder sitting in the background, in the non-bank sector it is the mortgage managers that really do pretty much all the work. So to my mind that offers customers and brokers the best of both worlds: an independent mortgage manager or non-bank, and also a stable funding partner in the background.
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