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Specialist lending: More mainstream than you might think

Nick Bendel 11 minute read

Brokers who do specialist finance say the sector produces higher commissions, increased referrals, stickier clients and more flexible lending. So why do some brokers stick solely to the mainstream?

Are you one of those brokers who have their doubts about specialist lending and the type of clients it attracts? Well, Bluestone national sales manager Royden D’Vaz has an anecdote that might make you change your mind.

“We’ve done a loan for a High Court judge,” he says. “It didn’t mean that he was a bad borrower; it’s just his circumstances were such that none of the major lenders wanted to lend to him.”

If a specialist or non-conforming loan is good enough for a High Court judge, it’s difficult to think why it wouldn’t be good for other borrowers as well.

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Bluestone chief operating officer Peter Wood says specialist loans have been a part of the mortgage market for almost two decades and will continue to be in the future.

“My point is that specialist or non-conforming loans are stock-standard residential loans, the difference being that the borrowers have slightly different circumstances. All these loans are also governed by NCCP, so in my opinion they are no different.

“Therefore these loans should be considered ‘mainstream’ and brokers should consider them a mainstream product,” he says.

“I think given that they are currently separated in the market gives brokers the impression that they aren’t compliant with regulations, which couldn’t be further from the truth, and therefore some are hesitant to write this business when they shouldn’t be.

“In addition, many forget that the major banks were somewhat playing in this space prior to the GFC and I’m sure that they didn’t differentiate.”

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AFG’s general manager of sales and operations, Mark Hewitt, also says brokers are wrong if they think non-conforming finance puts them at greater risk of breaching NCCP regulations.

“Providing the broker maintains their obligation to ensure that the borrowing is not unsuitable for their customer’s requirements; then I don’t think they have anything to worry about,” he says.

“My simple view on this is that if the customer is not able to qualify for a mainstream loan and can afford the repayments, then the fact that it is a little more expensive – does that mean the loan is unsuitable?”

Seven reasons to say yes

Mr Hewitt says specialist lending is a viable alternative for borrowers who don’t qualify for a prime loan, and that it would be wise for brokers to be able to offer this option to their clients.

He’s not the only one to give the sector the thumbs-up; the MFAA, FBAA and a range of brokers also see the value in traditional loan writers at least considering a move into non-conforming finance.

Here are their seven reasons why:

1. Loyalty

Non-conforming clients are more loyal than regular borrowers. They’re often in difficult financial situations and may have been rejected by banks and other brokers. So they’re grateful when they meet a broker who is prepared to listen to their story and solve their problem. That means more referrals.

2. Double-dip

Smart brokers set their clients a plan to help them transition from specialist to mainstream finance. Guess which broker the grateful client is likely to turn to when the time comes to refinance?

3. Serious customers

No one can accuse specialist clients of being rate-chasers who shop around brokers. They are often desperate for a broker, and desperate for a loan, so their focus is on service not price.

4. Commissions

That’s why specialist borrowers are more open to the idea of fee-for-service. Specialist commissions are often higher than mainstream commissions as well.

5. Flexible lenders

While mainstream finance can be a box-ticking process, non-conforming finance is more flexible and personalised. The BDMs are more accessible, because specialist lenders are more willing to work with brokers to get deals approved.

6. Income

Saying no to customers is a double-whammy: brokers not only miss out on that particular deal, but also refinancing, cross-selling and referrals. Those rewards go to the broker who says yes.

7. Reputation

Brokers who handle difficult loans are regarded as finance experts. They’re also considered to be a level above the loan writers whose only trick is to save clients a few basis points. Building a reputation as an expert is another way to guarantee more referrals.

Brokers who don’t do specialist

Of course, some brokers either feel uncomfortable with the idea of specialist finance or don’t believe there is enough demand from their clients to offer it. One example is Element Finance Fremantle principal Mike Cormack, who says he can’t imagine ever working in this sector.

“It’s partially due to a lack of understanding of the policy and benefits for the clients and partially a feeling of wrapping the client into something that’s not ultimately beneficial, or even non-beneficial for the short term,” he says.

Mr Cormack also has his doubts about the reliability of specialist borrowers. “I feel like they’re more transient and change policies more frequently – and not always for the better. When things are going bad, they’re usually the first to react,” he says.

Full House Finances director Ian Miller is another who doesn’t do specialist loans – although he says it’s due to lack of demand rather than lack of interest.

“I don’t advertise. It’s purely referral-based and repeat business, and with the client base I have, I don’t seem to hit any non-conforming borrowers,” he says.

“I can think of only one real non-conforming client. I did shop it around and talked to the BDMs, and it turned out it wasn’t a deal.

“I don’t like to say no to clients, because I know they’ve come to see me because they’ve got a need. I don’t want to treat them like a bank and say, ‘See you later’. I try to find a solution for them.”

Although he’s not involved in specialist finance, Mr Miller rejects the idea that there might be something questionable about the sector.

“I think there’s a need for it. There are a lot of situations where clients have a genuine need for non-conforming. If it wasn’t there, some good people would miss out on getting finance,” he says.

Specialist versus mainstream

Matthew Trade from Home Loan Experts, who gets about 30 per cent of his business from specialist clients, understands both sides of the argument. He says it was only once he started doing non-conforming loans that his father – who had been a broker for 20 years – was willing to be convinced that there was nothing wrong with that type of finance.

Mr Trade says it’s important to be sensitive to clients. “Often they come with their tail between their legs after getting declined from their bank that they do their everyday banking with and they’re shocked,” he says. Clients can also be unaware they even have a credit impairment until they visit a broker. “Maybe they moved addresses and forgot about a gas bill. If you don’t apply for any finance, how would you know? People don’t check their credit files like they check their bank accounts,” he says.

So it’s up to the broker to explain to clients why they don’t qualify for a prime loan and how they can one day return to mainstream banking, he adds.

“Don’t do it on an emotional basis: don’t ridicule the customer, don’t make it sound like it’s their fault. You need to explain to them in facts. You need to explain to them why they’ve fallen out of the mainstream category and what they’re looking at to get themselves back to normal lending criteria.

“They’re going to tell you their requirements at the beginning of the process, and you’re helping them serve that purpose by getting them the finance,” he says.

Stuart Styles, managing director of Arthurmac Professional Mortgage Advice, has done specialist lending throughout his 11-year broking career.

He derives about 90 per cent of his volumes from specialist clients, and points out that they require more detailed questioning than typical borrowers.

“There’s generally an event that happened in these people’s lives and it’s really about uncovering what that is,” he says.

“Although brokers are required to know their customers via their fact-find form, sometimes you can’t get that information out of the fact-find form; you really have to prod them and peel back the onion. It’s asking that second and third question and really knowing what the issue was, how it came to be and why it isn’t going to be a problem in the future.

“Non-conforming lenders know there’s generally an issue – they just want to understand it.”

Mr Styles says that contrary to popular belief, specialist finance rules aren’t harder than mainstream finance rules – they’re just different rules. 

He also notes that there’s no ‘typical’ specialist client.

“There are some who have arrears, some who have defaults, there are the self-employed, there are people who maybe have fallen behind because there’s been an illness or they’ve lost employment temporarily – there are a myriad amount of different scenarios we get,” he says.

Scott Beattie from Cube Central says another false perception that exists among some brokers is that specialist clients must want small loans. When The Adviser called, he was putting together a $560,000 mortgage for a gentleman whose business had been liquidated.

Mr Beattie says 10–15 per cent of his volumes would be non-conforming, and that he’d be doing his clients and his business a disservice if he only offered mainstream finance.

“[Specialist clients are] often mistakenly thought of as a lower socio-economic client and a lower-quality client. There’s more work for a non-conforming loan than for a prime loan in regards to documentation, but the clients are stickier and the referrals they give you are generally much greater,” he says.

“If you don’t [offer specialist finance], another broker’s going to offer it. Are you prepared to lose that client because you think a loan is too hard? We’ve got a diversified business – we offer insurance and financial planning and a few other things.

“I don’t want my clients going to another broker because they think I can’t help them, because then perhaps we can’t offer them that other suite of products.”

Lending Solutions Group director Scott Vine gets about 80 per cent of his business from non-conforming clients. He says one reason he likes the sector is because specialist lenders are more flexible than mainstream banks.

“The banks these days have a tick-the-box mentality, and unfortunately if you can’t tick one of those boxes you become non-conforming pretty quickly. That’s the good thing about non-conforming – it’s not a box-ticking process, it’s more grey than black and white,” he says.

Of course, specialist interest rates are generally higher than mainstream rates – but that can be misleading, Mr Vine adds.

“They [clients] know they’re going to get charged a higher interest rate, but the industry now is so much more competitive that a higher interest rate now might only be one per cent higher. It’s not too bad,” he says.

“And when you’re doing a debt consolidation loan, the interest rate is actually irrelevant, because it’s the dollar saving that’s the key.

“The interest rate is one factor, but talking in dollars and cents as to what the client is going to save versus their current situation is what really matters. It’s a stepping stone to one day get back to a mainstream lender.”

Specialist lending: More mainstream than you might think
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