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Specialist lending: go your own way

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James Mitchell 12 minute read

Don’t be a sheep. Stand out from the herd, diversify your business and make a difference by funding those who think outside the box

Specialist lending still carries negative connotations in many circles. It shouldn’t, though, when you think about it; surely a specialist is preferable to a generalist?

When it comes to finance, this is most certainly the case. Brokers know better than anybody else that borrowers come in all shapes and sizes, and often require specialist solutions – particularly in today’s rapidly changing market.

The late Hunter S. Thompson once wrote that “when the going gets weird, the weird turn pro”. Right now, the Australian mortgage market is showing sure signs of strangeness, with investor rates going one way and owner-occupied rates going the other. Throw in the LVR caps and serviceability requirements and you’ve got a lending environment crying out for a pro.

Those of you who consider yourself a professional and can think outside the box should safeguard your business now – while the going is still good – by expanding your service proposition to accommodate all types of borrowers.

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A complex lending landscape is the perfect environment for brokers to consider their growth strategy and start to accept those customers who may not fit the bill for a vanilla home loan with a major bank.

While the market comes to terms with regulatory changes to residential mortgages, there is another hot topic on the lips of lenders across the country: SMEs. The opportunities to service small- to medium-sized Australian businesses and self-employed borrowers are palpable, to say the least.

The small business segment – and self-employed borrowers in particular – is something that non-bank lender Bluestone has specialised in from the very beginning. 

“It has been our bread and butter for a long time,” says Royden D’Vaz, Bluestone’s national sales manager. 

“We know this business well. I think too often there is that stigma attached to specialist lending that brokers have just got to lose.

“It’s something that has been carried over since the GFC, that these loans are non-compliant. But these are customers just like everyone else who needs a solution.”

According to Mr D’Vaz, a good proportion of brokers still view specialist lending as credit impairment and nothing else. Yet it covers a whole spectrum of lending.

“We feel there is a space that is not being catered for at present, particularly with mortgage insurance and credit scoring,” he explains.

“With self-employed borrowers, there is no time taken to understand their business in relation to income and expense. That is what we want to do.” 

Is it even worthwhile?

When you consider that there are more than two million SMEs in Australia – and SMEs are just one slice of the specialist lending segment – then you start to grasp the sheer scale of this market.

Smart brokers and mortgage managers have already clued onto this and adapted their businesses accordingly.

Take Rakis Panayi for instance. The director of Melbourne-based mortgage manager Premium Capital Finance changed his business model two years ago to focus purely on specialist lending. Prior to that, the group had been chasing the same prime mortgage dollar as everyone else since opening its doors in 1993.

“We have done a lot of investigative work as to how many people would require specialist lending solutions per suburb,” Mr Panayi tells The Adviser.

“Would you believe that just about every street in most suburbs in Australia is credit-impaired? We have the figures and stats to back that up.

“People don’t talk about defaults or having credit issues, so you don’t often hear about it. Until companies like Bluestone came about, it was stopping people obtaining finance,” he adds.

Premium Capital Finance now has affiliations with Bluestone and a handful of other specialist lenders. Mr Panayi says that with the way banks are looking at credit scoring and being particular over their prime clientele, the self-employed or credit impaired are getting left behind.

One of the biggest motivators for moving into the specialist lending space is the competitive advantage. There are almost 14,000 brokers across the country all trying to chase the same prime dollar.

That means that you’re competing with that many other brokers, plus the majors, who get walk-in after walk-in looking for a home loan or a refi. But, Mr Panayi suggests, with specialist lending, the volume is just sitting there waiting to be tapped.

“You’ve got self-employed people waiting for a solution. A lot of them don’t understand because their accountants are not aware of low-doc or sub-prime funding,” he says.

“If you can go to accountants, financial planners, advertise on social media and attract that type of client, you will get a lot of referral work. The opportunities are absolutely endless. You don’t have 14,000 people chasing that other half.”

Specialist lenders have an inherent understanding of the types of clients who require an alternative solution. Lenders like Bluestone don’t use credit scoring to assess a client’s suitability. Each application is handled individually and assessed on a personal basis. It’s this type of unique service that allows Australian small businesses to keep growing.

Mr Panayi says that in today’s market, specialist lenders are a necessity.

“The market would be a lot different if you didn’t have specialist lenders,” he adds.

“The SME market would be very different. The big banks don’t necessarily understand the challenges self-employed clients have. There is so much scope to help with self-employed people, whether they’re running a cafe or they’re builders.”

Who are these people?

More often than not, brokers will say that they don’t get “those types of clients” coming through their doors.

But a specialist lending client is really no different to any other. Have you ever had a client who’d recently arrived in the country, had clear credit, a great career and wanted a home loan? Could be a specialist lending situation.

What about one of your long-term clients who has recently gone through a divorce? Or that property investor who the banks won’t lend to anymore. Sound familiar?

These are all examples of clients who could require a specialist lending product.

John Lennon once said that “life is what happens when you’re busy making other plans”. You can’t always plan for what’s around the corner. Your clients aren’t expecting to get sick and take time off work, or get divorced, or have the banks turn them down when they try and buy their fifth investment property.

But that’s life – it happens.

Wouldn’t you want a specialist solution to keep those clients in the money?

Consider the self-employed: entrepreneurs in the early stages of starting a business; successful business people raising working capital to expand; or contractors working on a variety of short-term projects. Specialist lenders are well versed at handling the nuances of all these borrowers.

According to Mr Panayi, a lot of self-employed people have issues trying tokeep up with their tax because they tend to use that for turnover.

“When you do an evaluation on self-employed people, you will always look at their tax records,” Mr Panayi says.

“If you’re under arrangement, most banks won’t refinance that, because the stress is too hard on their serviceability.

“Bluestone and other sub-prime funders will pay out that tax – as long as the LVR and equity is there in the property,” he adds.

This releases that self-employed person from having those commitments on a monthly basis to be able to establish cash  ow and run their business and make it pro table, rather than repaying a massive amount to the tax office on agreement.

While it can be a challenging experience to go through the application process with the client initially, the bottom-line benefits to your business far outweigh any short-term pain.

The bottom line

Chrish Samuel, managing director of Finstar Home Loans, says specialist clients tend to stick around a lot longer when you’ve been with them from the start.

“Ultimately, once they get into that situation and we get them into a specialist product, then after a year or 12 to 18months, we clean them up and re nance them into a traditional loan,” Mr Samuel says. “The ultimate goal is that these borrowers become prime.

“Because you have helped them out, they tend to stay with you for longer during that prime period as well, rather than being rate shoppers.”

As every broker will attest, it’s these ‘rate shoppers’ that wind up causing that lost trail and clawback.

Brokers who remained closed off to specialist lending will continue to lose out on potential business, according to Mr Samuel, particularly if they’re not continuously working on improving themselves and learning additional skills to improve their customer’s experience.

“If you just stick to home loans, it won’t come,” he says. “It’s so competitive in that prime space.”

Without a diversified business model that includes a specialist offering, it can be argued that brokers may not be able to provide an adequate level of service. When life happens, these clients may just move right along until they find what they need.

“If they find it at the bank, then there’s a good chance they’ll take their home loan with them,” Mr Samuel says.

But if you can help these borrowers and build that trust, the opportunities for additional revenue streams are mighty attractive.

Tell me more...

Mr Samuel says that self-employed clients usually visit Finstar for a home loan need, rather than business funding.

“That’s the type of client we’ve been targeting. Our call centre capabilities have been built to accommodate that,” he points out. “However, equipment finance is just an offshoot of that home loan.”

The cross-sell opportunities with self-employed clients are plentiful. Asset finance, short-term finance, business funding, lines of credit, commercial property loans and insurances are just some of the solutions that self-employed clients may require. So if you’re interested in diversifying your business, start mining your client base for those that may need a specialist solution.

By putting yourself out there as a broker that does specialist lending, other brokers are more likely to refer their unwanted clients on to you. Much to your benefit.

Mr Panayi says accountants are a valuable referralpartner when it comes to self-employed clients.

“Accountants are a very interesting source because they don’t usually promote their self-employed clients,” Mr Panayi says. “We get most of our business through accountants. We actively sit down with accountants and ask them to sign a declaration or provide us with bank statements to approve a higher income; they are very happy to help their clients.”

Specialist lending is the perfect growth opportunity for brokers in today’s market. In increasingly uncertain times, you can bet your bottom dollar that more and more Australians will be needing specialist solutions.

Professional brokers should be their first port of call.

Partner message

Bluestone is pleased to partner with The Adviser to highlight the value specialist lenders bring to the industry. We are especially excited to be part of a feature that focuses on providing solutions for self-employed borrowers who traditionally have found it difficult to source finance.

Often referred to as the ‘engine room of the Australian economy’, the self-employed market is as diverse as any. This is why at Bluestone, we work a little differently than most and treat every deal on its own merits, taking the time to understand the circumstances of each individual client. We then match these borrowers to a Bluestone product that best suits their needs.

Bluestone can help brokers find a solution for self-employed and small business clients, no matter what stage their business is at.

Having designed our range of products for this segment, we encourage you to find out how you can help self-employed clients more often.

Royden D'Vas is national head of sales at Bluestone Mortgages

Q & A with Ebony Maxwell BDM Victoria at Bluestone Mortgages

How do you engage with brokers about self-employed borrowers?

From our perspective, it’s more about education. Most people think that self-employed products will be the same with other lenders, but the way we tailor our products for the self-employed, it is really an area that we specialise in. Previously, there were a lot of people who were PAYG and it was limited on the self-employed side. A lot of older people are now getting into self-employed businesses at 50 or 55, especially women.

Who are self-employed borrowers?

They can be anyone from a start-up business all the way up to a self-employed applicant who has had their ABN for 12 months but their income is not supported with their full financials. We are flexible around that and have ways of showing income by using their trading statements or BAS rather than using their tax for financials. 

So Bluestone can pay out tax debt?

We can pay out tax debt for self-employed clients – particularly now, towards the end of the year when everyone is getting their tax done.

Why should brokers become accredited with a specialist lender?

Most lenders will use 40 per cent of trading statements, whereas we don’t. So we’ve got that extra flexible when it comes to income.

What is the average loan life of a specialist product?

There will be some customers due to circumstances or security who will be on our books for a long period of time. But half of our book is really a band-aid for borrowers. They are not going to be locked in for a 30-year term; it’s going to be a short term to get them back on track. There is a perception out there that non-conforming is just bad credit, that they’re bad customers who just don’t pay their bills. But they could be perfectly clear customers with no issues.

Do specialist lenders service property investors?

We haven’t got any restrictions on our investment lending at the moment. We don’t load the rates.

Is every loan assessed individually?

We don’t do any credit scoring. Every application that has been submitted is actually picked up and looked at by an assessor. Everyone has a story: it’s not that they don’t want to pay their bills, there is always a reason why they are in the situation they are.

Easy steps to specialist lending success

STEP 1: Identify the applicant’s credit impairment level.
STEP 2: Confirm an acceptable security location. Brokers can do this by checking online, over the phone or by contacting their BDM.
STEP 3: Select the right product.
STEP 4: Submit the application.

After gathering all required supporting documentation, the new loan application can be submitted via your aggregator or direct to Bluestone by email.

Who requires a specialist solution?

  • Recent arrivals to the country
  • Entrepreneurs in the early stages of starting a business
  • Recently divorced couples funding their assets
  • Successful businesspeople raising
    working capital to expand their current ventures
  • People who are consolidating credit cards/store cards to reduce their monthly repayments
  • Property investors raising funds to purchase another property
  • Borrowers with credit problems
    looking to put them in their past
  • Contractors working on a variety of short-term projects

Bluestone's key points of difference

  • No credit scoring or LMI
  • Accepts other lenders’ application forms
  • Mortgage arrears calculated differently
  • All pensions (excluding Newstart) accepted
  • Transparent interest rates and fees
  • Defaults >24 months and/or <$1,000 ignored
  • Only three-month ABN required for Business Easy
Specialist lending: go your own way
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James Mitchell

James Mitchell

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.

He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.

James holds a BA (Hons) in English Literature and an MA in Journalism.

 

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