The Adviser takes a look at how the non-banks have been faring in the third-party channel and if the future is looking rosy for this increasingly competitive sector.
Non-banks play an essential role in today’s lending market, helping to stimulate competition and provide attractive product alternatives for brokers and their customers.
While the sector has been reshaped in recent months as funders adjust their participation levels, we believe non-banks will still occupy a differentiated place in the lending market going forward.
Non-bank lenders enjoy a strong presence on a number of aggregator lending panels, which is why it’s important the funders they work with allow them a high degree of ﬂexibility when it comes to selecting product features.
As Australia’s leading wholesale funder, Advantedge provides a ﬂexible business platform which enables mortgage managers to select product features that will support their business model.
Today’s non-bank market is dynamic and full of change, both in terms of the consolidation of funders we have recently seen and also in terms of the broader regulatory changes affecting the industry.
Advantedge is committed to being a proactive voice in the non-bank industry, and we believe mortgage management will continue to be competitive in the new lending landscape.
We will continue to support our non-bank partners with ﬂexible and competitively priced funding options. We are pleased to support this year’s non-bank report and excited to see what the future holds for the sector in 2016.
Brett Halliwell, general manager, Advantedge Distribution.
The last 12 months have seen a number of regulatory changes affect the Australian lending landscape, particularly those institutions under APRA’s oversight.
Increased capital requirements and a slowdown in investor lending growth are the two main issues that banks have faced, adjusting their products in terms of pricing and policy to compensate.
In turn, this has forced brokers and borrowers to look beyond the banks for mortgage solutions, providing their non-bank counterparts with a huge window of opportunity to gain more market share and solidify their brand in the third-party channel.
Another important change in the non-bank sector has been the level of consolidation between some of the key mortgage management players, according to Brett Halliwell, general manager at Advantedge Distribution.
“Some of the larger wholesale funders have also adjusted their level of participation in recent months,” he adds.
“In the context of this rapidly evolving landscape, non-banks continue to play an important role, offering alternative product solutions that stimulate competition.”
So what strategies are the non-banks using to prove their relevance to brokers and borrowers to secure their position as a genuine player in the mortgage market? Have recent regulatory changes forced them to tweak their game plan?
Better Mortgage Management (BMM) managing director Murray Cowan believes these regulatory changes have been a boon for non-bank lenders, helping their rates look more competitive against the banks, especially those for investment loans.
“We are patiently observing changes in the marketplace, with plans to make adjustments in due course,” he says.
“With our variety of funders, we believe that these changes will affect some of our products and not others.”
While BMM has been well known for its altdoc and specialist lending solutions, it wants to be recognised for its investor offering too.
“Whilst we can’t say anything now for certain, we advise you to look out for some fixed specials in the near future,” Mr Cowan says.
With broker distribution being its only lending channel, BMM sees itself as a natural partner for brokers, and regularly holds workshops to educate them on its self-employed and alt-doc products.
“In the future, we will be looking to conduct some of these education sessions online through the use of webinars and educational videos,” Mr Cowan adds.
Cory Bannister, vice president and head of distribution at La Trobe Financial, says APRA’s changes will result in greater awareness of non-banks’ value propositions, particularly around product and policy flexibility.
“We expect to see a continued increase in brokers’ willingness to try what are genuine alternatives to the major banks’ offerings,” he tells The Adviser.
As a specialist lender, Mr Bannister says La Trobe focuses on providing niche solutions and a “high-touch” service proposition that the major banks generally don’t offer.
Its product suite comprises six loan types – residential, commercial, construction/ development, SMSF, non-resident and rural – that cater for a variety of loan purposes such as debt consolidation, credit impairment, cash out, business and personal purposes.
“Our experience tells us that service and ultimately a solution is often the most important consideration for our clients,” he says.
“In terms of innovative policies, our ‘life event’ risk grade policy offers great flexibility in that rather than counting the number or size of defaults and judgements, we look at the number of events, such as redundancy or divorce, which led to the impairments – meaning borrowers are able to access more competitive solutions.”
And Mr Bannister says the policy that is most loved by brokers is La Trobe’s competitive commission structure with no clawback.
“We have a great relationship with brokers and find that many are high-volume repeat users, which is a great indicator that the products and service we provide are well received,” he explains.
“That said, we are constantly looking for ways to improve the broker-user experience, a recent example of which was the expansion of our solicitor panel to include a national law firm in order to provide brokers in each state with a local touch point. This was the direct result of broker feedback.”
Liberty Financial’s national sales manager, John Mohnacheff , says it’s no secret that current market regulations have seen non-banks increase their investor numbers, and Liberty is no different.
“But it’s not just investors – we’re seeing growth across the whole spectrum of clients,” he notes.
Mr Mohnacheff says brokers have known Liberty for its custom lending products, but it is now raising awareness of its prime products as well.
“For example, several of our products have recently received Canstar’s highest rating of five stars,” he says. “Also, we’re still bringing our same free-thinking attitude to our prime products. One example of this is Swift, which allows us to lend at a 95 per cent LVR, removes the need for LMI and can be used with non-genuine savings for first home buyers.”
Liberty is committed to helping its brokers learn more about these products.
“To help us achieve this, we’ve put more BDMs on the road than any other lender – more than 40,” he says.
“We recognise that a ‘one-size-fits-all’ approach doesn’t work because every broker is different, with different customers and unique needs. A single flyer won’t cut it – brokers need face time to ask the tough questions, so we’ve responded.”
Traditionally seen as a specialist lender, Pepper has already positioned itself to go head-to-head with the likes of the big four in the prime mortgage market, offering products at or below the average bank rate, according to the group’s chief operating officer, David Holmes.
“Pepper’s alternative in the prime home loans is the fact that mortgage insurance and credit scoring is not used – each case is judged on its merits,” he says.
Mr Holmes adds that Pepper is one of the leading industry players in broker education, working closely with the MFAA to provide brokers with tools and information to help them understand the opportunities to grow their businesses.
“Pepper’s sales team is highly skilled and focuses on the training and education of brokers. This is supported by a unique education suite of videos which provides assistance to brokers in areas such as writing business plans, marketing and how to understand financial statements.”
Meanwhile, Bluestone Mortgages’ national sales manager, Royden D’Vaz, believes the opportunity for non-banks and brokers to cater for the specialist segment is “enormous”.
“Our focus is on the self-employed sector, as we see this under-serviced market has the biggest growth opportunities, and we want our brokers to come along for the ride,” he explains.
It is this focus that saw Bluestone launch two new products aimed at self-employed and small-business customers in 2015.
Business Easy allows a small-business owner to take out a mortgage that can then be drawn down to manage their working capital and is suitable to both clear credit and credit-impaired borrowers.
Meanwhile Crystal Blue is designed for self-employed borrowers with clear credit histories, providing a transparent and understanding approach to income calculation and not relying on universal criteria or rules.
Mr D’Vaz says the product suits contractors and tradespeople in any industry with low to medium expenses.
He says that Bluestone’s BDMs are very active and pride themselves on the strong relationships they have with their brokers and on being available when needed to provide a great service.
“Never standing still, they are on the road meeting new and existing brokers one-on-one and in group environments run by aggregator groups or at one of our own Bluestone workshops and roadshows,” Mr D’Vaz explains.
“At these events, the emphasis is on educating brokers on the opportunity that exists for them and how Bluestone can assist in growing their business by helping more clients, more often.”
What brokers think
It is their competitive rates, low fees and service proposition that make non-banks popular with brokers and borrowers, says Kim Cawthorne, owner of Prestige Mortgages and Mortgages for Women.
“Non-bank lenders keep the banks honest – as their market share grows, the banks realise customers have other options available to them,” she says.
Ms Cawthorne’s preferred non-bank lender at present is Qantas Credit Union.
“They are quick and efficient with a ‘can do’ mentality and they really seem to want to please the broker,” she tells The Adviser.
“You can talk to the credit manager if need be to discuss your application, their rates are sharp, and their products are excellent with different options available such as Frequent Flyer points.”
Cube Home Loans broker Scott Beattie says the main area that non-banks are leading the banks is in accountability.
“In my experience dealing with lenders, most banks have very little accountability for what they say. It certainly happens with non-banks too, but they’re probably the exception rather than the rule,” he says.
“I recognise that service times do blow out from time to time, but as a broker I’m the middle man, and what I get told is what I relay to my customers and referral partners. I don’t want to ruin my credibility with these people or lose future income due to misinformation.”
Another reason Mr Beattie likes using non-bank lenders is that he doesn’t feel his customers are being churned internally.
“Non-bank lenders also seem to use more common sense when prioritising a deal compared to banks,” he adds.
Mr Beattie’s number one non-bank lender is Australian First Mortgage (AFM) because it has multiple funders under one roof and great BDM support.
“If I do an application for a client and a funder says that they don’t like it, the application can be easily moved to another funder, whereas if a bank doesn’t like an application I’ve submitted for a borrower, I’ve effectively got to start the whole process again,” he explains.
“My BDM is outstanding. She understands our business and it’s not uncommon for her to workshop a deal with me, especially in the low-doc space.”
However, Mr Beattie admits that brand awareness is one challenge he faces when talking to clients about non-bank lenders.
“The other challenge is that non-bank lenders who work in the prime and sub-prime space such as Liberty are often associated with a higher interest rate, and therefore clients are sometimes put off by that,” he adds.
Ms Cawthorne says clients can also be concerned about the regulation of non-bank lenders, and that there may be some risk to them in regards to rates in the future.
“It’s about educating the client that the same regulations are imposed on non-bank lenders and providing them with as much information on the chosen non-bank lender as possible,” she says.
If there is one thing that non-banks can do better in order to win business, Mr Beattie reckons they could be a bit more competitive in the pro pack space.
“For example, if I’m doing a loan for a client through CBA, I know that anything pretty well above $250,000 is typically more competitive to do on a professional package loan where you pay an annual fee, which I see as like an NRMA Road Assist membership. Whereas with the non-banks, they’ll come and fix your battery, but you’ve got to pay for the full service,” he says.
The immediate future for non-bank lenders seems promising, with many identifying the massive opportunity now in front of them.
Advantedge’s Brett Halliwell believes mortgage managers will continue to occupy a differentiated place in the lending market while still enjoying a strong presence on a number of aggregator panels.
“We also believe that non-banks who source their funding through regulated lenders are likely to be at an advantage compared to securitised funding, which tends to cater to a smaller section of the market and be more restrictive,” he says.
“While banks are currently tempering investor lending to take a prudent approach with the view that interest rates will eventually rise, we believe mortgage managers who source their funding from banks will continue to be competitive in the new lending landscape."
There have been many strategic moves made by the non-banks in recent months. Here’s a snapshot …
Pepper's ASX debut
Pepper debuted on the ASX back in August as part of a focus on new global opportunities in consumer lending and loan servicing.
At the time of listing, Pepper Group CEOs Mike Culhane and Patrick Tuttle said in a joint statement that the group was thrilled with the shareholder support for the business.
“The founding shareholders represented on the board and management team will hold a cumulative 45 per cent stake in the company post-listing,” the statement said.
“A majority of Pepper employees have been gifted a parcel of shares valued at $1,000 to align our combined interests as shareholders. Many of our team have also invested above this in additional shares, which shows the faith our people have in Pepper’s future.
“We are now focused on delivering on our exciting growth plans for the beneﬁt of our business partners, customers and our new shareholders.”
AFM merges with NMC
Australian First Mortgage announced a merger in March with Queensland-based non-bank lender National Mortgage Company (NMC) – a move that would see the new entity grow its loan book to over $4 billion, write $1 billion a year in new business and generate revenue of over $30 million per annum.
AFM managing director Tanya White said at the time of the announcement that the merger is a “hand-in-glove” ﬁt.
“The merger compliments both of our existing operations and will provide our brokers and their customers with higher levels of service and support,” she said.
“It will combine NMC’s back-office capabilities with AFM’s broker distribution platform and robust branding to build scale and growth.”
Liberty unveils new image
Liberty Financial launched a direct-to-consumer branding and advertising campaign in November to support mortgage brokers.
Liberty’s national sales manager, John Mohnacheff , said never had it been more important for the lender to raise its proﬁle with consumers.
“With banks continuing to restrict their lending appetite and consumers needing alternative lending solutions, Liberty is fast becoming the lender of ﬁrst choice for consumers in the know,” he said.
“By increasing the awareness of our brand, and educating consumers about our diverse range of products, we want to make the job of our business partners easier.”
Liberty also designed a new website, logo and new customer tools which provide more detailed insights into indicative customer borrowing capacity and suburb by suburb property index metrics.
BMM launches alt-doc tool
Better Mortgage Management launched a calculator in October to help educate brokers and borrowers about alt-doc and specialist products.
BMM designed the alt-doc and specialist loan calculator after noticing that some brokers were putting together their own Excel spreadsheets to show clients the true cost over the expected life of the loan and to help meet compliance requirements.
“Our calculator goes a few steps further and considered things like how much equity the customer may have if they hold the loan for a number of years, compared with how much they would have with a different loan for the same period of time,” BMM managing director Murray Cowan said at the time.
“It also gives brokers the ability to compare the impact of capitalising fees versus not capitalising fees, and also examines the impacts of interest-only versus principal-and- interest.”