The lending landscape has changed dramatically over the past year, with near-prime lending becoming the fastest-growing sector and lenders beginning to see the rise of “super prime” borrowers.
Given the reduced risk appetites from the banks following the banking royal commission and an increasing trend from the majors to “simplify” their offerings, the non-bank lenders have taken a growing proportion of market share as more borrowers fall outside of the credit policies and brokers turn to non-banks for more specialised products for their clients.
Speaking on The Adviser Live webcast yesterday (21 March) for the Leadership Series - the Changing Lending Landscape, leading non-bank representatives outlined how the lending market was changing and what brokers can do to ensure they are across all the changes and offering solutions to their clients.
One of the themes from the webcast was the rapid rise of near-prime borrowers, given the reduced number of exceptions that some banks are willing to accept.
Aaron Milburn, director of sales and distribution at Pepper, revealed that the fastest-growing segment of the lending market was near-prime borrowers.
Mr Milburn said: “Near-prime lending in our industry is the fastest-growing sector of it. A lot of near-prime [deals] used to be a major bank deal with a credit exception on it, effectively, [but] that’s all tightened up now.
“So the near-prime space is our fastest-growing sector of lending at Pepper and as an industry. We see that only growing because we see no relaxation of credit policy at the majors… You think about the gig economy, you think about people that are Uber drivers, or they do Airtasker jobs at the weekend and they have been doing that for a prolonged period of time and they can prove that. Why shouldn’t they use that income? We see that sort of area growing and that is our fastest-growing area.”
Mr Milburn noted that the growing near-prime category was not just expanding in the residential space but in the commercial space too.
He said: “We’ve recently started in the commercial real estate lending [space], and Mal Withers has come in to run it for us, and the near-prime sector of that credit policy, or that product, is growing substantially fast as well.”
Mr Milburn elaborated that the near-prime commercial borrower may be a commercial client who has “a small default” or a “bump in the road in the past and is trying to get back on their feet”.
“We think that customer base is bankable, as we do in the near-prime residential space, and we don’t think they should miss out, so that is an area of growth for us as well,” he said.
Building on this, Cory Bannister, VP-chief lending officer at La Trobe Financial, said that the lender had to “re-categorise” its borrower segments in the current environment, given the changing borrower make-up.
He elaborated: “We’ve even had to re-categorise almost how we determine what’s prime and near-prime. Now, when we look at it, we look at ‘super prime’, which we would say is probably what the banks are looking at now.
“Prime, which is probably the loans that would have been bankable all day, every day, which have probably slipped out [of major bank’s appetites] and near-prime is the old traditional space, and specialist sits at the end of that.”
Mr Bannister concurred that the near-prime sector was a “growing sector” but added that these were not necessarily applications that have serious credit defaults or infringements, but instead borrowers who may have had a “change of circumstances” such as a variable income or variable employment.
Looking to the future, both Mr Milburn and Mr Bannister, as well as Matt Bauld, general manager, sales and business development at Prospa, agreed that the non-bank sector would continue to flourish with the support of the broker space.
Mr Bannister concluded that he believed broker market share could reach 66 per cent in the next year, adding: “I think we will see the non-bank market share continue to grow… I think you’re seeing more of the bank simplification strategies playing out, more products being exited, [so] non-banks are doing more of the lifting now to try and provide more solutions.
“The overall credit tightening, I don’t see that being retraced any time soon, that zero exceptions policy is starting to bite.”
“I think it will be some time before we see the major banks’ credit policies change. I think it’s going to increase the broker market share and increase the non-bank market share,” he said.
Mr Milburn agreed, stating: “I think non-bank share will continue to grow… the near-prime market, whether that be residential or CRE, is going to continue to grow out because the major banks aren’t moving their credit policy in line with the changing world… The number of exceptions to that major bank policy now are reducing. So near-prime, near near-prime or super prime, those sections will continue to grow out because the majors aren’t willing to see individuals as individuals.”
Mr Milburn continued to suggest that several banks “do not have a near-prime product, they do not have a specialist product and they are not there for when customers go into times of hardship. We are. And that’s the beauty of the non-bank space, we are there for Australians who are undervalued and underserved by the major banks, and we will continue to grow that out.”
Speaking from an SME lender perspective, Mr Bauld added that non-banks would also grow in this space as brokers continue to diversify into this space.
Mr Bauld said: “We have literally scratched the service of a $20-billion-plus market, so there is massive room for continued growth, that’s why we absolutely implore brokers to look at this space and think ‘OK, how do we get involved?’ We will absolutely help them get involved...
“[So], there is a massive opportunity for the intermediated market, but they have to seize it. They really have to future-proof their business. And if they do, there is a huge and massive opportunity ahead,” he said.
Find out more about the need for competition in the lending market, why the lending landscape is changing and what brokers can be doing to ensure that they are offering a holistic service offering to borrowers in the second episode of The Adviser Live webcast, the Leadership Series - the Changing Lending Landscape.
[Related: Credit crunch weakening borrower confidence]
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