Investors Shift to Non-Bank Lenders Amid Changing Borrowing Dynamics

Recent adjustments to negative gearing policies are influencing borrowing strategies among property investors, who are increasingly leaning toward non-bank lenders. This shift stems from the constraints being placed on borrowing capacities due to the new regulations that exclude negative gearing from serviceability calculations.

Rachelle Kroon, co-author of The Quick-Start Guide to Your First Property and director at Sphere Home Loans, contends that these changes are likely to drive more investors to non-bank solutions. Traditionally, non-bank lenders have catered mostly to self-employed individuals and those with less-than-ideal credit, but the current climate opens these options up significantly for investors facing tighter borrowing conditions.

Understanding Non-Bank Borrowing

While non-bank lenders are not under the same regulatory oversight as traditional banks from the Australian Prudential Regulation Authority (APRA), they still adhere to responsible lending practices. According to Kroon, borrowers must navigate various factors as they evaluate these lenders, especially in light of the recent federal budget changes.

Kroon recently facilitated an investment purchase for a client seeking their third property, a deal that a bank had declined. Even though the terms with the non-bank lender involved a higher interest rate, lack of a loan fix option, and no offset account, the client's broader objectives aligned with this choice. Their existing ties with banks for other loans didn’t deter them from pursuing more suitable financing options.

How Non-Bank Lenders Operate

Joseph Daoud, founder and CEO of It’s Simple Finance, clarifies the mechanics of non-bank lenders, stating they primarily operate through wholesale markets and securitization. Though they maintain an Australian Credit Licence and are subject to the National Consumer Credit Protection Act, they often present a different set of choices to borrowers.

An essential distinction is that non-bank lenders are not bound by APRA's stringent serviceability buffer, allowing them to offer solutions where banks might see an outright no. For example, Daoud mentions that Kroon's client was assessed with a mere 1% serviceability buffer as compared to the standard 3% from banks, which reflects how these lenders can accommodate borrowers differently.

Advantages of Choosing Non-Bank Lenders

The flexibility of non-bank lenders often makes them attractive, particularly for self-employed borrowers and those with non-traditional financial situations. Daoud points out that business owners frequently have lower declared incomes due to effective tax strategies, which banks may interpret negatively when assessing borrowing capacity. Non-banks, however, are more inclined to evaluate business-based documentation, such as accountants' declarations or Business Activity Statements, affording a broader view of actual financial health.

Ultimately, non-bank lenders can also expedite the approval process and typically have assessors available for more personalized discussions with brokers, which can lead to more favorable outcomes for borrowers. Importantly, they often remain competitive on pricing, especially for those within acceptable risk profiles.

Drawbacks to Consider

However, there are notable drawbacks. For non-prime borrowers, interest rates from non-bank lenders can be considerably higher than those from banks, often by up to 1.2 percentage points more for complex cases. This can translate to increased long-term costs when compared to conventional bank loans.

Furthermore, non-bank lenders often lack some traditional banking conveniences, such as physical branches and bundled banking services. Kroon highlights that since non-banks rely on wholesale funding, their rates can be highly variable and susceptible to market fluctuations, which could lead to unpredictable rate increases.

Without features like offset accounts or fixed-rate options, borrowers may need to carefully weigh their choices. Kroon stresses the importance of consulting with a broker to navigate these waters effectively, ensuring a clear understanding of trade-offs involved with borrowing through non-bank channels.

As the demand for non-bank lending rises among investors navigating the changing financial landscape, it’s critical to evaluate all aspects – from interest rates to serviceability features – to find the right fit for long-term investment strategies.