Why interest rates are irrelevant

private lender interest ratesSecuring a business loan can be confusing and finding a transparent lender can be a difficult task. When choosing a lender there is a lot of jargon to sort through which is why it is easy for borrowers to focus only on getting the lowest interest rates. However, it’s far too common for borrowers to buy into a loan because the interest rate looks good only to discover a range of hidden costs and fees.

Interest rate vs total cost of the loan

The rate of interest is only one portion of the total cost of a loan. Trying to calculate the true cost over the life of a loan can be daunting but it makes good business sense to do so. This is why finding a lender that is entirely upfront and transparent about fees is incredibly important.

Possible fees

Here is a list of fees a lender may require as part of the loan agreement, which can greatly increase the overall cost of the loan:

  • Establishment/Origination/Application Fees: Setting up the loan/account .
  • Documentation Fees: A fee to cover time spent preparing the loan documents.
  • Direct Debit Fees: When making a repayment some lenders charge for every transaction which add up over time.
  • Monthly Management Fees: Ongoing fees charged for the management of the loan.
  • Withdrawal Fees: Charged for every withdrawal, often seen in Line of Credit loans.
  • Late Fee: If the payment schedule is missed.
  • Early Repayment Fee: Some lenders do not charge a fee but still charge full-term interest.
  • Amendment Fees: Added by the lender if you request amendments to your loan/ repayments.

Educating borrowers

Helping borrowers to understand the difference between a good interest rate and the total cost of a loan is extremely important. We have had clients come to us in the past who have been offered an interest half of what we offered, however when they took into account the other fees and charges they were required to pay they discovered that we were significantly cheaper than the other lender. When you look at the total cost of the loan, interest rates can become completely irrelevant.

Below is an example of a $435,000 two-month loan for a second mortgage we arranged for a client on an incomplete development site:

Interest for the two-month loan:                                         $16,530 (1.90% per month)

Approval fee:                                                                               $15,206 ($2,871 to Referrer)

Legal fees:                                                                                     $2,735

Total cost of the loan:                                                               $34,471

This shows that the interest was just less than 50% of the total cost, demonstrating how critical it is to know what all the other costs are.

The total benefit

When looking at whether to take this loan, the borrower also needed to consider how much money they would make out of the transaction.  They not only needed to look at the cost of the loan, but at the benefit that the loan was going to deliver.

This is where a rough feasibility study for the development was important.

Gross Realisation Value:                                                        $1,950,000

Land purchase:                                                                          $650,000

Stamp duty:                                                                                 $35,000

Build cost:                                                                                    $650,000

Other costs (agent, council, holding):                               $115,000

Total costs:                                                                                   $1,450,000

TOTAL GROSS PROFIT:                                                          $500,000

This means the project yields a gross profit of $500,000.

Therefore, the cost of the loan divided by the gross profit is approximately 7% of the total cost. The client was able to determine that it made business sense to give away 7% of their profit ($34,471) to get the deal done. As we can see from this example, the interest rate is less significant than the overall cost of the project.

Sound advice

When considering a loan, a borrower needs to gain perspective on the overall outcome of the loan rather than getting caught up just comparing interest rates. This is where sound advice from a broker and a transparent lender is critical.

For further information about private loans for business projects, give us a call on 1800 856 683 or contact us via our website: www.privatemortgagesaustralia.com.au/contact-us/

SMEs with tax debt need to take action

ATO tax debt refinancingOn 22 October 2019, the Government passed law which allows the Australian Taxation Office (ATO) to disclose tax debt information of businesses to registered credit reporting bureaus (CRBs). The law received royal assent on 28 October 2019.

Under the law, the ATO can only disclose tax debt information of a business where certain criteria are met.

The ATO will only disclose tax debt information of a business to a CRB if the business meets all of the following criteria:

  • it has an Australian business number (ABN), and is not an excluded entity
  • it has one or more tax debts, of which at least $100,000 is overdue by more than 90 days
  • it is not effectively engaging with the ATO to manage its tax debt, and
  • the Inspector-General of Taxation is not considering an ongoing complaint about the proposed reporting of the entity’s tax debt information.

The ATO will notify a business in writing if they meet the reporting criteria and give them 28 days to engage with the ATO and take action to avoid having its tax debt information reported.

Many businesses have previously used the ATO like a bank and racked up debts by not paying their commitments on time. This decision could now have adverse effects on credit ratings and credit insurance limits, making it harder to maintain or extend credit terms with suppliers.

There has never been a better time to get your ATO debt in order and set your business up for success in 2020. Private Mortgages Australia is able to help businesses refinance ATO debt and pay out the tax debt with a short-term mortgage. This enables the borrower to pay off the ATO debt and build up a few months of good payment history. The borrower can then try to refinance to a long-term debt and pay off the loan.

For more information about how Private Mortgages Australia can help, read our case study or get in touch via our Contact page.

 

 

5 Ways a Mortgage Broker Can Help You Navigate a Business Loan

Commercial Mortgage BrokerObtaining funding for your small-to-medium business can help you survive tough times or take your enterprise to the next level. Juggling all the steps you have to take to obtain a loan can be stressful and  take up valuable time and resources!

Taking time out from your business to do an analysis of your business needs and research your lending options is only part of the process. Once you find a lender you can work with, you need to negotiate a deal with them that works for you over time and understand all the terms and conditions required over the term of the loan.

Working with a Mortgage Broker

Like most of the tasks in your business, if you can’t do them yourself, find someone who’s an expert at them. Brokers create a bridge between you and the lending world. Their role has them matching business owners with business lenders year-round. They know the best lender to engage for your purposes, so you achieve your important goals. Here’s how they help:

1. They source suitable loan options

This requires a sound knowledge of the finance market and the benefits provided by different lenders. Being able to access a range of lenders, means they are more likely to find one that matches your specific needs. A Mortgage Broker knows who to suggest and why.

2. They find workable solutions

Lenders have criteria for preferred investments. By understanding your specific need for a loan, a Broker uses their knowledge to source the most suitable Lender. You don’t have to decipher which Lender would be more interested and inclined to provide the funding you need, that’s the role of the Broker. You get on with running your business, they get on with finding the right loan for you.

3. They navigate the fine print

A Mortgage Broker conducts Due Diligence on your behalf, so you achieve your desired outcomes safely and easily. There is a specific process to sourcing, securing and completing a loan. A Broker knows how to navigate all the risks associated with private lending. With a greater understanding of the terms and conditions, a Broker can guide you through the whole process and keep you informed.

4. They have the experience

Brokers have a network of Lenders with whom they have developed professional connections. Building rapport with a platform of Lenders is crucial to a Broker’s ability to assist a wide range of clients. A good Broker has extensive experience in private lending and has negotiated loans for many other small to medium businesses. They understand how to avoid any pitfalls and negotiate the best outcome for you.

5. They know their stuff

A Broker can translate all the financial jargon and acronyms prevalent in finance documentation into simple terms for you. You can rest easy knowing they can decipher any complicated terms and conditions that may apply, so you’re not left wondering what’s going on. Plus, they don’t mind you asking questions. They understand that you need to feel confident in agreeing to the terms and conditions of your loan.

Time you won’t get back!

The most important aspect of using the services of an experienced Mortgage Broker means you save time – the one resource you never get back. You can focus on building your business while your Broker takes care of all the rest. By taking on the responsibility of negotiating all the steps required to secure your business loan, a Broker saves you time, energy, money and a lot of stress!

As a private lender, we appreciate the work that Mortgage Brokers do to help our Borrowers. In fact, over 90% of the loans we provide are introduced to us by Brokers. If you have any questions about how a Broker can make your business borrowing plain sailing, please send us a message via our Contact Page.

Diversifying into business lending: Are you ready?

Diversifying your mortgage broking businessThe Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is done and dusted, but some of the resulting changes to the finance sector are still to be seen. Potential impacts to commissions and remuneration for mortgage brokers have many considering diversifying to new income streams to ensure their survival.

The other main reason for residential brokers to diversify is to look after the long-term needs of their client base and uncover hidden value based on their needs. Research shows that 25% of mortgage borrowers own small businesses or are self-employed. More and more, consumers are looking for a single source to meet all their finance needs. Brokers who can provide the right product or service for their clients have the potential to build stronger relationships, uncover the hidden value of their database and put them one step ahead of the competition. If you don’t offer business lending to clients who need it, they could go elsewhere and eventually switch their mortgage lending as well.

The recent Reserve Bank’s Advisory Panel has stated that big banks are reluctant to finance newer businesses given the high risks involved. Recent research shows that small and medium size businesses (SMBs) are increasingly turning to alternative lending options because they aren’t having much luck with traditional banks. This presents an opportunity for brokers to provide guidance and value by helping business owners and those managing the finances of SMBs find viable, credible financing alternatives. The market has seen a rise in non-bank lenders providing small and medium business loan options, leaving businesses with a lot more options to navigate, even more decisions to make and in need of serious help.

Diversifying into business financing can be daunting, but understanding the lenders requirements and business documentation requirements is easier than you may think. Most lenders have a simple application process and offer training and support. Private Mortgages Australia hosts regular webinars that explain exactly what is required from a broker and how the process works.

Diversifying into small business lending can help brokers not only grow their business but to service more of their customers’ financial needs and deepen customer relationships. Increasingly, customers are looking for advice across
a broad spectrum of financial products, not just their mortgage.

To be successful, brokers will need to put the customer at the centre of everything, understand the customers’ full needs and to address those needs. This comes down to brokers ensuring they have a range of products on offer to address the holistic financial requirements of their customers.

We believe that diversifying into business lending is the biggest opportunity that brokers will have to grow and develop their business over the next few years.

Private Lending in 2019: The Year in Review

Private Lending in 2019: Year in ReviewAt the start of the year we penned an article titled, “Will 2019 be the year of private lending?” where we looked at the implications of the Royal Commission and the possible outcomes for the private lending industry. We thought we’d take a look back and see whether our predictions came to fruition.

A move towards transparency

First off, we discussed the level of distrust of the major banks following Commissioner Hayne’s report and how we believed borrowers would look to lenders with more transparent lending processes. While scandal after scandal has rocked the big banks, the latest being Westpac’s money laundering and child exploitation crisis, non-bank lenders have doubled the number of loans they are writing, according to one report. This isn’t to say that all non-bank lenders are transparent with their fees and interest rates. An ABC investigation recently revealed the unscrupulous practices of some non-bank lenders which has thrown a dark cloud over the industry. Private Mortgages Australia urges all borrowers and brokers to have an in-depth look at any lender before signing up for a loan. Here’s 10 questions we recommend you ask any private lender before moving ahead.

Continued tightening of the purse strings

We probably didn’t get this one quite right. In May APRA announced that banks should change the way they assess customers’ ability to meet their mortgage repayments in a move that would let people borrow more. The Coalition government also announced the First Home Loan Deposit Scheme which will allow some first-home buyers to purchase a property with as little as a 5 per cent deposit from 1 January 2020. Despite these measure and lower interest rates, the Big Four banks have not seen an uptick in customers with total operating income (cash basis) declining 3.7 percent according to KPMG. This reflects subdued lending conditions, the squeeze on margins and intense competition in mortgage markets, which has resulted in their market share of the total mortgage market decreasing 92 basis points to 81.2 percent and their share or new loans decreasing rapidly.

Rise of commercial brokers

We previously stated that in these uncertain times, borrowers will increasingly look to brokers for guidance and advice. This has certainly been the case. Commercial brokers have reportedly seen an increase of enquiries from borrowers who until this year would have been acceptable bank customers. Reportedly non-bank lenders settled 112 per cent more broker-introduced commercial loans in FY19 than they did the year before as banks face “capability challenges”.

What has PMA seen? 

In the past 12 months we’ve seen increased in demand from borrowers who have been turned down by the banks or are increasingly frustrated with the time it takes for the banks to settle. We’ve increased the number of loans we’ve settled by 50% this financial year and expect for this to grow to 100% in the new year. To deal with this growth in demand we are also expanding the team by 50%, taking our numbers up to 15 staff.

This year PMA received the backing of an independent wholesale funder that committed to investing up to $100 million to fund our portfolio of registered first mortgage loans secured by Australian property. This has allowed us to grow the number of loans we are able to service and saw the maximum loan amount increase from $2 million to $10 million on registered first mortgages. It has also allowed PMA to offer more competitive interest rates with our base rate now at 9% per annum for applicable loans.

It’s been a hugely successful year for Private Mortgages Australia and we’re excited about some new changes coming in 2020. Stay tuned!

 

 

 

Sick of settlement letdowns?

Avoid settlement letdownsA common criticism of private lenders is the regular occurrence of settlement default, where the lender is unable to come up with funds promised. This can happen when the lender doesn’t have a steady flow of cash coming in and is unable to raise the funds necessary to finance the mortgage for the agreed amount.

Usually a private lender will need to raise funds from investors in order to fund the loan. If the lender does not have a steady flow of investor funds coming in or a pool of funding readily available there could be issues when it comes to time to settle. Unfortunately this happens far too often and can leave the borrower high and dry and the project they are borrowing funds for can fall over. Not to mention the time and money wasted on the loan application process.

How to avoid settlement default

If you want to avoid the letdown of settlement default then here’s a few things you can do:

  • Don’t fall for quick settlement claims. Many private lenders will state that they have super fast settlement times, sometimes as little as 24 hours. Usually this is completely unrealistic and used as a marketing ploy. If it sounds to be good to be true…well, you know the rest.
  • Ask about the lenders settlement record. Find out how often loans they have worked on make it to settlement stage. Take a look at case studies and check out testimonials received from respectable brokers or borrowers.
  • Ask where the funding come from. This is a very interesting concept that very few people consider, where does a private lender actually get their money from? Its a good idea to ask who the Lender of Record is? Some lenders will change this on the ultimate loan documentation when a private lender is brokering the transaction to the person writing the cheque. Private Mortgages Australia uses the one vehicle for all its loans. A lot of private lenders use a sophisticated investor networks to underwrite their loan advances. Other private lenders raise funds from wholesale or retail sources with the use of an Australian Financial Services License (‘AFSL’). PMA has received backing from an  independent wholesale funder that has committed to investing up to $100 million to fund our portfolio of registered first mortgage loans.
  • Find out who makes the lending decision? In some cases it is the individual investor that makes the final decision to lend the funds required and will essentially “write the cheque”. This isn’t an ideal situation. Imagine that you are a borrower and you submit a loan to a private lender. Everything seems to be going well, you pay the upfront fees, order the loan documents from the solicitor, but then are taken by complete surprise when your loan application is rejected despite being formally approved. What has occurred is that the loan was approved by the ‘middle man’ but then turned down by the person writing the cheque. Unfortunately this occurs all the time. The smarter alternative is to make sure that the private lender is the one who is making the decisions. This is a safer and more effective situation for the borrower. PMA operates a number of Funds and our Credit Committee makes the lending decision on behalf of the pooled mortgage fund.

If you haven’t already, align yourself with a good private mortgage provider that has a proven track record with finalising settlements which can only be a good thing for you and your clients.

 

What exactly is a private mortgage?

What exactly is a private mortgage?Originally posted on Mortgage Professional Australia

There seems to be some confusion with brokers about what a private mortgage actually is; so let me set the record straight.

I can understand why there is some misunderstanding with this as the lines can become a little blurred between non-bank, low doc, non-conforming and a mortgage fund.

A private mortgage is quite literally that, a mortgage that is funded via an individual, not a bank or an institution. Private mortgage lending dates back to roman times and is very similar now as it was then, with one-person lending money to another, in other words peer to peer.

In the past many legal firms facilitated private mortgages as they would often have high net worth clients wanting to invest their money, and other clients who wanted to borrow.

While not as many as in the past, there are still a number of legal firms offering private mortgages. It is however more challenging for them now as they are no longer able to act for both the investor and the borrower; this is considered a conflict of interest.

Some brokers call a private mortgage an “asset lend”. This is due to the fact that in the past many private loans would really only focus on the value of the asset being offered as security and while the borrower’s financial situation was noted, it was more to do with the asset than the borrower.

Times have changed and while the asset is still the primary consideration, the client’s financial position and their ability to service and repay the loan are more relevant than in the past. Having said that, paperwork and requirements are still minimal when compared to mainstream loans.

The best way to describe a private mortgage is as a sensible asset lend, meaning relevant questions about the borrower will be asked but there won’t be endless, and often irrelevant, requests for information and documents which often seems to be the case with the banks at the moment.

For the most part private mortgages are non-code, meaning they’re not designed for mums and dads to buy a house. They are typically commercial transactions such as for a business person wanting to raise capital, or a developer wanting to purchase or raise funds on a site. The key is business purpose which is good, as these are just the kind of loans the banks seem to have the most trouble with at the moment and is why private mortgages have become very relevant for brokers.

Private mortgages are typically short term, 12 to 24 months and are designed to provide a fast no fuss solution for a borrower seeking business related capital. For this reason, the borrowers exit strategy is important. This will often be the sale of an asset or a refinance with a mainstream lender following the loan term.

We are often asked if a private mortgage is safe for the borrower, an odd question really when they are the one that is being lent the money. Perhaps this is because some people think private mortgages come from the underworld and non-payment will result in a visit from thug on a Harley Davidson.

This is far from the truth as private mortgage investors are typically professional business people and the loans are documented via a registered mortgage that is prepared by solicitors. The security documents a borrower will sign are much the same as those a bank would produce.

Even though most private mortgages fall outside the code, if a loan does go into default, standard recovery action would be applied. Borrowers can take comfort in the fact they have the same protections with a private mortgage as any other non-code commercial loan.

While not the answer to every loan problem, a private mortgage can be a great way of securing business finance for a client when the banks have either said no, are asking way too many questions, or if quick settlement is needed.

If you haven’t already, align yourself with a good private mortgage provider as this will ultimately mean more options and more options mean more settlements which can only be a good thing for you and your clients.

How does the private lending process work?

It’s no secret that the banks’ can be slow, with the lending process often taking 6-8 weeks to be completed. Greater flexibility and quicker turnarounds are major reasons borrowers often prefer to work with private lenders when obtaining finance. In a recent survey we found that nearly 50% of brokers had decided to work with a private lender because their client needed fast access to funding. This may be because they have an urgent business opportunity, need to quickly refinance some debt or require an injection of funds so they can finalise a project. Access to quick funding is often the difference between being able to take advantage of an opportunity or missing the boat.

So, how exactly does the private lending process work then?

Private Lending Process

Step 1. Submit application form

The Borrower or Referrer fills in the Quick App Form (found here) which includes details about the business, the individual borrower/s, loan amount, loan purpose and real estate assets and liabilities.

Step 2. We conduct initial assessment

We look at the details provided and see if it is possible for us to offer a loan in the provided circumstances.

Step 3. We issue an Indicative Letter of Offer

We provide the Borrower with and Indicative Letter of Offer which gives the details of how much we are willing to lend, the terms of the loan and the interest rate. If the Borrower decides that the Indicative Letter of Offer is suitable to them then they pay a small assessment fee ($550 to $770 inc. GST depending on complexity) to cover costs for searches that we need to ensure that everything is in order for us to move ahead with the loan.

Step 4. Conduct due diligence

Due diligence involves assessment of the applicant, loan structure, security position and exit strategy. There are a number of documents we need the Borrower to send us  to complete these tasks which are included on this checklist here.

Step 5. Issue Letter of Offer

Once we have conducted all the necessary checks and searches we will then issue a formal Letter of Offer. This includes the final interest rate, expected disbursements at settlement and details of any outstanding conditions to be met prior to settlement (if any).

Step 6. Settlement

Once the Borrower has accepted the Letter of Offer loan documents are prepared and sent to applicant’s solicitor by email. Upon return of the fully executed documents the approval fee, legal costs and prepaid interest are deducted from the loan and the balance can be paid by the next business day, sometimes sooner.

Referrer fees are paid within 24 hours from settlement with no clawbacks.

 

We endeavour to make this process as quick as possible and depending on the complexity of the loan can move from the initial application to settlement in as little as 5 business days – possibly sooner. If your client requires quick turnaround on a loan then make sure you get in touch with Senior Relationship Manager, Shanta Lobo at [email protected] or call 1300 856 683.

What does the election result mean for private lending?

Scott Morrison and the Coalition won the electionIn the lead up to the federal election there was a degree of stagnation across both the residential and commercial property markets with house prices dropping in the major cities and clearance rates at commercial auctions much lower. The looming possibility of changes to franking credits and capital gains taxes had people feeling nervous that their pockets could soon be feeling a lot lighter. Therefore, many Australians were waiting to see the outcome of the May 18 election before making any financial decisions.

However, with the election now done and dusted, and the Coalition remaining in power, a level of certainty and stability has come back to the market. The constancy of a familiar government will boost confidence in the property market and should see vendors and buyers reengage. Add to this the likelihood of interest rate reductions as early as this month and buyers, investors and developers are feeling a lot more confident about the future.

Property investors will be keeping an eye on where the billions promised in infrastructure spending is distributed, which may present growth opportunities in suburbs and regions which get a funding injection. The Coalition’s First Home Loan Deposit Scheme and APRA removing the 7% serviceability guidance may also have some effect on the housing market, however this remains to be seen.

For private lenders, a confident and stable market is always a good thing. It means borrowers are feeling better about the value of the properties they are purchasing and lower interest rates on current investments are helping to keep dollars in their pockets. At Private Mortgages Australia we are confident that now the results of the election have been finalised we will see an increase in loan applications from borrowers and also an increase in the amount being borrowed.

Will 2019 be the year of private lending?

Private lending in 2019With the release of Commissioner Hayne’s report  it’s clear that 2019 is going to bring about a number of changes to the private lending industry for lenders, brokers and borrowers alike. We take a look at how we see 2019 panning out for the private lending market.

A move towards transparency

The royal commission has destroyed borrowers’ trust in the big four banks, and now they’re looking for alternatives that offer honesty and transparency. This is an opportunity for those lenders with straight-forward and open lending processes to put their best foot forward and show borrowers that there is a genuine alternative to the mainstream banks.

Continued tightening of the purse strings

2018 saw the banks reducing their risk appetite and placing a number of restrictions on what they will lend and who to. This meant that obtaining finance became increasingly difficult for borrowers, particularly commercial borrowers. This restricted lending environment looks to continue throughout 2019, with the findings of the Hayne report recommending further regulations for the banks’ lending systems.

However, this has created a real opportunity for non-bank lenders who look at lending situations in a different light to the banks. Private lenders are able to be more flexible in who they will lend to. Rather than just look at the serviceability of the loan, they will look at the bigger picture when making a lending decision. This means that while the purse strings are tightening at the banks, more opportunities to access funding will become available through the non-bank sector.

Rise of commercial brokers

Borrowers seeking alternative lenders with transparent and flexible lending processes are going to need help. In these uncertain times, borrowers will increasingly look to brokers for guidance and advice. This is particularly the case for business borrowers who are most likely to be turned away by the banks. For this reason, it makes sense that a number of residential brokers will consider diversifying into the commercial space in order to assist this growing group of borrowers.

The year of private lending?

Overall, the changes in the lending landscape will shine a spotlight on the advantages of working with a private lender. Whether a borrower has become disillusioned with their big four bank or has had their loan application rejected, 2019 will see more and more people looking for an alternative solution for their finance needs. Private lenders have always been able to offer something different to the banks, however this year looks to be the time when the benefits of a non-bank lender really become known throughout the industry.