How Mortgage Brokers Can Thrive in a High-Interest Lending Environment

The interest rate increases by the RBA during 2023 have put a dent on the residential lending sector. People looking to buy a home may be having second thoughts, since the increase in interest rates means the house of their dreams just got more expensive to pay off.

While there are resilient housing markets like in Brisbane, Adelaide and Perth, the general trend is that demand for residential lending is cooling down. With the next couple of years expected to be tough for residential mortgage brokers, there is a great opportunity to adapt and even thrive through diversifying your brokerage.

Why Mortgage Brokers Need to Diversify

As the market changes, brokers who stick solely to residential lending may find themselves stuck. If the housing market continues to cool, brokers may want to look to other loan products to help them continue growing their business.

Offering a diversified range of funding solutions can allow you to service the ever-changing needs of clients. As a broker you can position yourself as much more than someone who can only help with a once-off mortgage transaction. Clients would much rather deal with someone they know who helped them with a residential loan, and it makes your job easier as you already have the relationship and know the client’s personal situation. Not only will this create ‘sticky’ clients but by expanding your offering you will have more opportunities to engage with different types of clients.

Diversifying will not only help you provide your clients with a broader suite of solutions but will also enable you to future-proof your businesses. It’s a way to ensure you remain sustainable and continue to grow, regardless of market forces or economic conditions.

Opportunities Growing in the Commercial Landscape

Opportunities are ripening in sectors like commercial lending as businesses get a boost from the lifting of pandemic restrictions. Following a couple of dismal years, businesses are now looking to the future and wanting to resume and even expand their operations. Just as the residential lending sector is cooling down, the commercial lending sector is heating up. Brokers who are able to expand their services to accommodate commercial clients are in a good position to weather the dip in the residential space.

Understanding the Challenges of Businesses

Yes, many industry experts agree that mortgage brokers need to diversify. But it’s one thing to know how important diversification is in the mortgage broking industry, it’s quite another thing to actually diversify, especially if one has focused on residential lending for most of their careers.

In order to diversify into the commercial lending space, a mortgage broker needs to understand the challenges unique to business owners.

Reasons for needing business finance

There’s a multitude of reasons a business might require funding, including:

• Setting up a business
• Expanding a business
• Working capital
• ATO debt
• Equipment purchases
• Investments

Why is it difficult for small businesses to get loans from banks?

Capital is difficult for small businesses to access for several reasons. Traditional financial institutions have a strong focus on serviceability that a lot of businesses aren’t able to demonstrate with historical financials, whether that’s because they haven’t been in operation for long enough or they’ve had a tough couple of years (like we’ve just had).

Another reason a bank is not a suitable option for businesses is because the lending process takes too long. If a business needs cash to pay an invoice or staff, they need it now, not in four to six weeks.
Finally, a borrower may only require the funds for a short time rather than needing to take out a 25-year loan, so again, a bank is not ideal.

It’s not just about the lowest rate possible

When venturing into commercial lending, it might be easy to assume that what a business owner is looking for is the lowest rate possible. While a low-interest rate is always beneficial, someone running a business will more likely select the option that solves their problems and helps them to reach their business goals over the promise of a lower rate.

For instance, a report titled “Small business, big growth” by cloud banking platform Mambu, showed that roughly half of SMEs are unable to get sufficient funding. Slow lending speeds and time-consuming paperwork were atop the list for barriers to secure financing at 32% and 25% respectively.

Many brokers favour bank loans because they tend to offer the lowest rates possible.

However, if a business needs to pay off creditors and cover the salaries of their employees and the bank requirements aren’t allowing them to secure the funding they need within the desired time-frame, then the lowest possible rates become hardly a selling point.

In certain scenarios, a business owner will be willing to pay a premium for faster transactions to make sure the business keeps on operating and employees are paid. If you’re able to provide the solution to the business borrowers problem then it’s a win-win for everyone.

Private Lending Solutions for Businesses

Private lenders offer tailored solutions for small businesses and are more flexible than their banking counterparts. Unlike a bank where they follow a rigid standard applied to all businesses (e.g. serviceability), private lenders are able to provide terms specific to their clients’ needs.

Secondly, because of how flexible private loans can be structured, the processing doesn’t take as long as traditional bank loans. Faster processing times is extremely essential, especially for loan types like bridging loans.

In some cases, businesses don’t need to be tied down to long loan terms. Private loans can offer much shorter loan terms (like 6 months to 2 years). A shorter loan term also means less months paying interest costs. So while on paper, the interest rates of a private loan is higher, the shorter loan term means that when the loan term ends, a borrower can still end up paying less overall interest costs.

Solving your client’s problems

The important point to remember is that you as a mortgage broker are able to present numerous options for your client. Ask them what they need and assess how you can help them reach their goal.

Don’t restrict yourself with just one type of solution. The more options you provide, the more flexibility you give to your client to find a solution that works for them.

By doing so, you’re able to provide a more holistic service, allowing you to accommodate a larger pool of borrowers.

About PMA

Private Mortgages Australia offers short-term, flexible loans to business clients. Our credit team is readily available to accommodate brokers and borrowers alike. We pride ourselves on our quick response time. We also provide generous referrer fees within 24 hours of a loan settling with no clawbacks!

If you are a broker and have a business lending scenario you would like to discuss, feel free to contact us or you can complete our Quick App form here (< 10 mins)