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/

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.

Q&A with Shanta Lobo – Senior Relationship Manager

Shanta is Senior Relationship Manager LendingShanta Lobo recently joined Private Mortgages Australia in the role of Senior Relationship Manager. We thought we’d take the opportunity to find out from Shanta herself what’s involved in her role and how she can help clients with short-term business finance.

1. What made you decide to join PMA?

Having been a career banker, with a history of 20 years in commercial business banking, I wanted to try something different that also complemented my experience and expertise. The role with PMA was able to offer me just that. The Senior Relationship Manager role is challenging because it’s a new environment but maintains the basic functions of a commercial lender.

2. What are you looking forward to most in this role?

I’m looking forward to learning more about the private mortgage space and working out ways to help small-to-medium businesses with their borrowing needs. I’m also excited about establishing relationships with brokers and helping to educate them about the various ways we can help their clients.

3. What do you think the key benefits of working with a private lender are?

This is lending at a grass roots level. We’re helping clients based on their individual needs and providing realistic lending solutions. The best thing is that we’re able to think outside the square and structure deals very differently to banks in order to provide more practical options for businesses.

4. What do you bring specifically to the PMA team?

With my background in business banking I bring a thorough understanding of business requirements. I have extensive knowledge relating to interpreting financials, financial projections and security structure. I also have a great network of brokers and referrers that I’m looking forward to working with in the future.

5. What makes PMA different to other lenders?

PMA recently made the decision to increase our maximum LVR to 80%. Most private lenders will generally only lend 65% to 70% LVR, and a lot of the time this is based on a forced-sale valuation rather than the true value of the security property. We always take the true value of the security property without any tricks in order to give our borrowers a better solution.

We’ve also introduced a ‘subsequent referral fee’ in order to eliminate channel conflict. This means we still pay a referrer should a borrower come back to PMA directly after taking a previous loan with us via a referrer.

At PMA we’re all about having a transparent lending process that offers greater flexibility and quicker turnarounds than traditional lenders so that a business can get the best solution.

6. What do you think is most important when maintaining good relationships with brokers/referrers?

Listening to client or referrer and understanding their requirements is absolutely paramount. Taking the time to ask questions and fully understand their individual circumstances makes the rest of the process so much simpler. It’s also important to provide prompt responses and to make quick lending decisions. Overall, by providing solutions that work for the client ensures a smooth process that everyone is happy with.

7. PMA doubled its new loan volume last financial year, why do you think this is?

I think it comes down to great service and delivering great results. We receive a lot of return business which is pretty rare in private lending but it’s something we’re extremely proud of. We’ve found that the great relationship we have with brokers means that they spread the word to other brokers in their network.

8. What are you aiming to achieve at PMA?

I’m hoping to get in touch with as many brokers as possible to find out more about their clients’ needs and educate them about what PMA is able to provide. I also think it’s important to establish a good relationship with the client directly and make them comfortable whilst maintaining a good relationship with the broker.

I’m aiming to always provide prompt and efficient lending solutions and keep on top of the entire lending process through to settlement.

 

To speak to Shanta about your business finance needs get in touch with her on 03 8488 9926 or 

[email protected]