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.

How property development finance works

Every homeowner understands the difference between their mortgage and the equity they have in their home but when it comes to commercial real estate transactions like property development finance, the difference between equity, preferred equity, mezzanine debt and senior debt can confuse even the savviest financial minds.

Let’s take a look at what’s called The Capital Stack to better understand where the different types of finance sit in a commercial property development.

The Capital Stack for property development finance

Senior Debt

Senior Debt is secured by a First Mortgage on the property itself, so if the borrower fails to pay the lender can sell the security property. This greatly reduces risk on the principal invested because, at worst, the lender can recoup its principal by selling the property.

Mezzanine Debt

Mezzanine Debt sits behind the senior debt in order of payment priority. Once the developer pays operating expenses and the senior debt payment all income must go to pay the mezzanine debt. If the developer is unable to pay (assuming they aren’t also in default under the senior debt), the lender typically has the ability to quickly take control of the property. The senior debt and mezzanine lenders will usually enter into an agreement, called a Priority Deed, where they spell out how their rights interact (i.e. what happens if a developer stops paying both of them).

Preferred Equity

Preferred Equity is perhaps the hardest portion of the capital stack to speak about generally because, for better and worse, it’s very flexible. Preferred equity holders have a preferred right to payments over regular (common) equity holders. “Pref” equity positions range from “hard” preferred equity, which function similarly to mezzanine debt and include a fixed coupon and maturity date to “soft” preferred equity, which is more likely to include some of the financial upside if the project performs well. While hard preferred equity holders may have the ability to make some decisions or kick out the developer if they fail to make payments, soft preferred equity holders typically have more limited rights.

Common Equity

Common Equity is the riskiest and most profitable portion of the real estate capital stack. Typically the developer (or sponsor) will be required – by the lender and/or by other equity investors – to invest their own money as some portion of the equity to have skin in the game. Equity investments carry the greatest risk, because investment agreements entitle every other tranche of capital to be repaid before common equity holders. However, if the property development does well equity investors usually receive an exceptional rate of return. This is because they receive a portion of profit which can easily outstrip the return paid to debt holders usually expressed as an interest rate.

For example, a sponsor may have sourced senior finance at 6% per annum, mezzanine finance at 22% per annum but the sponsor and common equity holders return on investment is 50% per annum. Another way to think about it is that common equity is very expensive when compared to debt within the capital stack.

Understanding the stack is incredibly important as certain lenders will only become involved in particular types of property development finance and interest rates will vary depending on the risk. Currently, Private Mortgages Australia provides Senior Debt and Mezzanine Debt, and have aspirations to offer Preferred Equity in the future.

If you’d like to discuss finance for your next property development project then please get in touch.

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.

How to obtain development finance

Development FinanceIt is well known that to secure development finance from a major bank is getting much more difficult. Like the GFC days when it was virtually impossible to obtain finance, tighter controls continue to be implemented. Banks generally require 100% of debt coverage from pre-sales and they have pulled back on the percentage of hard costs that they will fund.

However, there are non-bank lenders and private lenders that will look at a project from a different angle to the major banks. Developer finance lenders will work off the gross realisation value (GRV) of the project rather than the traditional hard cost or total development cost (TDC) method when working out how much they will lend.

The main things non-traditional development finance lenders will look at are:

  • The project – does it make sense?
  • The profit – is there a big enough profit in the project?
  • The people – are the people behind the development experienced?

GRV development finance method explained

Gross realisation value (GRV) based first mortgage facilities look at the projected end value of the project and will extend funding to a percentage of that. In general, the maximum GRV is 65%, or 70% in some cases.

Advantages of GRV development finance

  • No pre-sale requirements can mean a higher realisation price especially in a rising market.
  • No pre-sale requirements can mean the project holding costs are less and the development can commence more quickly.
  • Less developer equity required.
  • Taxable income figures for the borrowers are not generally required.
  • All fees and interest can be capitalised

GRV development finance general guidelines

With non-bank lenders and private funders, each project is looked at on an individual basis. However, below are some guidelines that, if met, will help you secure developer finance.

  • Projects should be in desirable locations with high demand for the product being built.
  • Profit margins should be between 15% and 25% depending on the type of project.
  • The borrower should be an experienced developer.
  • The borrower, while not generally required to prove serviceability, will need to have some tangible assets behind them and not be credit impaired.
  • While the funding may typically be available up to 65% of the GRV or end value, this ratio cannot be exceeded at the land stage or any stage of the development. If the land has increased significantly from when it was purchased there is no restriction on using the increased value. This means that 100% of hard costs can be funded in some circumstances.

Have a read of a case study for a development finance deal we recently undertook and you can also hear more about how PMA can help developers with finance in this video.

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]

 

PMA’s 2017 In Review

What a year it’s been for Private Mortgages Australia! We’ve had some standout moments in 2017 including:Private Mortgages Australia celebrates some stellar moments in 2017

  • Doubling our new loan volume in the 12 months leading up to our third birthday in July
  • Raising our maximum LVR to 80%
  • Taking a stand to put an end to channel conflict.

We’ve also continued to grow our team with new hires, hosted well-attended webinars and increased our Referrer Remuneration and Referrer Rewards. Here’s a bit more information about the highlights of 2017:

Doubling our Loan Book

In 2017 we saw our new loans grow by 115%, doubling our volume.  We’re so impressed that we’ve been able to maintain this growth (in our second year we increased our loan volume by 151%) – we definitely have our database of 3,000 brokers and referrers to thank for this.

We’ve put this success down the ever-increasing number of small-to-medium businesses needing access to commercial funding who can’t get it from the banks. It’s also been great to see so many brokers diversifying into the commercial space to work with these businesses.

We’re expecting a further 50% increase in the number of settled loans in the current financial year and are already well on track to achieve this.

LVR Increase

In the second half of this year we decided to raise our maximum LVR to 80%. The decision comes after we partnered with Property Predictions Pty Ltd, the creator of patented methodologies which measure demand trends and predict expected changes in prices across the Australian property market.

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. The Traffic Light Reports from Property Predictions employ predictive and patented algorithms developed by leading property market analyst, John Lindeman, to provide highly accurate short term rent and price change predictions for houses and units in any suburb in Australia.

Combatting Channel Conflict

A recent survey conducted by The Adviser found that 78 per cent of brokers had lost a client as a result of channel conflict. It appears to be a growing concern with 88 per cent more worried about channel conflict than they were 12 months ago.

We receive over 90 per cent of our business from broker referrals and we want to keep it that way. That’s why we decided to make changes to our referral fee structure to alleviate any concerns from our broker partners about channel conflict.

We’ve now introduced a ‘subsequent referral fee’ which is paid to the referrer should a borrower come back to PMA directly after taking a previous loan with us via a referrer. We get a lot of repeat clients (which is uncommon in private lending) so we believe we’ve got to be doing something right. We want to reward referrers for providing us with a good lead and will continue to do so no matter how many times that client comes back to us directly. It’s basically free money for our referrers but we believe they deserve it. All referrer fees are paid within 24 hours of settlement with no clawbacks.

Finally, we’d like to take this opportunity to wish all of our supporters a very merry Christmas! It’s an extremely busy time for us and we’ll be working right up until Christmas Day in order to help any borrowers who need finance before the end of the year. If you have any commercial finance needs please get in touch.

MERRY CHRISTMAS!

PMA makes new hire on back of stellar year

Royce Goh Senior Relationship Manager at Private Mortgages AustraliaPRESS RELEASE: 

Private Mortgages Australia (PMA), the specialised lender offering cost-effective loans to small-to-medium businesses, has hired experienced credit professional Royce Goh in the role of Senior Relationship Manager.

With 15 years of lending experience in Australia and overseas, Goh joins PMA from First Financial Services where he held the position of Mortgage and Business Loan Consultant. Prior to this he was the Asian Business Development Manager & Relationship Manager with NAB Business Banking.

“Private Mortgages Australia is experiencing incredible growth in the short-term lending space for commercial clients, so I’m really pleased to be joining them at such an exciting time,” said Goh. “The team are a great bunch of people who work with great brokers and borrowers and I’m looking forward to growing the business even further.”

In 2016 PMA saw a 210% increase in the number of loans settled and saw an 38% increase in the number of referrals coming in through referrer relationships. In order to accommodate this growth, PMA expanded the team with new hires, including Goh, over the last 12 months.

“2016 was a very exciting time for us at Private Mortgages Australia and with Royce joining us I can see the business getting bigger and better,” said Managing Director, Tony Barbone. “There’s been a real shift in the market with small-to-medium businesses realising that funding options are available if they get turned down by the banks. We’ve also seen many brokers diversifying into the commercial space which has seen more borrowers being introduced through referrer partners.”

“We’re expecting 2017 to be an even stronger year for us as many foreign investors look for alternative finance solutions due to the banks placing stronger restrictions on overseas borrowers,” continued Barbone. “Royce’s experience in Australia and abroad as well as his multi-lingual skills will make him the ideal person to help foreign borrowers find a loan that works for them.”

 

– ENDS –

About Private Mortgages Australia

Founded in 2014, Private Mortgages Australia (PMA) offers short-term, flexible loans to commercial clients that can’t get finance from the banks. Its transparent lending process offers quicker turnarounds than traditional lenders so that a business can get the best solution for achieving its goals. PMA offers first mortgage finance, second mortgage finance and caveat loans and can offer tailored solutions for borrowers who require urgent funding, have an ATO debt, are refinancing, are developers completing a project or are credit impaired.

Borrower Beware: Lender Tactics

Learn how to avoid unscrupulous lender tacticsA private mortgage is a great option if a borrower is having issues borrowing from a bank or if they are looking to have their mortgage application approved quickly. A private lender provides the loan with less red tape and processes the application in a timely manner, so you can access the funding you need sooner. Unfortunately though, there are some bad lending practices out there which can bring a borrower unstuck.  However, as with all industries, it’s a case of just a few bad operators making a bad name for the industry. If you know what to look out for and the right questions to ask your lender then a private mortgage can be a great option and deliver the best results for the borrower.

Here are five things to keep an eye out for when looking at a private mortgage:

1. Upfront Fees

The practice of lenders charging huge upfront fees is one of the biggest problems with the private mortgage industry. Some lenders can charge tens of thousands of dollars in upfront fees without the borrower even knowing whether or not they will be accepted for a loan. To ensure a borrower isn’t out of pocket and without a loan make sure you look carefully at the upfront fees charged by a lender and go for a company that charges minimal fees upfront. $550 – $1,100 is typical depending upon the size and complexity of the loan. You want a lender who makes their money by actually lending money not just charging upfront fees and rejecting the loan.

2. 24-Hour Loans

One of the major benefits of a private mortgage is the speed.  A private mortgage can be settled within a fraction of the time in which a traditional lender would require. This is because a private lender tends to focus on the security – the property to be used as collateral for the loan – rather than on ‘red tape’ processes and the applicant’s credit history, which a traditional lender might be more focused on.

A quick turnaround on a loan application is something that most private lenders will be able to offer, however, many lenders are now taking this one step further by saying they can have the loan settled within 24 hours. While in some cases this may be possible, there is still a phenomenal amount of work that needs to go into any lending decision and it would be very unlikely that every loan could be settled within this time frame. If you a working with a lender that claims 24-hour turnarounds then it may be wise to ask them exactly how many loans they have completed within a day. You may find it’s not something that happens very often. The lender knows that once the borrower is committed to them it will take too long to start again with another lender so they stay with them even if they take another week to do the loan.

3. Expensive ‘Forced Sale’ Valuation

Many lenders don’t offer loans based on market value but rather will do a ‘forced sale’ valuation which typically comes in well under market value. This means that when the Loan to Value Ratio doesn’t stack up they will come back to the borrower and make them pay the upfront fees and charges. Make sure you check with the lender what type of valuations they do.

4. Cancellation Fees

Lenders can also include a clause in their offer that if a borrower doesn’t proceed with the loan then they can be charged a cancellation fee. Usually this can be around two percent of the loan value. In some scenarios the lender can put a caveat over the property and hold the borrower to ransom until the fees are paid. To ensure this doesn’t happen, make sure you read all the fine print and ask about cancellation fees up front.

5. ‘Too Good to be True’ Rates

A sneaky trap that some lenders use is advertising a low interest rate, in order to attract a borrower, however when it comes to the actual loan offer the rate is much higher than this. The way they trap the borrower is by including a ‘from’ rate in the Indicative Letter of Offer. When the final loan documentation is received the rate is completely different to what they signed up for. If they withdraw at that point and don’t sign the loan documents the lender then caveats the properties in the offer and demands their cancellation fee. Obviously, this can cause a lot of disappointment and frustration so make sure to ask the lender up front for an estimate of the rate which will be applied to the loan. A good lender should be able to give you a pretty accurate interest rate based on the upfront information you provide.

 

While most private lenders have a transparent lending process and are genuinely trying to find the best loan option for the borrower, there are other lenders out there that can make the process a lot trickier.  Hopefully these five pointers have given you an idea of what to look out for and will help you to navigate your way through to a successful private mortgage deal.

 

By Tim Hart

Director, Private Mortgages Australia

New Website Launches

Private Mortgages Australia has launched a new websitePrivate Mortgages Australia is very excited to announce the launch of our new website. We’re hoping the new site will be the place to go for all the information you could ever need relating to private lending. On the site we will regularly share industry news, give our opinion on relevant topics and provide updates on our products and the work we’re doing for our clients.

We’d be very happy to receive suggestions from our brokers and referrers about the kind of information you’d like to see on the site. We also hope to feature some of your articles and case studies so feel free to send over anything you think would be of interest.

Keep an eye on the website for details on our next webinar and we also hope to be launching a new ‘Referrer Rewards’ program in the not too distant future.

You can also follow us on our various social media pages including: