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.

Private Mortgages Australia raises maximum LVR to 80%

Specialist commercial lender, Private Mortgages Australia, today announced that it has raised its maximum LVR to 80%. The decision comes after the private lender 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.

“Having access to these Traffic Light Reports from Property Predictions gives us confidence to offer a higher LVR to borrowers who are looking to secure finance against properties in those suburbs,” said Tony Barbone, Managing Director of Private Mortgages Australia.

“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.

“It’s great that PMA is able to use the insights from our Traffic Light Reports to offer better solutions to their borrowers,” Lindeman said. “The predictive software we use gives them the confidence to back the borrower and increase the maximum LVR to 80% in selected suburbs. It creates a win-win situation for both PMA and the borrower.”

Q&A with Peter Cuskelly – National Credit Manager

Private Mortgages Australia National Credit Manager Peter Cuskelly.Peter Cuskelly is the National Credit Manager at Private Mortgages Australia. He joined in 2015 bringing with him his wealth of experience in credit across all types of lending including commercial, agribusiness, mortgage and personal clients.  We thought we’d take the opportunity to find out from Peter himself what’s involved in his role and what he’s looking for in a commercial finance application.

1. What made you decide to join PMA?

After a long career as a bank lender and a short time as a broker, I was attracted by the flexibility of PMA to do a deal that makes sense, rather than making the borrower/broker meet the rules and restrictions of bank lending policy. I also like PMA’s transparent approach making sure the broker and client stay informed along the whole process with no nasty surprises.

2. What’s some of the more common reasons why borrowers can’t get traditional bank finance and need a private mortgage?

Common reasons include poor credit record, inability to demonstrate servicing and speed to funding.

3. You charge higher rates of interest than traditional bank lenders. Why is the market prepared to pay private mortgage rates?

We provide a niche service to provide loans where the loan structure gives the borrower what they need and has a sound exit, but just doesn’t meet the strict criteria of the bank. Often our customers are entering deals that are very profitable, so they don’t mind paying a bit extra for the ability to get the deal over the line quickly.

4. Tell us about the type of credit PMA provides?

PMA lend for any legitimate business purpose. Our core business is short term funding from two to 12 months up to $2 million, however we are now also managing larger loans from $2 million to $50 million with our wholesale funding pool which has really opened up some great opportunities.

5. Do you have postcode restrictions?

No – PMA will lend against property anywhere in Australia however we do reduce the Loan / Value Ratio (LVR) based on the property type and use the Genworth Security Location postcodes.

6. What’s the maximum LVR you will go to?

Our maximum LVR is 75%.

7. What evidence of serviceability do you require from a borrower?

This is the key differentiator for PMA – we capitalise interest over an agreed prepaid term so the client doesn’t need to make regular payments during that period. Repayment is based on the borrowers’ ability to execute their “Exit Strategy” to repay the loan, rather than service the debt over a long term.

8. Tell me more about what you look for in an exit strategy?

The key things that I look for in an exit strategy are that it is realistic and can be achieved in the timeframe. For instance, if the exit strategy is to receive funds from a contract then we need to ensure the contract can be fulfilled and is large enough to repay the debt. A secondary exit strategy such as refinance or sale of security property is also usually sought as a back up.

9. How and when do you pay your referrers?

Referrers are paid 24 hours after settlement, with no “claw backs” for arrears or early repayment.

10. How quickly can you settle?

We can usually provide an Indicative Approval within a few hours. Caveat loans can be settled within 48 hours with a straight forward security and co-operative borrower. Registered first and second mortgage loans generally require valuations (and bank consent for 2nd mortgage) so will take longer.

11. How do you value the security properties?

PMA have a very flexible valuation policy which allows us to use a range of sources including existing valuations, desktop valuations and agent appraisals as well as full valuations depending on the lending scenario.

12. Do you do development finance? If so how does it work?

We get involved in development finance both as a construction financier and also on a second mortgage basis to assist completion when the banks won’t help fund cost overruns.

As with all PMA loans we are flexible and make sure our deal structure suits the requirements of the borrower.

13. What loan sizes do you do?

We are the exclusive Mortgage Manager for PMA Capital Ltd, which is our own Fund that specialises in loans up to $2 million. We can now also manage larger loans from $2 million to $50 million with our new funding pool.

14. What tips would you give referrers to give them the best chance of getting their application approved?

If you have a scenario you would like considered, please use our one page Quick App which provides us all the information we need to quickly assess the proposal and a basis to provide an indicative quote or discuss the deal further.

15. What was the most exciting deal you’ve worked on?

Exciting is not usually a word you use a lot in finance. I think the most satisfying deal was one where we worked with the client and broker to pay out the ATO and stop administrators being appointed to a sound business. The exit strategy of selling a property was finalised within the loan term. It was the perfect loan from start to finish.

16. What makes an ideal PMA borrower?

I think it is a borrower that is keen to work with us to get the funding finalised as soon as possible and then make every effort to carry out the exit strategy and repay the loan.

17. What do you think makes PMA the best at what they do?

Taking the time to listen to the broker and client and making sure the deal meet their needs.

18. What’s next for PMA? Any milestones you’re looking to achieve?

There is so much going on at all different levels. I think the rate of growth of PMA has been great and I am looking forward to doubling our loan book again over the next 12 months. From an operational perspective, we are building a custom software program to automate the assessment process and will shortly start looking for a new credit support staff member, to help manage the growth (and take up some of my workload).

 

Peter has a Bachelor of Business, Graduate Certificate in Corporate Finance and is a qualified CPA. He has over 30 years experience in finance and also holds a Diploma of Finance and Mortgage Broking Management, and has completed the Agile Project Management Foundation & Practitioner course.

 

10 Questions For A Private Lender

Private Mortgages Australia explores what to ask a private lender.The strict lending requirements imposed by traditional bank lenders can mean that many borrowers have trouble qualifying for a conventional mortgage. However, a private lender provides a smart alternative for a business borrower who can’t get finance from a bank.

Private mortgage finance usually comes from private investors or institutional funders who are willing to loan borrowers money for a business purpose using a property as security. The process can be quite complicated but choosing the right lender and knowing the right questions to ask can make a private mortgage a great option. These are some of the questions to ask your private mortgage lender.

1. What types of products do you offer?

A private lender may offer a range of mortgages, such as caveat loans, car finance, invoice factoring, first-ranking mortgages or second-ranking mortgages. If you are looking for a specific type of loan product, check with the lender about the types of products they offer so that you can find the right type of business loan that meets your needs.

2. How quickly can you assess my application?

Private lenders are usually able to process applications much more quickly than traditional bank lenders. Generally, as long as the borrower has sufficient equity in the underlying security, a private lender may be able to approve a loan much more quickly than a traditional lender, sometimes offering pre-loan approval within a few hours.  However, be wary of lenders who advertise 24-hour loans as this is often a trap to get unsuspecting borrowers committed. These 24 hour loans are commonly also called “Caveat Loans”. Many say they ‘can’ offer loans within 24 hours, but with the amount of work that goes into a loan offer it is very unlikely that this will actually happen. Some exceptions do exist, for instance where a valuation has already been conducted by a reputable valuation firm thus reducing the need to order a new valuation and speeding up the application.

3. What interest will I pay on my mortgage?

The interest rate will vary depending on a number of factors including the type of security, location, and the length of time taken to pay it back. After an initial assessment of an application a lender should be able to quote a firm rate based on the information provided. Be wary of Indicative Offers that still quote a rate range or that sound too good to be true, as quite often the interest rate is much higher when the actual loan offer comes back.

4. Where does the money come from?

This is a very interesting concept that very few people consider, where does a private lender actually get their money from? 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’).

5. 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.

6. Are there any hidden costs?

Sometimes there are additional fees that you may not be aware of upfront. Check with the private lender about any additional costs that may be conditional upon specific conditions or circumstances. Make sure you work with a well-respected lender that has a transparent lending process so you don’t get hit with any unexpected fees.

7. What are the optional features?

If you are looking for specific features, ask the lender about whether these will be offered with the mortgage. Popular features that provide convenience for borrowers include prepaid loan terms. A pre-paid loan term is where a borrower doesn’t need to service the loan payments for a specified period of time. Some lenders only offer this feature for one month. Could you imagine the strain of having to service a private loan with a higher than bank interest rates every month? This would be very difficult especially if the reason for approaching the private lender in the first place was to assist with cash-flow issues. It is very important to work with a private lender that understands this and can offer a loan term that is capitalised with reliance on an exit strategy.

8. How much can I borrow?

Generally, private mortgages can be approved for any amount range from $20,000 to $4,000,000 or more, and up to 75% of the value of the underlying security. However, a good lender will treat every loan application as a unique case and can therefore lend based on the individual circumstances.

9. Do I need security for a loan?

In most cases the lender will require real estate as security. You should have some equity built up in the property to be able to borrow against it.

10. Can I make extra repayments?

If you would like the option to make extra repayments, ask the private lender about the possibility of making extra repayments and whether a fee will be charged if you do choose to make them.

 

By Tony Barbone

Managing Director, Private Mortgages Australia