There are plenty of banks and other lenders that are servicing the standard or "vanilla" home loan market.
But what about brokers whose clients are self-employed, may have variable income, their own SMSF, or are operating through trust structures?
La Trobe Financial and Thinktank have the loan solutions and support infrastructure to assist these brokers and their clients.
Australian Broker spoke to La Trobe Financial senior vice president and chief lending officer Cory Bannister and Thinktank general manager partnerships and distribution Peter Vala.
Specialist loan products
Bannister says specialist loans generally require a conversation with each borrower in order to fully understand the application before an approval can be made.
“There might be a detail within the application that fails automated scoring models, however, upon review, is easily explained and forms part of an entirely reasonable and suitable transaction,” Bannister says. “These ‘credit events’ include divorce, illness, change of employment, relocations and variability in income.
He says in addition to ‘credit events’, specialist loans at La Trobe Financial are also experiencing strong demand from the self-employed seeking alternative income verification methods, as well as those looking to borrow via their SMSF.
As the oldest non-bank of size and scale with 70 years of experience, Bannister says La Trobe Financial’s core purpose since setting up in 1952 has been to service those borrowers who are underserved by major lenders.
“So when, for whatever reason, the banks narrow their lending spectrum as we have seen recently, we are ready to lean in and assist – and we consider this to be specialist lending.”
Vala says Thinktank views commercial loans as specialised if the applicants are self-employed or there is a degree of complexity, for example, with multiple trust structures, or if the situation involves anything other than full-doc serviceability.
“We have always offered alternative income verification [alt-doc] products, such as Mid Doc and Quick Doc, which many now term as specialist loans,” says Vala.
“Specialised lending for us tends to be more about the uniqueness of the transaction that may vary certain pivotal credit criteria, such as high LVR, non-standard security property or sources of income, or transaction structure.”
Thinktank has been a specialist in structured commercial lending since 2006 and in SMSF lending for the past eight years. Vala says more recently it has also extended into alt-doc options for residential loans with its popular Mid Doc product.
“However, we have not ventured that step further into credit-impaired lending, which is another specialist field in itself.”
Bannister says La Trobe Financial has one of the broadest loan ranges in the market, covering first home buyers, upgraders, downsizers, the self-employed, those wanting to build a home, and clients who want to build their retirement nest egg via an SMSF loan.
“All of these products can become a ‘specialist loan’ at a point in time through circumstance,” he says.
“This could be due to variability in income, a change in employment, minor credit impairment, self-employed borrowers without up-to-date financials, or that segment of the market that would have been classified as ‘prime’ by the major banks just two years ago but now find themselves outside the banks’ ‘target zone’.
Bannister says the point is that a borrower’s circumstances change regularly, as do lender appetites, and it’s often the case that “a borrower is a ‘specialist’ customer today, with more options available tomorrow”.
This changing dynamic provides the great proof point of the customer value proposition to a broker, certainly more than any vanilla home loan.
“By helping a customer navigate a complex and uncertain path, you will earn their trust and create a customer for life,” says Bannister.
Vala says while all Thinktank loans are secured by standard commercial and residential security types, its Mid Doc products only need serviceability to be supported by the self-declaration of income, along with one of: an accountant’s letter, most recent BAS statements, or the last six months’ trading bank statements; whereas its Quick Doc loan only requires a self-declaration.
“These loans are popular with self-employed and SME clients who appreciate the ease, convenience and speed of approval while also knowing that, if and when the timing suits, they can convert over to a Full Doc loan product at no cost upon meeting the associated product criteria.”
Growing borrower demand
Vala says demand for alt-doc solutions continues to grow and has been accelerated by the emergence of COVID-19.
“Why? As the economy stops and starts, historical financial statements may not reliably demonstrate the customer’s trading position or profitability and therefore might fall short of meeting traditional full-doc criteria,” he says.
Thinktank’s Mid Doc and Quick Doc products rely on the borrower’s self-certification of current earnings, supported by one of the various verification document options above.
“This has been a major benefit during COVID and has enabled ready access to much-needed credit for good-quality borrowers,” says Vala.
Bannister says the coronavirus pandemic has been one of history’s most economically disruptive events, creating volatility in consumers’ income and expenses, both of which can cause challenges when applying for vanilla loans with major banks.
“We expect the pandemic to create further demand for specialist non-bank solutions for the short- to medium-term ahead.”
COVID-19 is also accelerating the gig and freelance economies and the rise of e-commerce, says Bannister, creating a greater need for specialist loans.
“The irregular nature of their employment often means that they sit outside major banks’ loan acceptance criteria. Without specialist lenders that can assess their applications manually, they are frozen from the market,” Bannister says.
La Trobe Financial thinks the broker industry will receive a major boost on the back of COVID-19 in 2021 and beyond.
“We know that where there is confusion and complexity, there is opportunity. Consumers can’t be expected to navigate their way through the thousands of loan products on the market,” Bannister says.
“Brokers can use their technology, knowledge and experience to distil these options quickly and appropriately to assist customers. As a result, we expect to see broker share heading back to 60% plus and retargeting the 70% milestone, and we hope to see NBFI market share heading back to 10% and beyond.”
Vala says, “The flexibility of alt-doc products makes them a great option for brokers to offer their clients in uncertain times.”
He says the advantage for brokers is that alt-docs are also a quicker form of finance for borrowers to apply for and lenders to underwrite and approve, compared to traditional loans that require time-consuming full-year or interim financials and/or one or more of cash flow forecasts, budgets and assumptions.
“As digitisation progresses throughout the industry at pace, alt-docs offer an opportunity to streamline the credit assessment as well as speed up critical steps such as valuation ordering, credit history enquiries, borrower and guarantor KYC [Know Your Customer], and fraud checking.”
Vala says all Thinktank loans are also set and forget, with no annual reviews or regular property revaluations, ensuring no onerous or ongoing requirements or uncertainties for borrowers.
Thinktank keeps brokers informed about its loans and provides training in conjunction with aggregators, such as Commercial 101, Commercial Balance Sheet and Construction Lending and SMSF sessions.
“We regularly create and shape bespoke sessions for brokers that may be seeking training in specific areas of finance and not just property secured lending,” says Vala.
Thinktank also communicates regularly with brokers via its newsletters and updates to its aggregator partners.
“If a broker is not yet accredited and wants these regular updates, our relationship managers can arrange accreditation and immediate support for any transactions,” Vala says.
Bannister says there is no difference between a broker’s approach to selling a mainstream/vanilla loan and a specialist loan – the process is the same. By following responsible lending guidelines, brokers are well equipped to complete a specialist loan application.
“The key is to understand the borrower’s situation and to be able to communicate that clearly to the lender. The more information we have up front, the quicker and easier we can provide a solution.”
La Trobe Financial holds regular webinars and attends PD days and presentations to educate brokers on its product range. Bannister says it has also a nationally renowned team of credit-skilled client partnerships managers to provide a highly personalised relationship service model to brokers.
Vala says Thinktank hopes for more settled conditions ahead and that the current financial year in turn offers a more consistent and confident trading environment. But with further uncertainty and disruption likely, it anticipates an ongoing increase in alt-doc activity until at least the end of 2022.
This is because “quality borrowers in established, enduring industries” are still experiencing instability, but they need credit to support their operations and grow.
“Thoroughly understanding a self-employed or SME customer’s cash flow and circumstances during and post COVID does enable brokers to provide incredibly valuable assistance at a challenging time and be effective, informed advocates for their clients across a range of financial needs,” says Vala.
Bannister says the major banks’ persistent tightening of bank acceptance criteria has been unfolding under their simplification strategies for the past three years.
They are pursuing a narrower segment of the market – the ‘prime vanilla’ home loan that can be scaled en masse, thanks to highly automated credit processes.
“We expect this focus will only intensify should the proposed change to responsible lending guidelines be passed as per the recent government draft,” says Bannister.
“This leaves a large segment of the mortgage market overlooked. We are terrifically positioned for this segment of the market and expect NBFIs will play one of the most important roles in the mortgage lending space over the next three years.”