Breaking the mould

by AB27 Jun 2018

Three leading lenders explain the products changing the alternative credit market place

Self-managed super funds are the largest superannuation fund sector in Australia. Over the five years to 2017 the number of SMSFs increased from 473,000 to 597,000, representing 26% growth. Over the same period, assets grew by 65% to reach a value of $274.3bn, according to data published by the ATO.

This high-level growth is underpinned by the flexibility of superannuation investments, with people now able to leverage their funds to invest in shared term deposits, managed funds and commercial and residential property. Crucially, member limits have now been lifted from four to six, and this is expected to drive further interest in the product.

“Over the last two years, we’ve seen more and more people choose to take control of their retirement by managing their own super fund,” says John Mohnacheff, national sales manager at Liberty Financial. “Most brokers would be aware of the various changes within SMSF lending over recent years, which has created a more robust SMSF market with increasing demand for solutions like Liberty’s SuperCredit.”

Liberty SuperCredit is available up to an LVR of 80% for residential and 75% for commercial property. It is not necessarily limited by the existing balance of the SMSF, nor by minimum contribution requirements. To ensure its products are at the forefront of the industry, Liberty Financial has increased the loan term on SuperCredit from 15 to 30 years.

An SMSF provides greater control over investment decisions, including how much exposure a fund has to different asset classes over the long term. Given that the minimum funds needed to purchase property are substantially higher than other asset classes, borrowing within an SMSF can be an attractive option for many people.

“Our SuperCredit product provides the flexibility that SMSF borrowers are looking for. It allows brokers to help customers obtain finance in order for their super fund to invest in either residential or commercial property,” Mohnacheff says. “We expect that demand for SMSF lending will continue to match or exceed the overall mortgage market, all else being equal. As more Australians investigate making their super work for them in different ways, that means SMSF lending will also remain an important part of any broker’s business.”

From left to right: John Mohnacheff, national sales manager, Liberty Financial; Royden D’Vaz, head of sales and marketing, Bluestone Mortgages; and Cory Bannister, chief lending officer, La Trobe Financial

Crystal-clear solution

Major lenders have made a series of changes to how they assess loan applications over recent months, and the changes aren’t restricted to residential lending. Further, these changes coincide with a steady rise in the number of borrowers with blemished credit histories, and the end result is a band of potential borrowers who cannot be serviced by traditional bank lenders.

Royden D’Vaz, head of sales and marketing at Bluestone Mortgages, says: “A groundswell of PAYG borrowers with a clear credit history who qualified for a loan only a few months ago are now being declined for a mainstream loan. This has emerged as a consequence of the tightened lending criteria of traditional lenders.”

“We expect that demand for SMSF lending will continue to match or exceed the overall mortgage market, all else being equal” - John Mohnacheff, national sales manager, Liberty Financial

D’Vaz says, “Unlike big banks, Bluestone doesn’t have credit scorecards, which means every borrower is assessed based on their merits and individual circumstances. Similarly, nonstandard types of income are considered and no formula for income calculation from BAS and bank statements is applied. This customised approach is increasingly appreciated.

In response, the alternative lender has introduced a new product for near-prime borrowers, Crystal Blue. Designed to specifically address the growing market demand from borrowers who need fully verified and alt-doc loans with highly competitive rates, take-up of Crystal Blue has doubled over the last two months. This coincides with the company’s mass rate cuts of up to 225 basis points across its entire product range.

Crystal Blue aligns with the increased need for flexible alternative funding for established self-employed borrowers who can demonstrate more than 24 months of trading history. Specifically, it supports borrowers who are in short-term, casual and part-time employment; have light credit impairment, tax or business debt; or are receiving workers’ compensation, with the latter assessed on a case-by-case basis.

Bluestone has aggressive growth projections and initiatives to fast-track its near-prime market penetration.

“It’s imperative that brokers recognise the changing lending landscape and actively embrace a diverse cross-section of borrowers” Royden D’Vaz, head of sales and marketing at Bluestone Mortgages

Further, the lender is preparing for the “exponential” take-up of Crystal Blue in the short to mid term, as it is expected that borrowers who have an investment loan with interest-only terms will increasingly require a solution to transition beyond their interest-only period.

“It’s imperative that brokers recognise the changing lending landscape and actively embrace a diverse cross-section of borrowers to remain viable in a highly competitive market,” D’Vaz says.

Tackling affordability

Faced with rapidly escalating property prices and flat wage growth over recent years, first home buyers have had a well-documented struggle to get on the housing ladder. With CEDA predicting the trend will continue for “another 40 years”, it’s little wonder the bank of mum and dad will unofficially remain Australia’s fifth-largest lender for the foreseeable future.

Historically, parents have routinely acted as guarantors or gifted money to their first home buyer children, but those options are not without risk. Cory Bannister, chief lending officer at La Trobe Financial, says, “The affordability gap for FHBs is the main driver for the number of parents around the country trying to assist their children onto the property ladder.”

In response, La Trobe Financial has developed a workable solution for all parties, while removing the risk of guarantees and addressing ambiguity around gifted money. The lender’s P2C product protects wealth transfer and prevents future loss in the event of a marital breakdown. With P2C, funds are protected under the Family Law Act as the money is not considered to be a gift and therefore is not divided in the event of a marital breakdown.

“Low interest rates also help with affordability, and we believe rates will be lower for longer” Cory Bannister, chief lending officer, La Trobe Financial

Additionally, large financial gains are made when using P2C, which can generate between $30,000 and $43,000 for the borrowers through stamp duty concessions, first home buyer grants and the non-requirement of LMI.

Bannister adds, “The affordability gap is not going away. We are now seeing demand from builders assisting homebuyers through financing the final 5% or 10% required to complete the purchase and as a result are generating healthy returns on those invested funds secured by property they ultimately know well and trust.”

Australia’s chronic undersupply of housing is well documented. However, add to that the net immigration numbers of around 300,000 people per annum and, over the long term, it isn’t unrealistic to predict that property valuations close to major cities will remain well supported, albeit with more moderate growth than that witnessed over recent years.

Bannister says, “Clearly property is more expensive than in the past, and salaries have not necessarily kept up with valuations. This has been exacerbated by low interest rates and is a global phenomenon, but low interest rates also help with affordability, and we believe rates will be lower for longer.

“With a P2C loan, parents can assist by setting their own low interest rate and economically transferring wealth to their children, thereby helping with affordability in a protected way.”

LIBERTY SUPERCREDIT: Liberty's approach to SMSF lending is designed to reduce stress by increasing access to BDMs. Liberty accepts both residential and commercial property as security, and the lender’s range of loan terms will give clients greater choice. “To make the most of SMSF lending, brokers should realise that it is not harder or longer than other forms of lending,” says John Mohnacheff, national sales manager, Liberty Financial. “Provided your customers obtain the right financial advice, SMSF lending can be clear, straightforward and highly valued.”

CRYSTAL BLUE: Bluestone understands that all borrowers are different, and therefore considers non-standard income for the Crystal Blue product. Borrowers with short-term, casual and part-time employment, light credit impairment, or those who currently receive workers’ compensation, can now obtain a financial solution that fulfils their needs and objectives. “Brokers can access an 85% alt-doc loan for their borrowers by providing BAS, bank and personal statements,” says Royden D’Vaz, head of sales and marketing at Bluestone Mortgages. Crystal Blue is often utilised to pay out ATO debts, payday lenders and other personal or business debt.

P2C®: P2C® assists first home buyers in generating the purchasing power they need at the right time. With no dollar limit on the P2C amount, it is the only product on the market currently that formalises and protects parents’ financial assistance without putting their own credit files at risk, or requiring personal guarantees. “Prior to this option, parents who wanted to help their children with purchasing a property had to guarantee the child’s loan or co-purchase the home with the child and in essence place their own home and retirement savings at risk,” says Cory Bannister, chief lending officer at La Trobe Financial.