Financing alternative income borrowers

by AB22 May 2018

As more Australian’s borrow against alternative forms of income, brokers are being challenged to source alternative lenders capable of meeting demand. Three major non-banks discuss the trend

PEPPER MONEY
NON-STANDARD INCOME

The way Australians work has reall changed over the last 20 years. More people are working for themselves, doing more than one job, or working different sorts of hours.

The ABS says 17% of Aussies are self-employed, with around one million being independent contractors. And we don't all do a 40-hour week; nearly a third of us work part-time. That's why proof of standard income is often something many customers don't have when it comes to applying for a home loan.

Lending to a customer with non-standard income has been around for many years, but in recent times the big banks’ appetite for this type of lending has been reducing – right at the time that the number of people earning non-standard income is surging. We all have a friend who is self-employed and doing their best to get ahead, or know a family who have their rental property on Airbnb.

Research carried out by Pepper Money last year showed that more than a quarter (26%) of Aussies surveyed were turned down for a loan because they were either self-employed or worked part-time.

At Pepper, we believe that everyone deserves a fair go, not just a PAYG earner. That’s why we’ll consider different sources of income when evaluating loan applications. That may include income from part-time employment, rental income, regular government payments, and allowances like Centrelink payments, child support payments or pensions.

The opportunity

When thinking about where the opportunities lie, it’s important to consider if the industry’s definition of non-standard income needs to change. We all know that the definition of prime lending has altered over time and the industry has accepted the inclusion of ‘near prime’ as a category. But have we acknowledged that what we accept as a customer’s primary source of income in support of a home loan application may need to change?

Our research found that 42% of Australians don’t feel as if their financial institution understands their needs and financial goals

With more people earning or receiving alternative forms of income, we know that the growth in this type of lending will only continue – and the big banks’ appetite for anything outside of the norm is diminishing. That’s a lot of people potentially missing out on receiving home loan finance. 

The question for the industry is: are we keeping up with the changing dynamics and needs of the common Australian? Our research found that 42% of Australians don’t feel as if their financial institution understands their needs and financial goals. They also feel that their financial institution doesn’t fully understand their real-life situation.

Broker impact

Lots of brokers shy away from customers with non-standard income, but they shouldn’t. In future, they may be missing out on a lot of new business. That’s why Pepper Money made it even easier for brokers to help their customers through its unique tool, the Pepper Product Selector. It takes all the hard work out of searching for and identifying the right product and can be utilised specifically for borrowers with non-standard income.

We’re not just talking self-employed borrowers. While there are few statistics on this phenomenon in Australia, last year US television network CNBC found that employment in the gig economy –characterised by temporary jobs and part-time contracts – was growing far faster than traditional payroll employment. That scenario could easily play out in Australia too.

 

BLUESTONE MORTGAGES
SME AND SELF-EMPLOYED LENDING

Since our inception in 2001, Bluestone Mortgages has actively provided alternative financial solutions to self-employed and credit-impaired borrowers. This strategy actualised an existing opportunity to provide otherwise unavailable products that directly meet the needs of two core groups. At this point, the company also focused its vision on an emerging sector: SMEs.

SMEs are the engine room of the Australian economy and equate to 69% of the workforce. This is a sizeable and often underserved market segment, representing a significant and ongoing opportunity. Brokers who embrace SMEs tap into the most powerful economic voice in Australia.

Since the year 2000, Bluestone Mortgages has originated more than $7.8bn worth of loans, helping more than 49,000 customers. Today Bluestone retains its stronghold as a leading provider of financial solutions for the self-employed. Our volumes of self-employed borrowers are at an all-time high, comprising 59% of total business, which represents a 76% year-on-year rise.

The opportunity

The ripple effect as the big banks tighten controls has resulted in a constant stream of self-employed borrowers being driven to non-bank lenders that cater specifically to the segment. This movement is being compounded by an increasing volume of borrowers who are also being classified as credit-impaired due to the restricted lending criteria. The increasing demand correlates with immediate opportunity for brokers to be solution providers to a growing swell of borrowers. This is particularly pertinent at a time of growing pressure on the industry to provide recommendations that genuinely address a client’s circumstances.

We also suggest brokers develop relationships with accountants, particularly those with small-business clients, who can help them assess the options

And there’s another long-term benefit to helping small businesses solve their problems: clients who need specialist help tend to remain loyal to the broker who helped them – even when they become mainstream borrowers. 

If you have taken the time to understand their needs, and not just with their home loan, you can become a one-stop shop helping them with everything from asset finance to short-term finance, business funding, lines of credit, commercial property loans and/or insurance. Further, if you can successfully position yourself as a broker with a deep knowledge of the specialist lending market, other brokers will pass off their more ‘difficult’ clients to you – to your benefit. We also suggest brokers develop relationships with accountants, particularly those with small-business clients, who can help them assess the options.

Broker impact

One of the biggest threats for brokers is being a ‘one-trick pony’. Embracing diversification continues to be important for brokers to strengthen their offering and get a competitive edge in an increasingly saturated market. It’s also a crucial tool that helps deepen client relationships and enhance a broker’s advisory capacity.

The SME landscape will continue to evolve and mature, which is expected to correlate with a market that is increasingly receptive to alternative financial solutions. This represents significant and sizeable opportunities for brokers to meet the growing demand for specialist lending, and those who embrace this segment will be in a much more robust position than those reliant on a linear residential portfolio.

As the SME market continues to expand, demand for specialist lending and near-prime products will increase. Simultaneously, the uptake of alternative lending solutions will continue to rise as the big banks tighten control and knock back more and more borrowers who would have previously been issued prime loans. So in short, the opportunity will continue to evolve as both the climate and SME sector continue to flourish.

 

LIBERTY FINANCIAL
SELF-INVESTMENT

Over the last three to four years, we have seen increased interest from brokers in professional development days, in addition to high attendance levels at lending seminars and other specialist education events. This indicates a significant shift among brokers in the marketplace towards self-development, professional education and continued learning.

The fact is, brokers are realising that they must invest in themselves, their knowledge and their product base, but above all they must invest in their personal brand in order to generate a steady stream of business.

This isn’t simply about being more innovative, but about creating relevance. If brokers are not investing in themselves and their business, both will quickly lose their momentum

Today, through social media platforms such as LinkedIn and Facebook it’s possible for brokers to tell their existing clients, potential future clients and also their peers about the things they stand for, believe in and are motivated by. This unparalleled reach allows brokers to develop their network online as well as off and to broaden their scope of work. Crucially, once a point of critical mass has been achieved, a growing online network positions the broker as a person of interest in other networks, and they can therefore attract better referrals.

The opportunity

At Liberty Financial, an innovative and flexible approach to finance has allowed us to help more than 270,000 customers by advancing over $25bn in funds. However, most consumers are very time-poor: they need personal loans, home loans, car loans and other products and are very happy to engage with a person who can help them obtain that finance. This deepens the relationship between the broker and consumer, and the next step is for brokers to work on generating repeat business from these clients. Today we see customers who took out their home loan a year ago and haven’t heard from their broker since. Brokers need to have a deeper understanding of their clients’ financial needs in order to meet them, and this is dependent on education, as well as the positioning of that all-important personal brand.

This isn’t simply about being more innovative, but about creating relevance. If brokers are not investing in themselves and their business, both will quickly lose their momentum.

Broker impact

People have a preconceived notion that certain loan products are difficult to process and sell, but it’s time to bust that myth. When a broker lodges their first loan application it’s a difficult process, but by the time they have done 10 it’s much easier. It’s time to realise that different doesn’t necessarily mean difficult – once everything is stripped away, the only thing that changes between loan products is the asset.

As brokers embrace this trend, they are showing the world – online, offline, client, lender or otherwise – that they are investing in their own professional development. The lender can observe how the broker is building their skills, business and client base, and this in itself is attractive to them, often inspiring them to support further investment in the best brokers.

Lenders, like everyone else, want the best possible outcomes for borrowers and will therefore back the brokers who pursue these. 

The key takeaway is that self-investment allows a broker to broaden their product suite. They can provide more services to the customer and generate greater engagement with them, much to the benefit of all involved.