With mainstream credit getting tougher every day, brokers are finding it difficult to help their "out of the box" clients
‘No’ is a word brokers are hearing more and more from mainstream lenders as credit markets continue to tighten. While it’s easy to get disillusioned, brokers need to focus on finding alternate funding solutions for their clients.
One possible solution that is often not considered is a private mortgage. Let’s have a look at what a private mortgage is.
A private mortgage is funded via an investor as opposed to a bank or other mainstem credit provider.
For sophisticated investors, a private mortgage can be a desirable investment opportunity as in the current market they can generate attractive returns with minimal risk.
Other than the source of the loan funds and the way an application is assessed and processed, everything remains the same as a mainstream product such as the preparation of mortgage documents and arranging settlements and discharges. Just like a bank, each mortgage is secured over an asset, in this case a property.
Private mortgages have been around for a long time. In the past it was common for legal firms to offer private mortgages as they would often have high net worth clients who were looking for investment opportunities. The legal firm would simply match a client who wanted to invest with someone that wanted to borrow. The firm would then prepare the mortgage documents and facilitate the mortgage and hey presto, a private mortgage!
While most legal firms acted in their clients’ interests, there were cases of wrongdoing such as investors being placed into mortgages where the firm had an interest, for example development projects.
Unfortunately, some of these situations ended with investors losing money. These actions lead to regulation such as the Managed Investment Act which meant in most cases anyone raising money via the general public had to be registered and compliant under this Act. Due to the cost of this compliance many legal firms decided not to continue with this part of their practice.
The GFC also took its toll on the private mortgage industry as the spotlight was well and truly on non-conforming lending and many investors became nervous and pulled out of the market.
Another challenge faced by investors in the past was the often liberal/aggressive lending behaviour of the banks and other non-bank lenders as even questionable loans were often approved, leaving only the scraps for private mortgage investors. It’s only over the past few years as the credit markets retracted have private mortgages found their place in the market again.
Unlike a traditional mainstream product, a private mortgage is typically written for business or investment purposes over a short term, usually 12 to 24 months with interest rates ranging from 8% to 10% for first mortgages up to 65% loan to value ratio.
The real benefit of a private mortgage is ease of use. Due to the royal commission and earlier actions by APRA, mainstream lenders are forced to use “rules-based” loan underwriting methods while a private investor is free to evaluate loan propositions on a case-by-case basis and apply common sense when assessing an application.
I’m sure you will agree that with mainstream credit, common sense is not currently all that common!
Because of the streamlined process of a private mortgage, loans can be secured and settled quickly, in same cases in a little as a week, which is in stark contrast to what many brokers experience when trying to get a loan approved and completed via a mainstream lender.
In all my years in the finance industry I have never seen such good lending opportunities for private mortgage investors.
Due to the tightening of mainstem credit, many bankable transactions are looking to the private sector for support. The result is good returns with minimal risk for investors and most importantly, more loan options for borrowers which is good news for brokers.
There has never been a better time for brokers to align themselves with a reputable private mortgage provider as this will ultimately lead to more options for their clients and more settled loans.
John Dickinson
ComDirect
Private Commercial Mortgages
