Alt-doc: same destination, different route

Lenders are urging brokers not to leave their small business owner and self-employed customers behind when it comes to lending. Here they tell MPA why alternative documentation shouldn’t hold borrowers back

Ever feel like you’re missing out on a big opportunity? Well, there could be one right within your reach. The SME market in Australia is a booming one and when it comes to alt-doc loans, small business owners and self-employed borrowers are the target market. In this sector focus, MPA talks to five specialist lenders about why this market sector is filled with opportunity and how it’s down to brokers to set aside any hesitations in order to seize it.

Since 2011, alt-doc lending has been growing year-on-year, says Pepper’s head of Australian mortgages and personal loans, Mario Rehayem. He attributes this trend to brokers gaining an increased awareness and understanding of the sector and also to the continuous growth in the SME/selfemployed market over the last four years.

Royden D’Vaz, national head of sales, marketing and distribution at Bluestone, explains that “brokers who embrace the alt-doc market (primarily self-employed and credit impaired) are tapping into a significant growth sector.

“It’s estimated that the specialist lending market is worth about $4bn and that the lion’s share is self-employed or small business operators. Not only do SMEs dominate the specialist lending sector, they’re also the engine room of the Australian economy, with new figures citing up to 2.4 million of the 11.6 million working Australians being selfemployed. Of this group, 62% operate as sole proprietors with no employees.”

At Pepper, Rehayem is seeing the emergence of a particular type of borrower for alt-doc loans.

“There’s been a huge shift in new entrant self-employed that had been working for that particular employer as PAYG for the last five or six years, and either the employer has been asked to change tack in their business, or the employee has opted for various reasons, eg tax, to leave the employer as a PAYG and then come back to them as a contractor.”

Better Mortgage Management’s founder and managing director Murray Cowan also saw healthy growth in the last year and notes the performance after settlement continues to be solid: “It has become more competitive and as a result pricing has improved. Loan sizes are increasing as property values rise.”

Not all lenders have seen growth in this sector. Liberty Financial’s national sales manager, John Mohnacheff, says he hasn’t seen any change in the last 12 months: “If I can say anything, it’s been flat.” 

Homeloans has seen steady volumes. “We’re not seeing a major shift in the alt-doc space; our volumes are fairly consistent,” says general manager third party distribution, Daniel Carde. “We’re more than happy with the volume and also how they’re performing.”

Lenders in this sector, nevertheless, remain positive. Bluestone products for selfemployed borrowers accounted for 58% of their total settlements in March and D’Vaz only expects the figure to increase: “This is expected to grow with brokers and borrowers becoming more aware of the solutions that are available to self-employed borrowers – particularly those who struggle to produce tax returns as a means to verify their income.”

“An alt-doc product provides the broker the opportunity to have two bites of the cherry” Royden D’Vaz, Bluestone

Opportunities abound
Not only is there a massive market for altdoc loans, a unanimous observation from the lenders is that SMEs are still underserved and, without doubt, they hold substantial business growth avenues for brokers.

“Providing a solution when an alt-doc customer is facing a challenge deepens loyalty and client retention,” notes D’Vaz. “An alt-doc product provides the broker the opportunity to have two bites of the cherry, when the customer moves onto a mainstream loan in two to three years’ time.”

Homeloans’ Carde says brokers already have an advantage in terms of first-hand insight into the self-employed market, since most brokers are self-employed themselves and run their own small business.

When it comes to finding clients, Liberty’s Mohnacheff says the most powerful way for brokers to find them is  by advertising themselves. But Rehayem warns that brokers need to be careful when advertising in order to find consumers who may suit an alt-doc loan option.

“The only time an alt-doc loan should be offered to a customer is when the customer cannot meet the requirements of handing in the income information as a self-employed.”

He says only after that should a broker bring up an alt-doc loan option to verify income in a different way: “To go out and actively coerce or entice borrowers to go down the path without understanding the customer’s current situation is an actual breach from the ASIC act, from our NCCP obligations and requirements. So we have to be very careful in the way people very loosely go out and try to advertise for alt-doc.”

“There’s been a huge shift in new entrant selfemployed that had been working for that particular employer as PAYG” Mario Rehayem, Pepper

Overlooking the opportunity
Although self-employed is a large market and underserved, Rehayem believes it’s an area where brokers can do better.

“The perception with a lot of the brokers is that self-employed is too hard. The only reason why it’s too hard I would say is their grass-roots training never had a focus point, or they didn’t religiously look at it as part of their suite of education to learn about.”

The National Consumer Credit Protection Act may also have played a part. It was introduced to encourage responsible lending so borrowers could handle their loan repayments. Mohnacheff says the SME market is underserved by brokers because regulatory changes may have given the impression that alt-doc is a more difficult road. But he says there is no reason for this.

“The whole situation about NCCP is that the lenders have got the brokers’ backs,” he says. “All it is, is that we look at income from a different lens. The applications are pretty well identical; we just assess their income with a different view.”

It’s an asset class that has taken somewhat of a back seat and it shouldn’t be the case, he says, noting the many good products out there and stressing it’s a matter for the industry and its associations to sound the message loud and clear that there is nothing wrong with alt-doc loans. “They’re there to help a segment of borrowers that are finding it a little bit difficult to get a loan.”

“The struggle is often twofold,” adds D’Vaz. “Taking the time to understand alt-doc products and fully understanding a client’s financial position. We find that the initial block is to invest in understanding alt-doc loans [whether it’s through BDM support or on-boarding training].
“The critical component, and one that’s often not prioritised, is becoming fully aware of the client’s circumstance – meaning it’s not just responding to the current requirement, it’s being across the client’s full exposure.” 

But he says there are positive signs, too. 

“In terms of market perception, there’s a growing interest and uptake in brokers investing in, and becoming more familiar with, alt-doc loans.”

Cowan agrees that more brokers are embracing alt-doc loans, and the lenders are making sure they have support in place to educate them in this sector.

“The applications are pretty well identical; we just assess their income with a different view” John Mohnacheff, Liberty Financial

Learning from lenders
“A large part of our service proposition is educating brokers in this space and we run seminars that are designed to help brokers understand alt-doc lending,” Cowan says.

Homeloans’ Carde adds that if there is a regulatory change, the lender will explain it to brokers and educate them to make sure they can comply, via one-onone training from BDMs, and also group workshops detailing full specialist lending, including alt-doc.

Collaborating with aggregators, Bluestone’s state managers and BDMs also hold regular technical workshops around alt-doc lending, and explain ways brokers can help their self-employed borrowers.

In Q3, Pepper is set to launch their latest version of interactive educational modules around the self-employed.

“You should always put a customer in a loan that you know they can comfortably service, and the only way you’re going to know that, in PAYG or in alt-doc, is by asking the right questions that meet the compliance regulations of your business – not that of the lender,” Rehayem says. “That’s where a lot of brokers fall short – where they go out there and display just the lender’s credit policy but not their own compliance responsibilities.”

Because of the way they earn their living, small business owners and the self-employed often need a different way to successfully gain a mortgage. As more Australians turn to business ownership and take control of their own incomes, it’s a growing market that brokers shouldn’t hesitate to embrace.

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