A Sydney mortgage manager has revealed what he calls the top 10 questions brokers should be asking when selecting a private lender for a client’s loan.
Damien Patterson (pictured above), associate director of Sydney Wyde Mortgage Managers, said falling into the “wrong lender trap” could be costly for both the broker’s pocket and their reputation.
“Private lending is on the rise in Australia,” Patterson said. “By using a private lender for your clients’ funding, it should be fairly straightforward if you know what to look out for. However, there are a whole lot of private lenders out there and they are not all cut from the same cloth.”
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Patterson said the rising interest rates and tighter regulation have made it much harder for businesses to secure funding from traditional sources such as the big banks.
“Enter private lenders, who are the solution for more and more businesses and borrowers seeking loans from the private debt market,” he said. “In fact, it’s one of the fastest growing asset classes for investors who see the benefits of partaking in peer-to-peer lending: diversification, decent yield and low volatility.”
Patterson said that in 2021, Australia’s private lending market doubled in value to some $1.4bn, according to the Australian Investment Council.
“With interest rates creeping up each month, APRA tightening lending conditions and traditional lenders cutting their balance sheets back, that figure will balloon,” he said. “Globally speaking, the potential for the Australian private debt market is relatively untouched and according to the Australian Financial Review, Australia is well behind Europe and North America, where commercial real estate is funded roughly 50% by the private market.”
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Patterson’s top 10 questions brokers should be asking private lenders:
Are they regulated?
“Being ASIC-regulated is not mandatory for private lenders in Australia, but it’s a pretty good yardstick of a decent, trustworthy lender,” he said. “A lender that’s ASIC-regulated has committed to a certain level of compliance standards and procedures and you’ll also benefit from a legal and dispute resource if need be – this is the Australian Financial Complaints Authority. If the company is non-ASIC regulated and not a member of the AFCA dispute resolution scheme, it’s much more difficult if something goes wrong.”
Are the fees transparent?
“A good broker should look at a lot more than just the interest rate of the loan,” Patterson said. “A lower interest rate is fine – but there are lots of different fees to consider, so it’s crucial to look out for hidden costs and fees. We give upfront fees, so everything is crystal clear.”
How quickly can they get the finance?
“Once a broker has chosen a lender who is offering a good rate on paper, how long would it take to be approved and how many hoops will the broker and client have to jump through to get it across the line?,” he said. “Don’t forget to ask about this as there’s nothing worse than a process that drags out for weeks or even months with screeds of paperwork and changing goalposts.”
What happens if the client defaults on the loan?
“Could they be the kind of lender who would jump straight to litigation if the worst happened and the loan defaulted, or were they going to talk to someone, lend a hand and be human about it?” Patterson said.
Are they flexible?
“A broker would not want a lender who sticks rigidly to one basic loan offering,” he said. “Can it be flexed to suit your client’s individual requirements? For example, can you pay off the loan early without huge fees and is there flexibility around interest rates and repayments rather than one-size-fits-all?”
Is the business well established?
“A new lender might be absolutely fine; however, it would be more of a risk to work with them,” Patterson said. “Find out how long have they been going for, do they have a registered business address, not just a PO box, a landline rather than just a mobile number. A business that has been going for many years is more likely to be a reliable lender.”
Do they have a solid reputation?
“The last thing a broker would want was a deal with a dodgy or difficult lender,” he said. “Make sure you check them out by asking around among people you trust in the industry and snoop through their Google reviews. Also search for any poor press to wrinkle out the bad guys before you come a cropper – and don’t just focus on the company, scrutinise the directors and the board, too.”
Is the funding secure?
“A broker would want to understand where the funding was sourced from, so investigate the clarity on the parties behind the lender and where the investment was coming from,” Patterson said.
How is their customer service?
“Choosing a lender who delivers an efficient, helpful and friendly service could be worth every bit as much as a low interest rate,” he said. “Poor customer service is the pits in any business scenario and it can be frustrating, time-consuming, chaotic, and it just makes everything that bit more difficult. It can also make you look bad to your borrower too.”
If it sounds too good to be true, then it probably is
Patterson said brokers should read the small print and do their due diligence before signing on the dotted line.
“More often than not, I hear of brokers who hastily push a loan because the rate looks good without digging down to find there are fees upon fees upon fees loaded up on top,” he said. “Often these low-rate lenders have aggressive inflexibility on late payments that prove extraordinarily costly and a reasonable private lender will have some leniency in their deadlines.”
Patterson’s advice is to always compare more than one lender, compare their rates, regulatory commitments and ask how readily their funds are available.
“Some lenders have a ‘pool’ on hand ready to disperse whereas others need to source the funds, costing borrowers precious time, which brokers may not realise,” he said. “No broker wants a deal to go sour as it can reflect poorly on you, damage your reputation, potential client loss, as well as causing potential financial and legal implications. But if you bear all these factors in mind and ask the hard questions, you shouldn’t go far wrong.”