Custom solutions for unique situations

They are taking a different approach to help their customers

Custom solutions for unique situations

Traditionally, Australian borrowers seeking finance have had to provide proof of income in the form of documents like payslips. This has often left people, like those who are self-employed, struggling to get access to finance.

Resimac’s general manager, distribution, Daniel Carde, says “times have changed” and not everyone is a nine-to-five employee. In fact, different ways of working have become “normalised”, not just in terms of self-employed Australians but those with a mixed income from different sources.

According to the ABS, in the December 2020 quarter the number of Australians working in multiple jobs increased by 8.6%.

Instead of asking for payslips, alt-doc lenders have more flexible income verification methods and will typically ask for documents such as an accountant’s declaration, six months’ business activity statements or three months’ BAS, or business bank statements.

There has been strong demand for alt-doc lending throughout the COVID-19 pandemic, and as the economy has revived demand has only grown. Carde says this will lead to great opportunities for brokers as the recovery continues.

“As business confidence has returned and the economy continues to recover, we’re expecting to see intense competition in the alt-doc space,” Carde says.

“We expect customer demand will continue to increase as they look to purchase and refinance, consolidate debt and start growing their investment portfolio again, and alt-doc lenders will continue to innovate and price competitively to attract this business.”

It’s not only alternative income that means borrowers will require alternative documentation. Carde says Resimac under-stands that “life happens”, and the non-bank offers loans for those who have faced credit impairments. As long as they’re on the road to recovery, an alt-doc loan can be used on their journey to becoming an eligible full-doc applicant.

“Having an alt-doc loan gives them the opportunity to build a strong credit history and show lenders they have the ability to satisfy their commitments. Then, when the time comes, they can convert or refinance to another type of product,” Carde says.

Beyond the traditional self-employed or credit-impaired borrowers, Australia is also seeing a rise in the gig and freelance economies as well as the continued growth of the e-commerce industry. Cory Bannister, chief lending officer at La Trobe Financial, says all this creates a need for specialist lending solutions due to the temporary and transient nature of the employment and the self-employed nature of these industries.

“The issue for people working in these industries looking for finance is that the irregular nature of their employment often means that they sit outside major banks’ loan acceptance criteria,” Bannister says.

“Without specialist lenders that can assess their applications manually, they are frozen out of the market.”

La Trobe Financial has been in the alt-doc space from the start, introducing the Lite Doc loan back in 1990. Despite the self-employed community representing 44% of Australia’s workforce, the banks have withdrawn from alt-doc lending, but Bannister says La Trobe Financial intends to remain in this sector for the long run.

“The financial landscape is likely to remain complex and uncertain in the short to medium term, and self-employed Australians will need the guidance and support of brokers and NBFIs [non-bank financial institutions] to ensure credit is appropriately provided,” Bannister says.

“To that end, we stand ready and willing to assist brokers and their clients during the rebuild phase of the post-pandemic economic recovery and beyond.”

Businesses hard hit by COVID-19

As uncertainty over employment has had a significant impact on borrowers’ ability to get finance, Liberty has seen “unprecedented demand”. In helping customers “get financial”, Liberty understands the important role that specialist lending plays. Group sales manager John Mohnacheff says that now more than ever customers need flexible options.

“We know not everyone fi ts in the same box, and there is often more to a customer’s story than what is listed in their credit fi le,” he says.

“For those with more complex needs, refinancing to specialist loans has helped them to free up extra cash to cover income shortages, for example. For others, going for a more custom solution has allowed them to take advantage of new investment opportunities.”

While most areas of business have adapted to the new normal, some sectors are yet to recover. Mohnacheff points to the tourism, hospitality and entertainment industries as being hardest hit. He adds that the rapidly changing landscape has also made it di‑ cult for businesses to return to their former capacity.

“Government stimulus programs like JobKeeper and the SME Guarantee Scheme, which Liberty is a part of, have made a tremendous impact in helping many businesses to keep their doors open. But others have had to close permanently, and this continues to affect a small percentage of borrowers,” Mohnacheff says.

With an event like a global pandemic, Bluestone chief lending officer James Angus says it stands to reason that all businesses would be affected in one way or another. Although businesses like cafes and restaurants may have recovered, the impact of any temporary cash flow challenges during the lockdown would still make it difficult for them to access finance.

The option to provide alternative documentation like BAS or business bank statements can mean the temporary closure of a business doesn’t negatively impact serviceability calculations. Alt-doc lending can also be suitable for businesses that have actually benefi ted from the restrictions.

“Many online-based businesses have significantly benefited from the new remote way of living, so two years’ tax records may again show reduced serviceability due to their significant growth,” Angus explains.

“For these borrowers, an alt-doc loan can be helpful, as looking at more recent financials will boost their ability to get the investment they need.”

While there is little awareness or under-standing of alt-doc loans among borrowers, Angus says there is no reason they need to be more complicated than a full-doc assessment; it’s all about making sure all documents are lined up and tell a consistent story, and any irregularities are clearly explained.

“Needing an alt-doc loan is not inherently a sign of a weaker application or worse financial standing. There are a lot of scenarios in which extremely strong borrowers find alt-doc suits their individual needs better,” he says.

An alt-doc loan is also subject to the same enquiry, verification and assessment process as full-doc loans, including the need for credit checks and repayment histories.

Pepper Money’s general manager, mortgages and commercial, Aaron Milburn, says using all the alternative documents, like BAS, business bank statements and a Pepper Money accountant’s letter, allows the lender to gain a solid understanding of the customer’s income and loan serviceability.

With no automated decisioning, Pepper’s credit assessors will manually review each deal and ask questions to get a more detailed view of the borrower’s circumstances.

“With more and more Australians choosing to start their own business, alt-doc lending is becoming more common. With that trend set to continue, brokers and their customers should approach alt-doc lending with confidence,” Milburn says.

“By using the information in these documents, we calculate loan serviceability from the business’s earnings at the present time, rather than a business’s tax return that at times can be over a year old.”

No additional risk for brokers

As the economy recovers, alt-doc lender Thinktank believes this type of lending will really increase over the next 12 to 18 months while businesses’ current trading and earnings are being more accurately determined.

Up until March 2021, the group was still accepting end-of-year financials for 2019, along with confirmation of current income, given that the 2020/21 financial year may not provide a true reflection of performance.

Thinktank offers a number of alt-doc products on the commercial front, including its Quick Doc and Mid Doc loans. Both products revolve around the borrower’s self-certification of current earnings, which is then supported by one of various verification document options. The lender’s Mid Doc product is also available to residential mortgage customers.

Peter Vala, general manager, partnerships and distribution at Thinktank, says alt-doc solutions are a great addition to what a broker can offer due to their flexibility and speed. He adds that regardless of product type, it needs to be in the customer’s best interests, but there are no additional risks when dealing with an alt-doc loan.

“This means assessing its overall value based on price, SLAs and ability to meet the customer’s stated objectives,” he says. “It’s important to note that interest rates do tend to be slightly higher for alt-doc loans than for a full-doc loan; however, the gap has been progressively closing over time.

“Using an alt-doc loan is certainly an acceptable financing solution provided you adhere to your obligations under BID, and when applied correctly it does not place any additional risk on you as an authorised repre-sentative or ACL holder.”

Supporting business reinvention

By not considering an alt-doc loan as a viable solution, Carde says brokers may not in fact be acting in the best interests of their customers. They should be looking at a borrower’s whole financial situation, which is where an alt-doc product might stand out as the best option.

“The interest rate isn’t the only metric a product should be judged on when it comes to presenting the best options to customers,” Carde says.

Working with brokers under the new BID regime, Resimac is focusing on communication to ensure they are across all the alt-doc offerings. This includes providing one-on-one support from BDMs and relationship managers, as well as regular EDMs and dedicated resources on the broker portal. Brokers – particularly those new to alt-doc loans – are encouraged to call to discuss scenarios.

“As we come out the pandemic, we’ve seen some businesses reinvent themselves, and they’re now trading better than ever. In these instances, their dated tax returns are really of little value,” Carde explains.

“For those businesses that did see a downturn, for the most part, they are now on the road to recovery. In both situations, alt-doc could provide the best insight into their current position for businesses looking to refinance, consolidate debt, purchase or invest. This presents a great opportunity for brokers to reach out to eligible customers to see if they can help.”

Bannister adds that the opportunities are likely to only increase as the self-employed sector continues to grow and more and more people begin operating online businesses outside their normal day jobs. He predicts the market will remain complex for some time, and says non-banks like La Trobe Financial are perfectly suited to providing credit to credit-worthy, self-employed appli-cants thanks to the custom nature of its credit assessments.

“We provide an appropriate tailored solution to meet the customer’s objectives and requirements, and we think it’s unlikely the major banks will reverse their long-term ‘simplification’ trend focusing on super prime home loan borrowers in any case,” he says.

He also expects brokers to receive a major boost off the back of COVID-19.

“History tells us that complex and confusing environments provide tailwinds for brokers,” he explains. “The net result should be broker share holding above 60%, and a targeting of the 70% milestone.

“We are looking forward to the year ahead, doing what we do best, which is helping brokers and their clients find financial solutions when they need them the most. We expect that 2021 is going to be a time when our solutions are in demand more than ever.”

Alt-doc a pathway to future borrowing

For Pepper Money, upskilling brokers is “a critical component of increasing aware-ness” of solutions like alt-doc lending. The non-bank’s broker support team provides them with an in-depth understanding of specialist solutions and how they can further assist the self-employed sector.

Milburn says Pepper Money’s key focus is on helping brokers identify when and why an alt-doc solution is suitable, and explaining the reasoning behind how the non-bank calculates serviceability.

“Alt-doc lending is there for those customers who are passionate about continuing to run their own business and want to achieve the goal of homeownership,” Milburn says.

“Alt-doc loans can potentially assist customers’ future borrowing as the equity built in that home can be utilised to further build a property portfolio, should they wish to. Alternatively, they could use that same equity to purchase a commercial property to further support their own business.

“We believe self-employed clients are greatly underserved, and providing these borrowers with an alternative option is incredibly rewarding.”

The flexibility of alt-doc loans means brokers need to not only have initial conversations with their borrowers but also remain in contact with them for the life of their loan to assess how their situation changes.

Vala says alt-doc loans can be written for either long-term or short-term borrowing; Thinktank allows conversion from its Quick Doc product to Mid Doc to Full Doc.

“They can be written for 25 to 30 years but can also be moved to other forms of loans if the borrower’s needs change,” he explains.

“There may come a time when moving to a full-doc loan is more beneficial. If this is the case, all we need is the verification requirements of a full-doc loan to be met and for the borrower to demonstrate serviceability at lower benchmark ratios.”

Specialist loans a valuable tool

A key factor that leads a customer to use a broker rather than going directly to a lender is the level of options the broker can provide, says Mohnacheff . It makes sense, then, that brokers should ensure they can support customers with specialist options that can be tailored to their individual circumstances. Specialist lending can open up “a world of opportunity” for them, he says.

“For some borrowers, a specialist loan may be their only option, but for others, going for a more custom loan can be a valuable tool to leverage their cash flow and make the most of their current circum-stances,” Mohnacheff says.

“Taking out a specialist loan can also improve a borrower’s credit history significantly, and it can help them to move into a more positive financial position.”

Mohnacheff adds that although the changing climate can make it difficult to predict what the future holds, it is likely that borrower demand for specialist loans will continue to grow.

“As more customers become aware of the advantages that a specialist loan can offer, we can expect to see this increase in popularity continue to soar,” he says.

In its efforts to help brokers understand more about self-employed customers and the lending options available, Bluestone is planning to roll out a self-employed masterclass to educate them. The non-bank has already launched the program in New Zealand with positive feedback.

The masterclass goes into detail about income verification and provides resources for advisers to take home and make use of.

Angus explains that because of the extra layer of complexity that self-employed income verification can present, building relationships with self-employed customers can lead to profitable and mutually beneficial long-term relationships.

“Self-employed borrowers are often time-poor and need solutions quickly. Brokers who can help these borrowers with alt-doc as well as full-doc options have the potential to gain their trust and loyalty faster than those who can only help with full-doc solutions,” Angus says.

Adding that he expects the effects of COVID-19 on businesses to last “for years to come” as most full-doc loan options require two full years’ of tax records, Angus believes that alt-doc solutions will continue to be important.

“Beyond the pandemic, there will always be circumstances that make alt-doc loan options the preferred way to prove income for some self-employed customers, and with the property market thriving, there’s no reason to expect demand to slow down,” he says.

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