Written by Tony Barbone, Director of Private Mortgages Australia
There’s often confusion with brokers about what a private mortgage actually is and when a private mortgage would be a good option. With a multitude of non-bank, low doc, peer-to-peer and alternative lenders in the market, there is good reason for misunderstandings. So, let’s get the basic details on private mortgages and how they work for brokers and borrowers.
To put it simply, a private mortgage is a mortgage that is funded by an individual or group of individuals, not a bank or an institution.
In the past many solicitors facilitated private mortgages as they would often have high net worth clients wanting to invest their money, and other clients who wanted to borrow. Nowadays, most private lenders have a funds management arm which deals with investors and raises the funds required to lend to borrowers. Some private lenders will only raise funds when they have a loan to fund, however, others will have a pool of funds on standby to fund a loan as it comes in. This is beneficial because it means settlement can generally occur a lot quicker as the lender is not scrambling to find investors.
This leads on to another important aspect of private loans, the turnaround time is usually a lot quicker than a traditional bank. Rather than waiting the typical 4-6 weeks for a bank loan, private lenders can usually settle within a matter of days. This is what makes private lenders ideal for borrowers who have an urgent opportunity that they need funds for very quickly.
Private mortgages can also be described as asset lending. This is due to the focus on the value of the asset being offered as security. While banks are mostly concerned with how a borrower is going to service a loan, a private lender is more interested in what security is being offered and the exit strategy of the borrower. One key thing that differentiates a private mortgage is that quite often the interest on the loan is paid upfront by the borrower rather than paying a monthly instalment.
Private mortgages are typically short term, with terms ranging 3-24 months. This is why a borrower’s exit strategy is important. This will often be the sale of an asset or a refinance with a mainstream lender following the loan term.
Private mortgages are usually ‘non-coded’, meaning they’re not covered by the National Consumer Credit Protection Act (“NCCP”) and therefore not suitable for a consumer borrower who is looking to buy a house or a car. They are typically reserved for commercial transactions such as a business needing working capital, or a developer wanting to purchase or develop a site. The key is that borrowers need to have a genuine business purpose. Banks often have strict lending policies when it comes to business borrowing which is why private lenders have become a useful alternative for SMEs.
The private mortgage lending process will vary greatly between different lenders. Some will charge large upfront fees, some will quote extremely low ‘from rates’ with little or no assessment or advertise unrealistic 24-hour turnaround times. This is why it’s extremely important to align yourself with an experienced, professional and trustworthy private lender that is transparent about the interest rate and fees from the initial quote. A quality private lender will have the flexibility to find a solution for almost any business requirement and help the borrower to successfully complete the business activity or project that they are working on. Ultimately, as a broker, by using a private lender when it is appropriate you’ll have more options to offer your clients which means happy borrowers and more settlements.