Risk Return: Helping those who feel trapped find the hidden treasures

In this environment, comfortable inaction on lending can mean paying a higher price. For those rolling off their fixed rates, inaction means paying a higher interest rate than they need to. For first home buyers, inaction may mean missing out on their dream home. And, for investors, inaction can result in an opportunity lost.

Sydney-based broker Mary Khatchadourian from Vault Finance suggests there are two common barriers for borrowers when trying to find an appropriate lender at the moment: serviceability and valuation.

Even for brokers, being able to stay on top of the lenders that are offering favourable lending conditions can be burdensome. Ms Khatchadourian said it’s often the case that “the lenders with good servicing have poor valuations and the lenders with good valuations have tight servicing”.

“It is all about finding a balance,” she said. “Understanding lenders and their policies is important for brokers, so we can help clients when they have been advised they can't do something.”

Indeed, the most successful brokers can find solutions for borrowers even when the case feels hopeless. While always keeping the best interest of the client in mind, it’s the fact brokers know the wide range of lender niches, product offerings, and risk appetites that are attracting more and more borrowers to brokers.

The most recent stats from the Mortgage & Finance Association of Australia (MFAA) show more than 71 per cent of borrowers are using brokers to help them with their home loans. On top of this, the Consumer Access to Mortgages Report 2023, partnered by the Finance Brokers Association of Australasia (FBAA), shows that borrowers would be more likely to use brokers for their next loan than the direct channel (see page 16 for more).

A large part of what keeps borrowers coming back to brokers again and again is not just the convenience factor, but also that they can help them find niche products and solutions that are outside of the mainstream.

The hidden treasures

Ms Khatchadourian told The Adviser: “As brokers, we can generally find a solution to anything. It is not often we advise clients against borrowing, it is more about setting realistic expectations about affordability.”

“Our client base is pretty sophisticated and conservative so we don’t often come across the situation where we can’t offer a solution.”

As an example, the Vault Finance broker flagged that she’s been servicing an increasing number of first-home buyers in Sydney who do not have enough money saved for a 20 per cent deposit, do not qualify for the Home Guarantee Scheme (as they don’t pass the means test), and don’t have the option of a guarantor.

These borrowers – who may feel that they have no option other than hoping they can service with a lender if they access LMI (see page 28 for more) – too often miss out because they just don’t know the alternatives.

“Saving for a deposit in Sydney is very difficult and the longer it takes them the more property values increase,” Ms Khatchadourian told The Adviser.

However, she says she has found a solution for high LVR loans through OwnHome, which can help clients borrow up to 100 per cent of the purchase price often with the fee being less than LMI.

“Before we even offer this as a solution to the client, however, we do spend a fair bit of time crunching numbers so we can present to the client the total costs,” she adds.

Another example of brokers finding solutions to the seemingly unsolvable is through loan portability. The Vault Finance broker outlined a case where a client had recently changed jobs and her husband was returning from paternity leave to a new career. The couple had sold their home and wanted to make an offer on a new home, but their bank advised them it was impossible and turned them away.

“Once we did the numbers for her we found a simple solution: loan portability,” Ms Khatchadourian said.

“We immediately filled out the paperwork for the bank to release her existing property and replace it with the new one. By offering this solution they were able to buy their new home.”

Weighing up risk v return

Another solution to helping borrowers in a jam is bridging finance. As Capital Bridging Finance managing director Damien Simonfi explains on page 20, there are solutions out there for those willing to go outside the mainstream and partner with a specialist – it’s all about knowing where to look.

Speaking to The Adviser, he provided the following example: “A mum and dad were building two townhouses in the east of Melbourne and had construction finance from a bank. It was 57 per cent completed construction and the value of the uncomplete townhouses was about $2.4 million. They had a first mortgage debt of $1.220 million but the bank had stopped the funding and wouldn’t advance them any further.

“So the broker came to us and we funded that loan in four days. The borrowers were able to finish the construction, moved into one of the townhouses, sold the second one for $1.93 million and were able to pay us out in full.

“The interest rate was about 18.5 per cent per annum.”

While some may baulk at an interest rate of 18.5 per cent, the cost of not doing it is far dearer. Indeed, the opportunity cost – and helping borrowers understand it – is a prime point of focus at the moment.

Alycia Inglis, broker director at Stoneturn Finance, said that many borrowers are taking “calculated risks” with property investment, for example.

She said that helping borrowers recognise their risk tolerance is crucial in identifying their blind spots, understanding their comfort zones, and knowing when it's time to push boundaries.

“Many potential investors seek perfect information. They want to eliminate all risks, predict future interest rates, guarantee property growth and snag bargains, she said.

“While these desires are understandable, they're also unrealistic. The quest for certainty can become a significant obstacle to taking any action at all.”

As such, she advises her investor clients to have a clear understanding of their financial capacity and to hire a buyer’s agent who can help navigate the market and advocate on their behalf. Plus, she says, it may require helping them accept the “market reality”; sometimes paying the market price is better than holding out for the perfect deal.

“The journey to property investment is fraught with uncertainties, but letting fear dictate your actions can be more costly than facing it,” she explains.

“It's not about eliminating risks but managing them wisely,” according to Ms Inglis, who suggests that by helping clients understand their risk profile, providing professional guidance, and adopting a practical approach, borrowers can navigate the complexities of the market and make more informed decisions on the risk v return.