Specialist support

The rapid change in the economic environment in Australia in the past 12 months has been one for the record books. From peak highs in new loans and record-low interest rates, the tide has been rapidly shifting from the boom of 2022 to a much more constrained 2023. As well as dealing with rampant inflation pushing up the cost of living, Australian borrowers are also facing the fastest central bank tightening cycle in over 30 years resulting in higher interest rate repayments. 

But due to the fact that many borrowers took out loans when fixed-rate loans were around 2 per cent, a large proportion of borrowers are yet to feel the pain of the consecutive rate rises. In fact, the value of fixed-rate housing loans peaked at almost 40 per cent of outstanding housing credit in early 2022 or roughly double the usual share from pre-pandemic levels. 

Given that many of these borrowers are now coming off their fixed-rate loan terms (with the central bank estimating that around 800,000 fixed-rate home loans are due to expire this year, equating to $350 billion in credit set to roll from fixed to variable), there is likely going to be many more borrowers finding themselves locked out of the credit policies of the banking system.

Pepper Money’s general manager of mortgage and commercial lending, Barry Saoud, explains: “I think we’re going to see the needs of many borrowers evolve in this shifting and volatile environment; as a result, demand for specialist lending options will grow — more so than ever. 

“With interest rates and inflation impacting the disposable income position of most Aussie households, this means mortgage, credit card, personal, and car loan borrowers could have a higher probability of missing payments across the next six to 12 months.

“If this is the case, I think we’ll see a significant increase in the number of borrowers that will no longer qualify for a traditional bank ‘prime’ loan. These are borrowers who would have been considered bank borrowers just two years ago who may be locked out of a loan today with a major bank and instead qualify as a specialist non-bank borrower.”

He notes that with CCR now capturing 24 months of repayment history, “lenders will have greater visibility into historical payment and conduct. As a result, we can expect that more borrowers are likely going to fall out of the bank's credit and policy requirements. 

“With rates on the rise, we have seen more pressure on borrowing capacity than ever before. However, borrowers have been able to uplock further borrowing capacity through the flexible approach that our credit policies provide. Non-banks like us with specialist options can allow these borrowers the chance to consolidate their debts and consider the whole picture.” 

Specialising in specialist

Pepper Money has been supporting specialist borrowers for the past two decades and has been investing heavily over the past 24 months in its processes, people, policy, and technology to help make non-bank lending easy.

But what exactly is a specialist loan? Pepper’s Mr Saoud explains that the term covers a range of definitions but basically describes a borrower’s circumstance that “doesn’t tick the bank’s boxes”.

This may be because they may have missed repayments or because they don’t meet credit scoring conditions or simply because they can’t provide certain income verification documents (for example, the self-employed or shift workers).

“Specialist loans are special in that they are designed to provide options for borrowers who may have otherwise been unable to realise their home ownership dreams,” Mr Saoud says.

Flagging that many people started up new or additional ways of earning income over the pandemic, there’s a growing group of “hard-working Australians, earning good money, who are shut out of traditional loans simply because they don’t fit the rigid income criteria of the banks”. 

“That’s where a non-bank like Pepper Money has the flexibility to make lending for these real-life situations possible. We’ve always been passionate about providing real-life solutions — particularly in the more rewarding specialist lending category, where people are doing it toughest,” Mr Saoud says.

“If we can find a way to help, we will,” he says, adding that many specialist borrowers go on to improve their credit position and take on prime loans.

“We don’t let the past or ‘rough times’ define the customer’s future.”

The main message for brokers who have clients who are finding themselves requiring specialist support for the first time is that help is at hand and it’s easier to access than you may think.

“Our research tells us that some brokers put non-conforming and specialist lending in the ‘too hard basket’ because it requires a different approach. But the reality is it’s not hard or harder to do than a bank loan,” Mr Saoud says.

“We arm the broker with tech that doesn’t require them to know our product options, credit policy, or rate card — this is all automated for a quick and efficient ‘yes’ often when the bank has said ‘no’.”

Mr Saoud flags that the lender’s pre-application tool, the Pepper Product Selector (PPS), was built to enable brokers to quickly and easily understand if Pepper has an option for their client with an indicative rate and repayment.

The technology tool leverages credit data integrations to automate the process and aims to “take all the guesswork out in a matter of minutes”.

“Don’t assume you know where the non-bank boundaries are either — we are constantly evolving our policies to adapt with the market and your clients’ changing needs,” he says.

“In this environment, specialist lending is likely to see increased demand; so, there’s never been a better time for brokers to get acquainted with our smart tech and our experienced BDMs.”

With more specialist borrowers expected to need broker support this year, Mr Saoud believes that brokers are in prime position to further cement themselves as the channel of choice for Australian borrowers.

“The value proposition of a broker has never been more relevant. Brokers are uniquely placed to offer the broadest range of lending options that a customer may need to find a solution,” he tells The Adviser.

“I think we’ll see even more of this in 2023 as customers will be looking to brokers for guidance and support as they navigate through a different (and increasingly difficult) landscape.

“When a broker finds a specialist solution for these customers, we know it’s genuinely rewarding. Ultimately, by helping a customer navigate a complex and at times a highly emotional journey with a specialist solution, you will earn their trust and have an advocate for life.

“As we navigate through another challenging year, Pepper Money can support customers by considering their current income and situation which will be important to helping those people and businesses to continue moving forward. 

“As this plays out more brokers — and in turn, their customers — will begin to understand the real value that non-bank lenders like Pepper Money can provide for them.”