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The specialist lending market is a growing sector but one that is considerably under-serviced. The Adviser takes a look at the benefits associated with catering to this segment
It’s vital for brokers to understand their clients. So which borrowers should be regarded as “specialist borrowers”? How many of them are there? What are their needs?
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According to general manager at Liberty Finance, John Mohnacheff, specialist products fall into two categories: low doc loans and customised style loans.
The low doc segment is used to make a substantial amount of settlements. However, after the global financial crisis (GFC), “a lot of people have walked away from the low doc”, Mr Mohnacheff says.
“If we put those together – low doc and custom design loans – it can account for up to 15 per cent of the market. It’s a pretty huge number.
“Are we there now? No, we’re probably around five or ten per cent. But we can get there.”
Michael Watson of MKM Finance says there are many reasons why a borrower might need a specialist loan. The needs of these borrowers, however, almost always have the same characteristic: “[They] help to meet a particular short-to-medium financial objective while the applicant goes about creating the order required to qualify for mainstream lending again,” Mr Watson says.
Saying yes
Why is it important for brokers to service the specialist market?
According to Mr Mohnacheff, doing so is as simple as being able to say ‘yes’ more often when people come looking for a loan – being able to help out confidently with a strong and legitimate subclass of home loans, as opposed to saying, ‘No, I don’t do those types of loans’.
“If you keep saying no to people, they will go to a broker who will say yes,” he explains. “So you’re limiting your business scope. Let’s say you were looking for a low doc loan and a broker says no to you, it doesn’t mean that you’ll stop looking for a home loan, it means you’ll go to another broker.
“So when you’re talking to your friends and you say, ‘My broker really helped me’, they will ask, ‘Who was it?’
“The more customers you’ve got, the more referrals you’ve got, the more advocacy you’ve got,” Mr Mohnacheff says.
For Allan Savins, chief operating officer at RESIMAC, diversification is an important reason for covering specialist loans.
“I continually hear about the need to diversify for growth and stability,” he says. “Brokers are encouraged to diversify into new products – vehicle and equipment finance, insurance, SMSFs and even term deposits – as new revenue streams where I believe brokers haven’t yet exhausted their opportunities in residential mortgages they are presented with every day.”
Covering the under-serviced specialist lending market is not just a way a broker can ensure their business is diversified, Mr Savins says. The other benefit is that by instead of turning your client away disappointed, you help to create borrower loyalty.
High demand
Unfortunately, the market for specialist lending remains under-serviced. According to Mr Watson, there is a misconception that specialist lending cannot be NCCP-compliant and as a small overall segment, it can fall into the ‘too hard’ basket.
“Demand for specialist lending has not shrunk, but the amount of brokers and lenders focusing on it has,” he says. “Since the GFC, and especially in the wake of the NCCP, there was a twofold squeeze on origination: many lenders exited the industry or pulled products, while brokers stopped writing specialist loans or exited the industry themselves.
“We are seeing brokers specialising in this area doing really well right now and lenders are increasingly re-entering the space. No doubt we will continue seeing a rebound in the overall market share of specialist lending as lenders continue to educate the market on the opportunities in compliant, appropriate specialist loans,” Mr Watson says.
An example of the market being under-serviced is the number of new alt doc loans that are being written today, according to Mr Savins.
“There have been some fundamental changes in the market over the last few years with the GFC and regulation, but this doesn’t mean that all those self-employed people who didn’t have updated accounts then now have them today.
“Where have they gone?” he asks. “I believe these borrowers are still there but brokers are nervous about using low doc loans due to this product being abused in the past and [due to introduction of] the NCCP.”
With such a high demand for specialist lending services, brokers who put aside their misconceptions and take on the challenge are likely to reap the benefits.
