If the lending market is a heavyweight boxing division, non-banks lenders are the plucky underdogs, defying the odds in competition against much bigger opponents.
When economic forces and shifting market dynamics upset the risk appetite of traditional lenders, non-banks have been there to fill in the gaps with flexible options, quick decision making, and more personalised approaches. It should be no surprise then that non-banks were named the category most committed to the broker channel in the interim results of Agile Market Intelligence’s Third-Party Lending Survey 2024.
There’s an opportunity for brokers to take advantage of healthy competition in the non-bank space and write loans for clients who might not fit the cookie cutter, whether they’re an in-demand freelancer who hasn’t received a PAYG certificate since the Sydney Olympics or an SME owner who could transform their operations with a capital injection.
Challenging outlook
In 2024, shifting market dynamics and economic forces have created a challenging outlook for borrowers, highlighting the need for out-of-the-box thinking.
Pepper Money head of mortgages – retail broker, Siobhan Williams, notes a combination of economic forces and market dynamics.
“Higher unemployment rates have driven more individuals to seek financial assistance to bridge gaps in income and maintain their everyday living,” Williams says.
“Also, the inflation rate has taken longer than anticipated to return to target, impacting household budgets and increasing the need for additional financial support. A continual rise in living expenses, including significant hikes in petrol and energy bills, has put additional pressure on household finances. This has led more customers to explore non-bank lending options to manage their daily expenses effectively.”
Williams says the increased pressure from the Australian Taxation Office regarding outstanding tax debts has driven many business owners to seek loans to settle these obligations and maintain financial stability and compliance.
“The self-employed segment has also seen shifts,” she says.
“This year has witnessed a boom in independent contractors and freelance opportunities. The gig economy is increasing, providing more individuals with flexible work arrangements and contributing to a growing self-employed workforce.”
Non-bank solutions
In such an environment, banks typically shy away from out-of-the-box scenarios. But this environment is also just the sort of space where non-bank lenders thrive.
La Trobe Financial chief lending officer Cory Bannister says the current economic backdrop highlights the need for increased flexibility and customisation of real estate products.
“There’s been a notable rise in demand for alternative lending solutions in light of the current economic backdrop, meaning some borrowers would simply go without if not for the non-bank sector,” Bannister says.
“Credit availability constraints are pushing brokers to consider wider options, and we’re playing a critical role in servicing the market in a challenging time, which is something that we’re incredibly proud of.”
Credit availability constraints are pushing brokers to consider wider options
Cory Bannister, chief lending officer, La Trobe Financial
Bannister says major banks focus on the automation of credit decisioning. This approach, paired with economic and market factors, has meant some borrowers who are just as creditworthy, but don’t fit the mould required for access to capital, have been missing out.
“The bias to automated lending assessments adopted by major banks has created a gap, especially for self-employed borrowers, SMSFs, borrowers new to Australia, property developers, to name a few, which non-bank financial institutions (NBFIs) like La Trobe Financial are increasingly filling,” Bannister says.
The value of access to these out-of-the-box solutions can’t be overstated. Almost 90 per cent of brokers cited “client circumstances” as their primary reason for submitting an application to a non-bank lender in Agile Market Intelligence’s Broker Pulse: Residential Lending Survey, highlighting the importance of flexibility and customisation.
“NBFIs offer specialised lending products tailored to niche markets or specific needs, with flexible credit requirements, making it easier for borrowers with their unique histories and requirements to obtain suitable financing,” Bannister says.
These solutions are typically characterised by more flexible or tailored terms, a crucial feature for borrowers who need fast access to capital.
“We anticipate that the non-bank sector will continue to grow and innovate, driven by advancements in technology, evolving customer needs (especially in today’s high inflation, high cost of living environment), and a continuously changing economic landscape which we are nimble to adapt,” Bannister says.
The broker opportunity
This nimbleness and willingness to innovate have made non-bank lenders an indispensable source of capital for broker clients with unique financial situations. And in the coming years, non-banks should receive plenty of business as a result.
“The non-bank loan market in Australia experienced remarkable growth in 2023, expanding by over 30 per cent,” Williams says.
“Looking ahead, Foresight Analytics forecasts the non-bank lending sector to reach $146 billion by 2028, capturing 22.7 per cent of the total credit market. This presents a significant opportunity for brokers to tap into a rapidly expanding sector.
“Additionally, we expect to see a rise in demand for new housing. Recent population growth, higher prices for established housing and improved conditions in the construction industry are likely to offset affordability constraints and high construction costs. This will create further opportunities for brokers to assist clients in securing financing for new homes.
“We anticipate that the trends we’re currently observing will continue to grow and we are committed to providing brokers with innovative tools to meet the evolving needs of their clients. As the sector expands, brokers will play a crucial role in connecting borrowers with tailored options that support their goals.”
The opportunity for brokers to work with non-bank lenders is to make use of this flexible suite of products and provide solutions for borrowers with the most unique needs.
“Brokers should consider partnering with non-banks simply because it allows them to unlock opportunities they may have had to previously forgo,” Bannister says.
“NBFIs are now a genuine alternative – an alternative that most borrowers will need to lean on at some point in their financial lives. By becoming more familiar with NBFIs, brokers can enhance their value proposition, build stronger client relationships, and diversify their business in an increasingly competitive market.
“We know that word-of-mouth referral is the biggest contributor to a broker’s business growth, and what better way to build your business than by offering more solutions in a more tailored way.”
