Brokers can help bridge loan knowledge gap for borrowers – Pepper Money

Owning a home remains a goal for most borrowers and mortgage brokers play a key role in helping to educate people about loans, managing debt and non-bank lenders, says a new report from Pepper Money.

The second instalment of the Money Mindset – Borrower Knowledge Gap – Report, revealed that 89% of borrowers still believe that owning a home is part of the great Australian dream.

The report gauged the views and financial positions of more than 1,000 Australians wanting to buy a home. Most (71%) still aspire to own a home in their lifetime, with 43% currently saving towards a deposit to purchase a property in the near future.

Financial literacy and brokers – Pepper Money

Pepper Money CEO Mario Rehayem (pictured above) told MPA that its Money Mindset research showed there was a clear  need to help Australians’ financial literacy across a range of matters.

These included saving strategies, debt management, how loans work, loan types, loan options (including non-banks), understanding interest rates, what influences interest rates, how rates are set by different lenders, investment basics, financial planning and more.

“Brokers indeed play a key role given they are consistently the preferred and most trusted channel for borrowers who are actively embarking on their homeownership journey,” Rehayem said.

“However, the responsibility doesn’t lie solely on the broker, and it shouldn’t start there. Tackling financial literacy should be a collaborative effort between schools, government initiatives, and financial institutions to ensure a well-rounded education/understanding for all Australians.”

Rehayem said there were already a lot of existing resources such as the federal government’s ‘MoneySmart’ website, and a range of community organisations and educators that the mortgage finance industry could leverage to help Australians make better-informed financial decisions.

“We also recognise that social media platforms like TikTok are increasingly favoured by younger generations over traditional search engines, and it’s inspiring to see more brokers embracing it as a tool to educate borrowers in an engaging way.

“With greater awareness and education across the board, we know borrowers are more likely to make informed decisions fostering greater financial inclusion.”

Many borrowers ‘in the dark’ about non-bank lenders

Rehayem said one of the one of the most significant findings from the Money Mindset – Borrower Knowledge Gap – Report was the widespread unawareness among Australians about non-bank lenders such as Pepper Money.

“Almost 60% (58%) of respondents don’t know that there are alternative home loan options with non-banks on the table for them if a bank says ‘no’ to their loan application,” Rehayem said.

“Many are left in the dark about what to do if turned away for a home loan from traditional lenders … Many borrowers feel overwhelmed once they’ve been declined and then wait years until they pluck up the courage to apply again. Not enough borrowers know that there are alternatives and there could be another path to homeownership.”

Pepper Money understood that different circumstances could lead to rejections, yet these hurdles should not deter aspiring Aussies from their dream of homeownership. Rehayem said there was clearly an opportunity to improve financial literacy by educating Australians on the options available.

When asked why major banks and traditional banks didn’t always provide detailed information to customers about why they had rejected a loan, Rehayem said this was because they often used automated credit scoring.

“This means that the borrowers’ application could be declined based on a computer-generated score derived from things like their credit history, ability to repay, or number of credit enquires,” said Rehayem.

“While all lenders are required to issue decline notices to customers, the information is often general in nature. Instead of accepting a ‘no’ as the final answer, borrowers should be empowered to better understand why.”

For a non-bank lender such as Pepper Money, Rehayem said the heart of its business was “understanding each customer as an individual and considering their unique circumstances, challenges, and opportunities, to help them succeed”.

“That’s why we take a more holistic approach and take the time to get to know the person behind the application and their circumstances,” he said.

Pepper Money estimates that there are 7,000 mortgage applications each month that do not convert with the big four. Rehayem said combining this with the 60% of Australians unaware that there may be alternative home loan options with non-banks, it left a “significant number of customers in the dark with no solution in sight”.

“The path to homeownership may be more accessible than some borrowers think. I’m a big champion of encouraging borrowers to seek help from an experienced mortgage broker who can offer financial insights, market knowledge, and a wide range of financing options, including those from non-bank lenders,” Rehayem said.

Brokers can help borrowers bridge knowledge gap

The report also revealed that the majority of people (88%) that want to buy a home feel it is increasingly becoming out of reach despite their savings efforts.

Rehayem said there was a disparity between the ambitions of Australians wanting to purchase their own home, and their understanding of what it takes and the options available to them to achieve it.

“Our research shows that many are trying to save without understanding how much is enough, or what other levers and options they may have available to help get them into the market sooner,” he said.

“This is where a broker can be invaluable to someone’s experience, helping them to be really clear on what options are available to them and what it takes for them to be able to achieve their goals.”

The survey also backs up the MFAA’s most recent data showing the rising popularity of mortgage brokers, who wrote 71.5% of all new residential home loans in the September 2023 quarter.

Pepper Money’s Money Mindset – Borrower Knowledge Gap – Report found that 77% said they would seek advice from a mortgage broker when considering a home loan. When researching for a new home loan or refinancing an existing home loan they would turn to a broker first, over a preferred lender or bank (21%).

Rehayem said with the cash rate jumping to 4.35% from a record low 0.1% at the start of May 2022 and economists divided on what the future holds for rates in 2024, it was little wonder that 73% of respondents said they didn’t feel confident about when they would be able to buy their first or next home.

“When it feels like the goalposts are constantly moving for those wanting to buy a home, it can be hard to measure how far along in their home ownership journey they really are, so the support of a broker can provide much-needed financial education about the options that might be available to get into a home sooner,” he said.

Other findings revealed that over half of Australians (56%) said they wouldn’t compromise on the amount they needed, with 53% saying they would accept a higher interest rate if it meant being approved.

More than half (55%) believed they would be likely to qualify for a headline interest rate as advertised.

Rehayem said many borrowers who applied for these loans directly with the lender were told their application was not successful without any explanation.

“This is where brokers provide a service that can help people in this situation, so their journey doesn’t abruptly end at that point.

“Having non-bank lender options on the table for people who are not willing to budge on certain elements of a home loan, like the loan amount, but are willing to compromise on rates to get what they want, should be presented with non-bank lending options.”

You can read the full Pepper Money’s Money Mindset – Borrower Knowledge Gap – Report here

How can brokers bridge the lending knowledge gap for clients? Comment below.