Self-employed clients are a niche area, but one that rewards specialist brokers with repeat clients and referrals. MPA talks to a broker, a BDM and a lender about how you can get started.
The self-employed client is not a new client – they’ve always been there. All two million of them. Whether you’ve been dealing with these clients or accessing this new revenue stream is another matter.
Missing many of the important documents required by lenders to verify income, and often with complicated financial situations, selfemployed clients are not the easiest cases for a broker. But in today’s crowded and increasingly competitive broking environment, being able to assist employed clients can provide a crucial point of difference.
This article is intended as a practical introduction to self-employed clients. We’ve talked to a veteran broker specialising in the space, in addition to a BDM, addressing many of the concerns that prevent brokers dealing with straightforward ‘mum and dad’ clients from entering this market.
Finally, we’ve talked to Bluestone’s Royden D’Vaz on the strategic angle for lenders in targeting self-employed clients, and why brokers should do the same. All suggest ways that brokers new to the space can get more involved, and give practical tips you can implement in your brokerage today.
The broker
Geoff Rees of Mortgage Watch has been dealing with selfemployed clients for 23 years, having previously been selfemployed himself. When he entered broking, fee-for-service was still widespread, and his clients were largely focused on rate, with some also looking to consolidate rates. With knowledge of brokers still limited, many clients were simply happy to not be at the mercy of the local bank branch.
The lending landscape and the clients have changed considerably since 1993, Rees explains. “Some of them are quite well trained now. Most of my clients are repeat – I’ve even got grandkids coming to me now.” What brings them back, according to Rees, is that “they know I can put everything in writing and give them the main options anyway, and we can often give them a better deal because we’re privy to some of the other specials, and a lay person is going to have a hard time researching all this.”
Some clients still go to the major banks, Rees notes, because they’re already heavily involved and dependent on bank support. “Some of the really big ones, with a big overdraft, would typically deal with a business banker because the business banker ties up all their personal loans.” However, as this article will go on to explain, the majors are becoming less able to cater to the selfemployed, leaving space for brokers and smaller lenders to move into.
More sophisticated clients means Rees doesn’t sell just on rate. “I try not to ever sell on rate only. It’s a pretty short-term strategy to do that because you set yourself up for constant rate-watching and people bouncing around.” That’s not desirable because of clawbacks, Rees explains. “But if there is a genuine better option, we’ll let them know.” What makes a product suitable to a client is very much specifi c to the client. “Part of it’s rate, part of it’s fees, part of it’s flexibility.”
In many cases, Rees’ clients want flexibility. “Typically, there’s a lot of investors. Self-employed people, if they’re tradespeople, are often quite savvy, maybe even developers. They buy properties, rent them out, on-sell them, so we keep some fl exibility. They like to have surplus funds in their offset or redraw to pay tax on those rainy days, or to balance their payroll one month if they’re running short.” With residential property values undergoing huge increases in Sydney and Melbourne, many clients also have additional equity they could access.
Self-employed clients often need Rees to help fi nd them a lender who’ll understand their fi nancial arrangements. “When people are self-employed they can often have a pretty complex structure and there can be trusts involved, to protect assets,” Rees notes. Whilst these arrangements help minimise their tax bill, they prove unacceptable to some banks. “We’re often faced with the problem of serviceability because clients are well structured and they’re trying to keep their ‘profi t-distribution’ balance.” Proving income and presenting suitable documentation can prove to be a major challenge.
Rees often looks beyond the major banks, because “the smaller lenders are a lot more favourable. They’ll adapt a more commercial process in the servicing and assessing of the loan… Their LVRs are sometimes more generous. They’re very much less restrictive.” Of course, Rees adds: “Typically you pay for that. It’s risk-restrictive and everyone’s on the same page. If you want something no-one else will give you, you’ll pay more for that. They’re options in our bag of tricks and it’d be difficult to perform properly in your role without them.”
Whilst smaller lenders can take an individual view, they require the broker to present an individual case, according to Rees. “For the second-tiers and non-conforming banks the brief is much more important as they’re looking at ‘How can we make this deal work?’ rather than ‘How can we decline it?’” This is notably different from the majors, who often operate under strict criteria. If a client can’t meet the criteria, then even a well-presented case from a broker is unlikely to sway the bank’s decision.
A MESSAGE FROM OUR SPONSOR
Bluestone is pleased to partner with MPA to promote the value specialist lenders bring to the mortgage industry. We are especially excited to be part of a feature that highlights solutions for self-employed borrowers who traditionally have found it difficult to source finance.
Often referred to as the ‘engine room of the Australian economy’, the self-employed market is as diverse as any. This is why at Bluestone we work a little differently than most and treat every deal on its own merits, taking the time to understand the circumstances of each individual client. We then match these borrowers to a Bluestone product that best suits their needs.
We believe that as a broker you have a fantastic opportunity to broaden your client base and expand your business by targeting these borrowers, many of which may not know that these solutions are available to them. Having designed our range of products around this segment, we encourage you to find out how we can help you help more self-employed clients, more often!
Royden D’Vaz
director of sales,marketing and distribution,
Bluestone
The BDM
In order to understand how smaller lenders can deal with complex self-employed clients, we talked to Bluestone BDM Ebony Maxwell, based in Melbourne, about the application process from a lender’s point of view.
During her time at Bluestone, Maxwell has seen many examples of brokers who have provided invaluable assistance to selfemployed borrowers – and numerous occasions where self-employed borrowers
have been turned away. “When they come across customers who don’t have two years’ full fi nancials they’ll just turn them down, and they’re missing opportunities,” she explains.
In terms of proving income through documentation, “there are a few selfemployed options available, whether it’s providing BAS statements or simply trading statements… It can be simple things when it comes to ABNs. We can do loans for as low as three months ABN, and GST registration as low as one day.” In fact, Maxwell notes, trading statements may give a more accurate income fi gure as normal financials can underplay income for the purposes of reducing tax.
Lenders can accept substitute documentation, up to a point. “It’s very rare [borrowers] won’t have both their trading statements and BAS. If they’re running their business correctly, they’ll have income coming into both two… We don’t want those customers who aren’t doing things the correct way.” Also, in Bluestone’s case, they don’t accept accountants’ declarations as proof of income, although some lenders do.
Both Bluestone and brokers share an interest in making the application process as efficient as possible, and Maxwell has a simple solution for this. “I think it’s just about being upfront – knowing exactly where you stand, rather than the broker wasting their time with applications that can’t go ahead.” This makes the broker’s initial fact-fi nd particularly important, especially answering such questions as, ‘Do they have tax debts?’ If they’re asking for cash out, what’s the purpose for?”
The brokers Bluestone deals with most have an understanding of this process and tailor their fact-fi nding accordingly, Maxwell explains. “They know the process, they’ve done it before, they know Bluestone and how we work. They also might have some referral sources as well, whether accountants or financial planners, that can refer them selfemployed customers.”
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The lender
Opening the door to selfemployed clients will become increasingly important to brokers, but that doesn’t mean all lenders will follow suit. The GFC pushed lenders in two different directions – many chose to avoid the sector, where the complexity of documentation ran counter to the strict criteria introduced in the aftermath of the crisis. But for other lenders, including Bluestone, the GFC created a niche, and an opportunity, recalls Royden D’Vaz, director of sales, marketing and distribution.
“I think post-GFC, the world has changed. Pre-GFC, we were very much about the credit impaired customers who had a compelling event in their lives that caused them to fall behind, or had some difficulty paying their credit, and that’s always been our core business. It’ll continue to be that, but what we started to see was a big market when it came to SMEs or self-employed, and this particular market, even though it was so large, wasn’t being well-serviced, with the banks pulling out of the low-docs and self-employed.”
Since then, Bluestone has been busy promoting the opportunities that self-employed borrowers offer brokers. Unfortunately, just raising awareness isn’t enough, notes D’Vaz. “It’s all well and good showing you where the opportunity is, but what are we doing as a lender to help these brokers and their customers in this part of the market? We made a conscious decision – when people ask what Bluestone stands for we say we can help borrowers with clean credit, or impaired credit, no matter what their situation is.”
The complexity and diversity of the selfemployed space means Bluestone have needed to develop four different products for such clients. These products are arranged along two spectrums, including how well-established a borrowers’ business needs to be, and Bluestone’s criteria regarding credit history. For example, their Lite Blue product can deal with borrowers who are struggling to access prime products, whereas their Business Easy product is designed for start-up businesses, requiring only three months ABN. All products are secured against the borrower’s residential property, unlike standard business loans.
Most recently, Bluestone have moved into the near-prime space with their Crystal Blue product. This was a big decision for a lender traditionally specialising in non-conforming, D’Vaz explains. “We had to have a whole array of products that plays into this space… We need something to play in that space that the prime lenders are pulling out of and not really servicing. It sits somewhere in between. If you imagine three spaces in this market – prime lenders at the top of the credit curve, specialist at the bottom, and the middle is where this Crystal Blue fi ts in. So they have clean credit, and maybe a slight impairment that we have tolerance for but the majors won’t tolerate.”
Get started today
As the many statistics in this piece illustrate, the self-employed market is huge. What makes it a niche area – and thus its value for the brokers who take the time to understand it – is it requires brokers to go beyond standard documentation, and, in some cases, standard lenders.
Encouragingly, whilst experience counts, both Rees and Maxwell were fi rmly of the opinion that brokers could move from standard PAYG clients into the self-employed sector relatively easily. Rees’ top tip is “absolutely [to] learn to read a balance sheet and fi nancials”. Being able to do this means “you’ll know the banks’ perspective and what they look for. I think it’s invaluable because you’ll spend a lot of time thinking you’ve got x amount of income when [they think] you’ve got more or less.” Other than that, the process can be very similar to that for PAYG borrowers, he adds.
Attending a training session can help brokers learn or refresh these skills, while dealing with individual complications can be as simple as “picking up the phone and at least running the scenario past us”, concludes Maxwell. “At times brokers don’t know what customers are out there, and when customers go to those brokers they say, ‘No, I can’t help you’. Not only are they not helping customers, but they’re also missing out on potential business as well... At the end of the day it’s a massive missed opportunity for their business.”
Missing many of the important documents required by lenders to verify income, and often with complicated financial situations, selfemployed clients are not the easiest cases for a broker. But in today’s crowded and increasingly competitive broking environment, being able to assist employed clients can provide a crucial point of difference.
This article is intended as a practical introduction to self-employed clients. We’ve talked to a veteran broker specialising in the space, in addition to a BDM, addressing many of the concerns that prevent brokers dealing with straightforward ‘mum and dad’ clients from entering this market.
Finally, we’ve talked to Bluestone’s Royden D’Vaz on the strategic angle for lenders in targeting self-employed clients, and why brokers should do the same. All suggest ways that brokers new to the space can get more involved, and give practical tips you can implement in your brokerage today.
The brokerGeoff Rees of Mortgage Watch has been dealing with selfemployed clients for 23 years, having previously been selfemployed himself. When he entered broking, fee-for-service was still widespread, and his clients were largely focused on rate, with some also looking to consolidate rates. With knowledge of brokers still limited, many clients were simply happy to not be at the mercy of the local bank branch.
The lending landscape and the clients have changed considerably since 1993, Rees explains. “Some of them are quite well trained now. Most of my clients are repeat – I’ve even got grandkids coming to me now.” What brings them back, according to Rees, is that “they know I can put everything in writing and give them the main options anyway, and we can often give them a better deal because we’re privy to some of the other specials, and a lay person is going to have a hard time researching all this.”
Some clients still go to the major banks, Rees notes, because they’re already heavily involved and dependent on bank support. “Some of the really big ones, with a big overdraft, would typically deal with a business banker because the business banker ties up all their personal loans.” However, as this article will go on to explain, the majors are becoming less able to cater to the selfemployed, leaving space for brokers and smaller lenders to move into.
More sophisticated clients means Rees doesn’t sell just on rate. “I try not to ever sell on rate only. It’s a pretty short-term strategy to do that because you set yourself up for constant rate-watching and people bouncing around.” That’s not desirable because of clawbacks, Rees explains. “But if there is a genuine better option, we’ll let them know.” What makes a product suitable to a client is very much specifi c to the client. “Part of it’s rate, part of it’s fees, part of it’s flexibility.”
In many cases, Rees’ clients want flexibility. “Typically, there’s a lot of investors. Self-employed people, if they’re tradespeople, are often quite savvy, maybe even developers. They buy properties, rent them out, on-sell them, so we keep some fl exibility. They like to have surplus funds in their offset or redraw to pay tax on those rainy days, or to balance their payroll one month if they’re running short.” With residential property values undergoing huge increases in Sydney and Melbourne, many clients also have additional equity they could access.
Self-employed clients often need Rees to help fi nd them a lender who’ll understand their fi nancial arrangements. “When people are self-employed they can often have a pretty complex structure and there can be trusts involved, to protect assets,” Rees notes. Whilst these arrangements help minimise their tax bill, they prove unacceptable to some banks. “We’re often faced with the problem of serviceability because clients are well structured and they’re trying to keep their ‘profi t-distribution’ balance.” Proving income and presenting suitable documentation can prove to be a major challenge.
Rees often looks beyond the major banks, because “the smaller lenders are a lot more favourable. They’ll adapt a more commercial process in the servicing and assessing of the loan… Their LVRs are sometimes more generous. They’re very much less restrictive.” Of course, Rees adds: “Typically you pay for that. It’s risk-restrictive and everyone’s on the same page. If you want something no-one else will give you, you’ll pay more for that. They’re options in our bag of tricks and it’d be difficult to perform properly in your role without them.”
Whilst smaller lenders can take an individual view, they require the broker to present an individual case, according to Rees. “For the second-tiers and non-conforming banks the brief is much more important as they’re looking at ‘How can we make this deal work?’ rather than ‘How can we decline it?’” This is notably different from the majors, who often operate under strict criteria. If a client can’t meet the criteria, then even a well-presented case from a broker is unlikely to sway the bank’s decision.
A MESSAGE FROM OUR SPONSOR
Bluestone is pleased to partner with MPA to promote the value specialist lenders bring to the mortgage industry. We are especially excited to be part of a feature that highlights solutions for self-employed borrowers who traditionally have found it difficult to source finance.
Often referred to as the ‘engine room of the Australian economy’, the self-employed market is as diverse as any. This is why at Bluestone we work a little differently than most and treat every deal on its own merits, taking the time to understand the circumstances of each individual client. We then match these borrowers to a Bluestone product that best suits their needs.
We believe that as a broker you have a fantastic opportunity to broaden your client base and expand your business by targeting these borrowers, many of which may not know that these solutions are available to them. Having designed our range of products around this segment, we encourage you to find out how we can help you help more self-employed clients, more often!
Royden D’Vaz
director of sales,marketing and distribution,
Bluestone
The BDM In order to understand how smaller lenders can deal with complex self-employed clients, we talked to Bluestone BDM Ebony Maxwell, based in Melbourne, about the application process from a lender’s point of view.
During her time at Bluestone, Maxwell has seen many examples of brokers who have provided invaluable assistance to selfemployed borrowers – and numerous occasions where self-employed borrowers
have been turned away. “When they come across customers who don’t have two years’ full fi nancials they’ll just turn them down, and they’re missing opportunities,” she explains.
In terms of proving income through documentation, “there are a few selfemployed options available, whether it’s providing BAS statements or simply trading statements… It can be simple things when it comes to ABNs. We can do loans for as low as three months ABN, and GST registration as low as one day.” In fact, Maxwell notes, trading statements may give a more accurate income fi gure as normal financials can underplay income for the purposes of reducing tax.
Lenders can accept substitute documentation, up to a point. “It’s very rare [borrowers] won’t have both their trading statements and BAS. If they’re running their business correctly, they’ll have income coming into both two… We don’t want those customers who aren’t doing things the correct way.” Also, in Bluestone’s case, they don’t accept accountants’ declarations as proof of income, although some lenders do.
Both Bluestone and brokers share an interest in making the application process as efficient as possible, and Maxwell has a simple solution for this. “I think it’s just about being upfront – knowing exactly where you stand, rather than the broker wasting their time with applications that can’t go ahead.” This makes the broker’s initial fact-fi nd particularly important, especially answering such questions as, ‘Do they have tax debts?’ If they’re asking for cash out, what’s the purpose for?”
The brokers Bluestone deals with most have an understanding of this process and tailor their fact-fi nding accordingly, Maxwell explains. “They know the process, they’ve done it before, they know Bluestone and how we work. They also might have some referral sources as well, whether accountants or financial planners, that can refer them selfemployed customers.”
The lenderOpening the door to selfemployed clients will become increasingly important to brokers, but that doesn’t mean all lenders will follow suit. The GFC pushed lenders in two different directions – many chose to avoid the sector, where the complexity of documentation ran counter to the strict criteria introduced in the aftermath of the crisis. But for other lenders, including Bluestone, the GFC created a niche, and an opportunity, recalls Royden D’Vaz, director of sales, marketing and distribution.
“I think post-GFC, the world has changed. Pre-GFC, we were very much about the credit impaired customers who had a compelling event in their lives that caused them to fall behind, or had some difficulty paying their credit, and that’s always been our core business. It’ll continue to be that, but what we started to see was a big market when it came to SMEs or self-employed, and this particular market, even though it was so large, wasn’t being well-serviced, with the banks pulling out of the low-docs and self-employed.”
Since then, Bluestone has been busy promoting the opportunities that self-employed borrowers offer brokers. Unfortunately, just raising awareness isn’t enough, notes D’Vaz. “It’s all well and good showing you where the opportunity is, but what are we doing as a lender to help these brokers and their customers in this part of the market? We made a conscious decision – when people ask what Bluestone stands for we say we can help borrowers with clean credit, or impaired credit, no matter what their situation is.”
The complexity and diversity of the selfemployed space means Bluestone have needed to develop four different products for such clients. These products are arranged along two spectrums, including how well-established a borrowers’ business needs to be, and Bluestone’s criteria regarding credit history. For example, their Lite Blue product can deal with borrowers who are struggling to access prime products, whereas their Business Easy product is designed for start-up businesses, requiring only three months ABN. All products are secured against the borrower’s residential property, unlike standard business loans.
Most recently, Bluestone have moved into the near-prime space with their Crystal Blue product. This was a big decision for a lender traditionally specialising in non-conforming, D’Vaz explains. “We had to have a whole array of products that plays into this space… We need something to play in that space that the prime lenders are pulling out of and not really servicing. It sits somewhere in between. If you imagine three spaces in this market – prime lenders at the top of the credit curve, specialist at the bottom, and the middle is where this Crystal Blue fi ts in. So they have clean credit, and maybe a slight impairment that we have tolerance for but the majors won’t tolerate.”
Get started today
As the many statistics in this piece illustrate, the self-employed market is huge. What makes it a niche area – and thus its value for the brokers who take the time to understand it – is it requires brokers to go beyond standard documentation, and, in some cases, standard lenders.
Encouragingly, whilst experience counts, both Rees and Maxwell were fi rmly of the opinion that brokers could move from standard PAYG clients into the self-employed sector relatively easily. Rees’ top tip is “absolutely [to] learn to read a balance sheet and fi nancials”. Being able to do this means “you’ll know the banks’ perspective and what they look for. I think it’s invaluable because you’ll spend a lot of time thinking you’ve got x amount of income when [they think] you’ve got more or less.” Other than that, the process can be very similar to that for PAYG borrowers, he adds.
Attending a training session can help brokers learn or refresh these skills, while dealing with individual complications can be as simple as “picking up the phone and at least running the scenario past us”, concludes Maxwell. “At times brokers don’t know what customers are out there, and when customers go to those brokers they say, ‘No, I can’t help you’. Not only are they not helping customers, but they’re also missing out on potential business as well... At the end of the day it’s a massive missed opportunity for their business.”
