Finance lawyer and mortgage investor Jack O'Reilly on why non-resident loans are only good news for brokers and specialist lenders alike.
It's 6.30 pm on a Thursday evening and I'm looking to call it a day. Before I get the chance the phone starts to ring. My screen displays the call is incoming from Guangzhou, China. I answer. It's a young woman named Penny (not the client's real name) who speaks perfect English. Penny is looking to settle on a purchase of a brand new townhouse in Brisbane.
She is very thorough in her line of questioning about how our loan product works and if we will be able to assist her. I get the impression she has made a few of these calls. The LVR she is looking for is a low 60%. She has the remainder in cash and tells me she is single and earns $120k per annum. Sounds like a walk in the park. I take down Penny's details and tell her we will email her what we need to get started on funding her loan. I hang up and think to myself this is the 4th or 5th foreign buyer enquiry this week, another example of a buyer left high and dry thinking the banks would lend to them.
As most developers, buyers, agents and mortgage brokers know, the lending landscape for foreign buyers changed significantly in 2016. Quality overseas buyers are finding it extremely difficult to get a bank loan to settle on their off-the-plan purchases they signed up for during the marketing of the development project and a lot of market participants are feeling the pinch. Buyers and mortgage brokers are looking for alternate lenders, developers are scouring for replacement local buyers to fill the void, and agents are wondering about their hard earned sales falling over. It begs the question, are the major banks right to simply turn off the tap for this type of funding or have they done so without due consideration? A lot of the enquiries we are seeing are from sound borrowers who have the funds to contribute to a low risk loan.
From a buyer’s perspective it's easy enough to have happen. You sign an off-the-plan contract in an exciting new development with settlement in 1 to 2 years. Within that period the banks change their lending policies and by the time you apply for funding, you no longer fit the bank’s criteria. You risk loosing your deposit and face being sued by the developer. It's a terrible position to be in. You now have to look for options or solutions outside of the major bank lenders. Now, this is not unique to the non-resident lending space. Recently, we’ve also seen the banks restrict lending and LVR limits in certain suburbs they deem to be overheated or at risk of over supply. Buyers in these situations, even local investors or first home buyers, are having to come up an extra 10% more in cash to put towards the purchase which is not easy for many to find. In some cases the value of the property being purchased has even increased, however the banks will lend on the lesser of the value or the purchase price.
For developers, they either find replacement buyers or they grant the buyer in a current contract an extension until they find the finance. There has been some positive press lately from developers who are choosing to work with their current buyers whilst they find alternate finance. This basically means the buyers are shopping around like mad and finding finance elsewhere (i.e. from alternate lenders). It's positive to see developers take this approach in working on a mutually beneficial outcome. We saw during the GFC what can happen when contracts are terminated - stock floods the market and court cases ensue.
Developers are feeling it from both sides with development and construction funding becoming tighter and slower with lower LVR's, suburb restrictions and higher pre-sale requirements. In times like these we see some developers thrive under pressure whilst others falter. Although we don't do development construction loans here at funding.com.au, my team and I have funded some quality land banks to developers where they needed to urgently secure future sites where the banks stuffed them around with delays.
For mortgage brokers, the non-resident issue is probably the hardest for them to come to terms with. What was once a "gold brick" of a client with a low LVR, verifiable income and serviceability, has overnight become a difficult deal to set. Speaking with some brokers, they say they could find 100 applications of borrowers in this situation who they have been turning away. Malaysian, Chinese, British, South African - it doesn't matter. If they are non-residents, it’s too hard for the big four. Tough lending criteria from the banks, creates more business for specialist lenders and mortgage funds like funding.com.au. Lenders like us can cater to the market in a more innovative and less bureaucratic way. There are good loans and bad loans in any space, it's about vetting them correctly rather than just declining them all.
For example tiny units in Melbourne are increasingly difficult for any lender to look at. Some are built so small they are like university dorm rooms. We had one recently we were trying to ascertain how large the unit was to see if it will fit our minimum size. The registered plan did not have sizes stated, the developer and their lawyer were unable to advise of the size. They had to revert back to their original surveyor and it turned out that particular unit was too small. The banks, being less nimble and having more red tape, have chosen to put a blanket ban on this space. From our point of view these loans need to be looked at on a case by case basis, with a common sense approach taken and applications screened accordingly. Will it remain like this? No. It's the current state of the market. Markets change and bank products go with it. Are the banks wrong in pulling back from this market of lending? Will they be returning to this lending space? It will be interesting to see how the banks react to the changing climate in 2017. In the meantime specialist lenders like us are enjoying the source of business.
Jack O’Reilly is the founder and managing director of funding.com.au, a specialist mortgage lender providing non-bank mortgage loans for both business and personal purposes.
She is very thorough in her line of questioning about how our loan product works and if we will be able to assist her. I get the impression she has made a few of these calls. The LVR she is looking for is a low 60%. She has the remainder in cash and tells me she is single and earns $120k per annum. Sounds like a walk in the park. I take down Penny's details and tell her we will email her what we need to get started on funding her loan. I hang up and think to myself this is the 4th or 5th foreign buyer enquiry this week, another example of a buyer left high and dry thinking the banks would lend to them.
As most developers, buyers, agents and mortgage brokers know, the lending landscape for foreign buyers changed significantly in 2016. Quality overseas buyers are finding it extremely difficult to get a bank loan to settle on their off-the-plan purchases they signed up for during the marketing of the development project and a lot of market participants are feeling the pinch. Buyers and mortgage brokers are looking for alternate lenders, developers are scouring for replacement local buyers to fill the void, and agents are wondering about their hard earned sales falling over. It begs the question, are the major banks right to simply turn off the tap for this type of funding or have they done so without due consideration? A lot of the enquiries we are seeing are from sound borrowers who have the funds to contribute to a low risk loan.
From a buyer’s perspective it's easy enough to have happen. You sign an off-the-plan contract in an exciting new development with settlement in 1 to 2 years. Within that period the banks change their lending policies and by the time you apply for funding, you no longer fit the bank’s criteria. You risk loosing your deposit and face being sued by the developer. It's a terrible position to be in. You now have to look for options or solutions outside of the major bank lenders. Now, this is not unique to the non-resident lending space. Recently, we’ve also seen the banks restrict lending and LVR limits in certain suburbs they deem to be overheated or at risk of over supply. Buyers in these situations, even local investors or first home buyers, are having to come up an extra 10% more in cash to put towards the purchase which is not easy for many to find. In some cases the value of the property being purchased has even increased, however the banks will lend on the lesser of the value or the purchase price.
For developers, they either find replacement buyers or they grant the buyer in a current contract an extension until they find the finance. There has been some positive press lately from developers who are choosing to work with their current buyers whilst they find alternate finance. This basically means the buyers are shopping around like mad and finding finance elsewhere (i.e. from alternate lenders). It's positive to see developers take this approach in working on a mutually beneficial outcome. We saw during the GFC what can happen when contracts are terminated - stock floods the market and court cases ensue.
Developers are feeling it from both sides with development and construction funding becoming tighter and slower with lower LVR's, suburb restrictions and higher pre-sale requirements. In times like these we see some developers thrive under pressure whilst others falter. Although we don't do development construction loans here at funding.com.au, my team and I have funded some quality land banks to developers where they needed to urgently secure future sites where the banks stuffed them around with delays.
For mortgage brokers, the non-resident issue is probably the hardest for them to come to terms with. What was once a "gold brick" of a client with a low LVR, verifiable income and serviceability, has overnight become a difficult deal to set. Speaking with some brokers, they say they could find 100 applications of borrowers in this situation who they have been turning away. Malaysian, Chinese, British, South African - it doesn't matter. If they are non-residents, it’s too hard for the big four. Tough lending criteria from the banks, creates more business for specialist lenders and mortgage funds like funding.com.au. Lenders like us can cater to the market in a more innovative and less bureaucratic way. There are good loans and bad loans in any space, it's about vetting them correctly rather than just declining them all.
For example tiny units in Melbourne are increasingly difficult for any lender to look at. Some are built so small they are like university dorm rooms. We had one recently we were trying to ascertain how large the unit was to see if it will fit our minimum size. The registered plan did not have sizes stated, the developer and their lawyer were unable to advise of the size. They had to revert back to their original surveyor and it turned out that particular unit was too small. The banks, being less nimble and having more red tape, have chosen to put a blanket ban on this space. From our point of view these loans need to be looked at on a case by case basis, with a common sense approach taken and applications screened accordingly. Will it remain like this? No. It's the current state of the market. Markets change and bank products go with it. Are the banks wrong in pulling back from this market of lending? Will they be returning to this lending space? It will be interesting to see how the banks react to the changing climate in 2017. In the meantime specialist lenders like us are enjoying the source of business.
Jack O’Reilly is the founder and managing director of funding.com.au, a specialist mortgage lender providing non-bank mortgage loans for both business and personal purposes.
