The Australian Credit Market is segmented in to four tiers as suggested by the writer since
submitting an expert evidence report to the Supreme Court of NSW in 2009.

The different tiers broadly represent different types of:

▪ credit (eg: NCCP regulated home lending, trade finance, asset lending, and so on), and
▪ credit providers (eg: regulated banks, sophisticated & risk rated NBFIs, conduit / program
lenders and managed investment schemes, and private lenders that, because of their business
model and type of lending, do not provide credit under the NCCP legislation).

Private Lenders

The fourth tier of credit providers is referred to as the Private Mortgage market where there is a
plethora of participants ranging from individuals with spare cash on which they seek to earn high
rates of interest, to self-managed superannuation funds, to more sophisticated family offices.

Private lending involves any credit that is extended on the basis of a simple asset lend only, ie;
does not (usually) include any consideration for loan servicing beyond the pre-payment of interest
for the loan term – it may be relatively expensive finance but it provides flexibility and solutions.

Where the NCCP governs the home lending sector, for example, is primarily focussed on
responsible lending with the priority being the comprehensive assessment of borrowers’ living
expenses and disposable income for loan servicing without placing the borrower in to a position of
“hardship”, private lending pays little to no reliance on this.

The focus of private lending is the value of the underlying property security, and, sometimes /
sometimes not the customer’s exit strategy rather than long-term servicing and amortisation:
Private lending is not regulated, it is concerned with:

▪ the value of the underlying property security in assessing a lender exposure, expressed in
terms of an LVR (Loan to Valuation Ratio)
▪ the ability of the Lender to take possession of the property security to sell it to recover its
capital in the case of a borrower default.

Private Mortgages

Private Lenders engage in advancing credit and secure their loan funds by a variety of methods:
a. first ranking registered mortgage over real property (AKA, First Mortgage security)
b. second and even third ranking registered mortgage over real property
c. an unregistered mortgage secured by Caveat lodged on title
d. a combination of first and/or second and/or third mortgages, as the case may be
e. Personal Property Security Register.

Private mortgage lenders engage in several niches in within the fourth tier of the market:

▪ Term Loans (1 to 3 years)
▪ Short-Term Loans (1 to 6 months)
▪ Bridging Loans (1 to 3 months)
▪ Construction Loans (12 to 18 months)

By far, the most common of the above four are short-term and bridging loans, the providers of
which usually issue same-day offer letters and often promote settlements within 24-48 hours in
order to provide borrowers quick access to equity in their properties for the following purposes:

▪ property developer requiring short-term cash to complete a project for on-sale
▪ business with a requirement for temporary finance for inventory purchase
▪ property investor in the process of purchasing a second property prior to the sale of a primary
property
▪ distressed borrower required to clean up loan defaults or consolidate and refinance arrears
prior to applying for a long-term investment loan
▪ property investor seeking quick cash to secure a purchase while waiting for a standard term
loan to be made available from a mainstream lender.

The Private Mortgage Process

Private Lenders do not perform the full range of credit assessment as do mainstream, residential
or commercial investment property lenders; rather, they focus primarily on the property security
against which they seek to recover their capital by possession and sale in case of borrower default.

Short-term lenders pay little or no emphasis on checking and analysing income streams, no loan
servicing capacity assessment, little or no regard given to other assets or liabilities of the borrower,
and little or no regard given to the business and background and capabilities of the borrower.

It is said that there are three “Cs” in lending; Credit, Character, and Collateral: Private Lenders
concern their investment decision more with the collateral and their ability to sell it to recover their
investment, hence the standard industry exposure limit of 65% of valuation.

The future of Private Lending

While Private Lending may seem basic or crude, it serves a purpose in the market place to provide
access to equity in property that would otherwise not be accessible other than by sale.

As the banking sector continues to tighten lending policy in general and the alternative finance
sectors continue to fill the credit gap, Private Lending has come to the fore over the past halfdecade in particular with the emergence of former bankers representing groups of private investors
and tapping in to family office funds and providing professional solutions.

It is anticipated that in the coming half-decade or so, new lending platforms may emerge and
funnel funds from multiple sources to facilitate pooled lending with custodial and trustee
relationships to enhance versatility, greater scalability of volume, and reduction in pricing.

Contact LINK today if you wish to discuss viable options to assist you with your business or property
finance requirements – LINK is well connected to a wide range of Private Finance investors.

Disclaimer

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual  or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.