In the current market we’re finding that non-bank lenders – such as finance companies, building societies, and credit unions – are being considered more frequently by property developers and purchasers as a funding option.

Historically these providers have generally only funded projects that banks consider too risky.

With rising interest rates and property prices around the country flattening, banks continue to tighten criteria against which loans and finance secured against investment properties are approved.

Investors who are under contract to purchase may now find bank finance offers revoked, particularly where a property’s value has fallen from the agreed sale price. As a result non-bank lenders present a real option to avoid default.

While non-bank lenders are regulated similarly to banks, they often take a different approach to lending, security and enforcement. If you’re looking at accepting a finance offer from a non- bank lender it’s important to note there are different considerations to weigh up.

GIVE YOURSELF TIME

Non-bank lenders typically charge higher interest rates and fees compared to banks. Their lending is usually structured so you pay a higher upfront cost, and it’s not unusual for application fees, brokerage fees and other costs to be added onto the loan and deducted from the initial advance. Alternatively those fees and costs may be capitalised and added to the loan with interest payable in addition to the loan amount.

Loan documents can sometimes take longer to issue compared with banks, so it’s important to allow yourself sufficient time to carefully read any initial letter of
offer or other documents you receive, prior to signing, and meet any deadlines you require funding.

Such letters and documents typically state the borrower will pay the lender’s legal costs and some fees and you may be liable to pay this even if you don’t proceed with the borrowing. This liability may be secured with a right to caveat any property you own.

Often non-bank lending is used for a short term to initially finance a project or purchase before refinancing with a bank. Given that short-term timeframe, a non-bank’s initial costs, interest rates and fees need to be thought of as part of that secondary bank refinance goal and in respect of project cash flows.

‘Lending is usually structured so you pay a higher upfront cost’

ADDITIONAL SECURITY

A non-bank lender may require additional security beyond the property the lending is related to. This may be by way of mortgage over another property owned
by the borrower or a related party.

Sometimes this will be a second mortgage registered after an existing mortgage. Any existing mortgage you have may contain a clause that states you can’t grant a subsequent charge over your property to another lender. It’s important to talk to your solicitor about this before signing any finance documents with a secondary lender.

Both an initial offer of finance and the lending documents will also often contain a right for the lender to caveat any properties. Because a caveat can prevent any sale, purchase, subdivision, or registration of most other interests on a property title, it’s important to know which properties may be affected as this could impact properties other than the one that the lending relates to.

If you have structured your asset ownership using different entities, such as a trust or company, the lender may require additional security in the form of cross-guarantees, mortgages and general or specific security agreements from these entities.

That extended security arrangement may result in those entities becoming liable for loan repayments as if they were the borrower. Those security obligations, together with additional mortgages provided from those entities, may mean that other property could be subject to mortgagee rights if repayments are
missed and there is a default.

In addition, general or specific security agreements will allow the lender to take possession of and sell additional property such as appliances, fixtures and machinery if a loan is defaulted on.

EXPERT ADVICE

Non-bank lenders are certainly worth considering when financing a project. However, understanding all the hidden costs, lending and security terms will be important, particularly when assessing cash flows. Take the time to do your research and get expert advice before committing to a contract.