The internet is the new marketplace for funding options for outside-the-box consumers and Commercial Mortgage Lending and Property Development funding. Yet, as early adopters jumped on the bandwagon with excited glee, others are still standing on the sidelines, watching with scepticism, navigating rumours and myths about the Fintech revolution.
The Risks of Fintech in Australian Banking
Generally speaking, any innovation that disrupts our traditional methods of doing things will have inherent risks. As technology advances (at frightening speeds), and new products arise (without all consequences accounted for), the risks of using Fintech platforms are fluid and often unexpected. However, the rewards of cutting-edge innovation can be seen throughout history - and cannot be ignored.
Fraud and Identity: Both parties, the supplier and the consumer, need to know who they are dealing with and that they are who they say they are.
FinTech platforms utilise online registration processes to help with identity validation. In most cases, the registration process is fairly simple, and with the implementation of digital IDs, it is relatively safe and convenient too.
To reduce fraud, online marketplaces perform ID checks and require full compliance with many of the same bank requirements. This is to ensure against money laundering and counter-terrorist funding. Also, Artificial Intelligence (AI) is becoming a significant factor in helping to detect fraudulent activities based on personal data that is collected and “stored” for future analysis.
Data Privacy: Yes, everything you do - right down to liking a Facebook post - is tracked and the information stored in a database somewhere. Many believe that these data repositories and the temptations they pose are the Achilles heel of the 21st-century. Enter cybersecurity...
Cybersecurity: According to the 2018 3rd Asia-Pacific Alternative Finance Industry Report, Fintech platforms report spending 16% of their operating budget on cybersecurity and another 23% on IT costs. Distributed ledger technology and data encryption are two main forces protecting your personal data.
Regulatory Changes/Speed: The speed at which Fintech is disrupting the market makes it difficult for authorities to regulate and enforce laws, leaving consumers exposed to fraudulent and nefarious activities. Complicating things further, there is a delicate balance between flexible and quick, as too much imposition of existing regulations may, indeed, impede Fintech’s growth.
To this end, AUSTRAC, Australian’s government intelligence agency, is collaborating with Fintech startups to identify regulatory safeguards in the development lifecycle. Further, Regtech (regulatory technology) startups are helping banks improve industry standards in how alternative banking solution providers are handling regulatory, compliance and conduct risks.
What does this mean for Commercial Mortgage Lending and Property Development Financing?
Over the past decade, finance pricing in Australia has remained steady and at a significant premium. In large part, this is due to the lack of competition. The big banks - specifically, the “Big Four” - have dominated the marketplace, holding as much as 80% - 85% of all Australian mortgages. Borrowers have had few options.
With the rise Fintech platforms, options are becoming more readily available. Tier 2 and Tier 3 financing is busting out for those who need custom solutions to their individual situations.
The Myths: Non-Bank Lending
The Sydney Morning Herald (Sept. 4, 2019) reports customer frustration and inconsistent bank credit policies are primary factors leading to the double-digit growth in non-bank financing. So, what’s the worry?
Myth: Non-bank financiers are not licensed and as such, they are not subject to oversight or regulations, leaving the consumer vulnerable to unethical practices and market volatility.
Reality: Non-Bank loans (Tier 2), typically originate from the likes of credit unions and building societies. It is true. They are not authorised deposit-taking institutions (ADIs) which are regulated by APRA. Instead, they are monitored by the Australian Securities and Investments Commission (ASIC). The ASIC is, in fact, part of the Australian government’s deregulation agenda. That said, they are uncompromising in protecting the fundamental principles behind the regulation of financial products and services. Their goal is to protect consumers, investors and creditors while enforcing Australian finance laws. They have been instrumental in detecting and reporting on unethical behaviour in the Australian banking system.
Myth: Getting a commercial mortgage or property development financing is almost impossible.
Reality: Non-banks can assess existing debt and new debt differently than traditional banks. They can do this because they are not regulated the same way as big banks are. Therefore, they can accommodate higher maximum borrowing capacity and higher loan-to-value ratios (LVR). For these reasons, they are able to approve more applications, often faster than banks can.
The Myths: P2P Lending
According to the 3rd Asia Pacific Region Alternative Finance Industry Report, Australia hosts the largest alternative (online) finance market in Asia Pacific (excluding China). Closely behind its balance sheet business lending is the P2P marketplace, up 88% from 2017.
Myth: P2P lenders charge higher interest rates than banks.
Reality: This is true. But the added expense may be worth the investment, especially if you need non-conforming financing (low-doc or no-doc), if you have a low credit rating, or if you need the funding quickly. Remember, banks can take up to several months to process an application, and they still might decline the loan. Your opportunity may be lost.
Myth: P2P won’t drop interest rates when they fall.
Reality: This too, is true, especially if you have a fixed-rate loan as opposed to a variable rate.
What you need to know about dropping interest rates is: private lenders tend to be more vulnerable to economic downturns as government guarantees do not back them. During economic slumps, they may elect to sell their debt portfolio. Should this happen, private lending rates will be significantly higher than that of mainstream lending. If you are able to refinance due to improved financial standing — such as decreased debt or improved income — you should do so.
For variable-rate loans, it is a good strategy to model alternative scenarios to determine at which point it makes sense to dump the investment (booming economy and rising rates). The best rule for those holding a privately-backed, short-term, high-interest, or interest-only loan is to stick to a predetermined exit strategy as indicated by your financial model.
Myth: Interest-only loans are a bad deal since you never pay down the principal and never increase your equity stake.
Reality: In its essence, this is true -- you do not pay down the principal balance or increase equity. However, while not for everyone, these loans hold an important position for those who accurately predict that their investment will generate a cash-flow that exceeds the interest rate, or for those who plan to liquidate the investment before the interest payments deteriorate the profit margin.
Interest-only loans are optimal for commercial property development or speculative residential developers, as it allows for maximum tax deductions on interest paid while keeping capital free to pay construction and other overhead costs.
This is also true of commercial mortgages. Fuelled by the reduction of government intervention, low vacancies in storefronts, a higher yield on commercial property investments, and a general shift away from the residential property market as long-term investments, “mum and dad” investors have shown an increased interest in Australia’s recent commercial real-estate market. As long as your income overproduces your interest and associated costs (such as overhead, maintenance, etc.) and your cash-flow remains positive, this type of investment can strengthen your future borrowing potential.
Whether you need a short-term swing loan, a high LVR loan, interest-only or other, Acumen Finance will provide custom “financial modelling” to find the best loan structure and provider for you. By backward engineering from the market line with a thorough understanding of your specific circumstances, they can match you with the best solution available. They will perform all the necessary credit checks and produce for you a “best-of-breed” credit discussion paper. Then, they will match you to an appropriate lender - one who’s actively seeking consumers just like you. Contact Acumen Finance and get your loan for a better tomorrow, today.