The History of Commercial Mortgage Lending in Australia
The current finance and banking environment in Australia is changing with Fintech, P2P, and non-banks on the rise, giving more options.
The History of Commercial Mortgage Lending in Australia
Historically, commercial mortgage lending in Australia has been restricted to the limiting rules and structure of traditional banks. Borrowers with anything beyond a low-risk profile have found it either impossible or extremely difficult to lend without jumping through endless hoops and exhausting application processes. On top of the standard regulations, changes to the market have urged regulatory bodies to tighten bank regulations further, causing the banks to become even more unpredictable.
On the other hand, as technology has evolved, so have the demands of the modern-day customer and their expectations of banking experiences. With a simple google search providing rates, comparisons, and a plethora of lending options, the days of popping into a local branch as the first point of call are over. As Fintech continues to disrupt the banking landscape, brick-and-mortar banks will be forced to evolve from their traditional operations. An approach of “less is more” should be taken to do this by reducing the scope of products and services offered, leaving room to specialise and deliver quality customer experiences.
Traditional Commercial Mortgage Lending
Commercial mortgage loans are typically long-term, more significant loans that are used for purposes such as purchasing commercial property or for large scale developments. They come with an individual set of requirements that impact how much you can borrow and what it will cost you to do so. With a lower loan to value ratios (LVR), commercial mortgages require a larger deposit, and there is no lenders mortgage insurance available (LMI) if the full deposit cannot be met. Loan terms are much shorter, and the interest rates and pricing vary depending on the overall quality of the deal but are typically much higher than residential lending. One of the major differences with a commercial mortgage is the regular reviews the bank will conduct to ensure the borrower holds a solid financial position.
Until recently, traditional banks--in particular the Big 4--have held much of the commercial mortgage lending monopoly, keeping the market and options limited with their strict conditions. Stringent application requirements, such as two years of financials for income evidence and low LVR restrictions, have made it difficult for new businesses or applicants with a high-risk profile to borrow. This historically left a significant gap in the market.
Regulatory Bodies for Commercial Lending
ASIC, APRA, and the RBA are the main regulatory bodies for commercial lending in Australia. Any deposit-taking institutions, such as banks, are restricted by APRA’s regulations and ASICS legislations. These can include Fintech’s that operate as a bank. For non-banks and peer to peer lenders, they are regulated solely by ASIC.
The Australian Prudential Regulation Authority (APRA) is in charge of developing strict prudential policies to withhold a steady, safe, efficient, and competitive environment. This body is responsible for the licensing and supervision of any deposit-taking institutions, such as banks, building societies, and credit unions. These institutions are regulated under a single license and all covered by the Banking Act 1959, which is driven by depositor protection. APRA’s regulations, which can be risk-averse, create limitations to what banks can offer borrowers in terms of lending.
The Australian Securities and Investments Commission (ASIC) is the body that legislates the financial markets, financial sector intermediaries and financial products. ASIC exists to protect consumers and the market from unfair behaviours, deception, manipulation, and to promote a safe financial system for consumers and investors. ASIC regulations apply to peer to peer lending and non-banks, as well as traditional banks.
The Reserve Bank of Australia (RBA) is responsible for Australia monetary policy, issues currency, and sets the cash rate. Each month the RBA reviews the cash rate to protect Australia’s economic stability. This cash rate is the rate lenders pay on loans they borrow from the RBA. When changes are made to the cash rate by the RBA, lenders can adjust their rates to accommodate the fluctuation. The RBA’s decisions have a substantial impact on all lenders in the market.
Current Commercial Lending Limitations
The current climate of lending in Australia has drastically changed after recent events that have prompted further regulations across the banking and lending landscape. The following have been big players in these changes.
● APRA enforcing restrictions on loan assessments has led to the scrutiny of loan to value and servicing ratios, and this profoundly affects loan approval rates and efficiency.
● A Royal Commission into the major banks has led to risk teams going into a panic and limiting their exposure to any deals that could cause questions.
● Global standard-setter for the regulation of banks, The Basel Committee on Banking Supervision, will be implementing their international recommendations and regulations, Basel IV, to the banking industry in January 2020. This agreement was completed in December 2017 and included major changes to credit and operational risk, resulting in further restrictions to commercial lending.
● Mortgage loan fraud has been uncovered after admissions from big banks that they lent money to foreign borrowers based on fraudulently produced supporting documents supplied by brokers.
These events have, and will continue to impact borrowers as stricter regulations enforce banks to tighten their lending books, in particular with developers and investors. With traditional banks continuing to limit these types of borrowers, non-bank lenders are anticipating to snap up a 10% share of Australia's $300 billion commercial lending domain.
As our traditional banks slowly assimilate to the modern ecosystem and continue to adapt to the tightly regulated banking and financial landscape, tier two and three lenders--including peer-to-peer (P2P), non-bank, and Fintech--will benefit from today's sophisticated borrowers. These borrowers are seeking customer-centred and segment-focused lenders that can deliver efficient, fuss-free finance options outside of traditional banks.
If you want to free yourself from the increasingly challenging and restrictive rules of a traditional bank and work with a customer-focused broker, contact Acumen Finance to find out how we can streamline your lending process. Acumen are a progressive, highly experienced aggregator who work with tier one, two, and three specialists to ensure we find the most efficient and accommodating lending solution for your needs.