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Private vs. Bank - how to choose the perfect lender for your clients

    In the current economy, more and more brokers are being presented with atypical scenarios that don’t fit the mould of the traditional residential mortgage. When faced with these deals, it’s easiest to start with one question - traditional bank or private funder? Here are a few points to consider for your loan scenario.

    Time Sensitivity

    How soon do you require funding? Banks are best known for their sharp rates, but private funders are best known for their agility. While a bank can often take months to evaluate a loan scenario on commercial property, many private lenders are able to advance funds in weeks, and occasionally even in days. This can be important for urgent scenarios, such as:

    • A timely business opportunity, like the purchase of a new site
    • Receipt of a notice to complete on a property settlement
    • Mismatch in property settlement timing
    • Debts due, such as BAS

    Rates

    Banks raise their funds from deposits and in the wholesale money market. The cost of their funds is the lowest in the industry, and that’s why they can lend money out at the lowest rate. This makes a bank a great, steady long-term finance partner for an extended loan like a residential mortgage. On the other hand, private lenders raise their money from private investors. They have to pay more for their capital and so need to lend it out at higher rates. 

    Time Frame

    How long do you need to borrow money for? It’s one of the basic questions of any loan scenario, but it can quickly help you decide the funder for your loan. 

    Private funding is generally best suited to a short or medium-term loan, from 6-24 months for a specialist short-term lender, and 3-5 years for a medium-term lender. For a longer period than 5 years, the rates of a private funder tend not to make sense, and you may be better off with the banks. Not able to qualify for a bank loan? Many private lenders offer bridging loans, designed to help you with finance while you either explore exit scenarios with banks, or build up a strong repayment history in order to be eligible to refinance.

    Eligibility

    Sometimes, the choice between a private lender and a bank is a simple question of eligibility. Operating at very large scale, banks have developed a model that fits a large bulk of homogeneous borrowers (think steady employment with a company, tax returns up to date, clean credit record, consistent evidence of payslips to show you can service the loan). The private lending industry developed specifically to meet this shortfall - to address creditworthy loans that fall outside the banks’ rigid criteria.

    Are you tossing up how best to address a loan against commercially held property? Get in touch for an obligation-free chat.

    The major banks are tightening credit, under pressure from regulators. Private lending is stepping in to fill the void...

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