The Australian finance industry, traditionally dominated by the four major banks, has been experiencing an intriguing shift toward a previously underrepresented sector: private lenders.
Non-bank lenders and private lenders, which make up roughly 5% of Australia’s financial system, are witnessing a swift expansion, especially in the realm of mortgage lending. This movement suggests a notable change in borrowing habits and creates a persuasive argument for brokers to consider the potential within private credit. Also facilitating bad credit loans as lending based on assets rather customers servicing and borrowing capacity.
Untapped Potential Down Under
Primarily propelled by an increase in mortgage lending, the rise of private credit appears unstoppable. Growth in mortgage lending has been averaging 15% on a semi-annual basis — over double the rate reported by banks, based on data from the Reserve Bank of Australia (RBA). Private credit accounted for approximately 5.37% of housing finance in 2022, an increase from 4.88% in the previous year.
Despite the COVID-19 pandemic, lenders owned by the major banks saw their market share decrease from 77% to 67%, while non-major lenders boosted their market share by a staggering 42.4% year-on-year, amounting to $1.77 billion as per the article The Role of Private Lenders During the COVID19 Crisis.
Nevertheless, despite the significant presence of private credit funds in the US and Europe, Australia is only beginning to embrace this financial tool. At present, private lender credit represents just 8% of the market share for all commercial mortgages in Australia, in contrast to 70% in the US and 48% in Europe. This contrast underscores the need for greater knowledge and understanding of private credit funds in Australia, encompassing their advantages, risk-reward dynamics, and an array of investment options.
Structural Adjustments and Regulatory Climate
Structural changes in the Australian debt market have set the stage for the meteoric rise of private credit. The big four banks have traditionally ruled lending in Australia, but stricter banking regulations and an increase in borrower selectivity have allowed non-bank lenders to become a feasible alternative. Non-bank and private lenders also cater for loans for bad credit.
The fallout of the global financial crisis, followed by the banking royal commission, has diminished public trust in conventional financial institutions, prompting borrowers to seek quicker loan approvals from non-bank lenders. This shift has permitted private credit to gain momentum and solidify its position as a formidable contender in the lending sphere.
Despite reservations about potential risks, a recent research paper by the RBA (Non-Bank Lending in Australia and the Implications for Financial Stability) points out that the lending standards of non-bank lenders have not worsened, despite strong credit growth from 2020 to mid-2022. In fact, the proportion of non-bank loans with high Loan-to-Value Ratios (LVRs) has dropped below that of banks, as per the RBA.
The Appeal of Private Credit
Private credit offers substantial benefits to borrowers, especially those who may struggle to meet the stringent lending criteria set by banks. For such borrowers, private credit acts as an alternative finance source when their mortgage applications are declined.
For instance, Loanbrite utilises a holistic and personalized credit process that evaluates borrowers on the basis of character, capacity, cash flow, collateral, and competency. Instead of hastily dismissing potential borrowers, they adopt a meticulous approach to determine creditworthiness.
Another benefit of private credit is the rapid pace at which loans can be assessed, processed, and granted. Unlike the complicated apparatus of large banks, private credit providers prioritize efficiency, ensuring that loan applications are not overlooked or neglected.
The Road Ahead
The success of private credit in the US and Europe sets an example for its potential future in Australia. Customized solutions for borrowers, high returns for investors, regulatory favour, and robust growth in recent years all point toward a promising future for private credit in the country.
In order to leverage the increasing demand for private credit and infiltrate an underexplored market, Loanbrite has recently sourced direct lines of credit. This joint venture aims to offer more opportunities for investors to diversify and secure strong returns, backed by property.
Under this joint venture, new lending products will be introduced, with the initial focus being on lending to high-end residential properties and owner-occupied or rented industrial properties. The loans will cover up to 75% of the property values with loan amounts reaching up to $50 million on a low documentation basis. See our recent case study on private lending development finance.
This collaboration paves the way for diversification and provides opportunities for robust risk-mitigated returns.
