People who use private lenders are usually asset rich but cash poor. This includes people looking to do property flips, small business owners, property developers and individuals or companies seeking short-term finance solutions that fill an immediate need for money that bridges a gap. Private lenders in some cases, can be a more suitable option for borrowers under these circumstances as they can secure money faster than banks.
Because Private lenders aren’t bound by the same strict credit guidelines required to lend you money, like banks and traditional financial institutions, it means that there are limitations on when you can use them. However, contrary to popular belief, private lending in Australia is safe, as they’re governed by the same laws and practices used to govern banks.
Some things to consider include:
- Private lenders do not check credit scores
- Private lenders do not hold a banking licence, so they are considered non-bank lenders.
- They lend money based on a borrower’s assets not credit or serviceability
- Private lenders are vulnerable to economic conditions and are volatile when a crisis hits.
Benefits of Private Lenders
Because Private Lenders have to deal with higher risks, their interest rates are generally higher and you’ll find they don’t have as many loan options on offer like some of the major lenders. But their turnaround times are usually faster, since they don’t need as many documents from the borrower, which in turn makes their approval process is easier which is particularly convenient for borrowers with short-term finance needs.
How Does A Private Mortgage Work?
The private lender provides the funds to the borrower based on the borrower’s security and project feasibility in the case of developments. The lender will check the security provided and decide how the loan is to be repaid.
The lender usually takes a conservative approach with the valuation of the property, in case the borrower fails to repay the loan on time and they need to sell it. The set time is usually less than 2 years, at a fixed interest rate.
Terms of a private home loan include:
- Type of loan
- Loan term
- Interest rate (negotiated by lender and borrower)
- Exit strategy
Private lenders will consider things like your property value, your deposit, equity, and experience with regard to property development and or investment, when working on the loan process. They will also look at your exit strategy for the property and what cash reserves for the monthly loan payment if you choose not to capitalise interest for the term of the loan. If all of these criteria look reasonable, you generally don’t have to wait longer to receive the money.
Low Credit Score
One of the main differences between banks and private lenders is the impact your credit score has on whether or not you can take out a loan. In the case of a Private Lender, a low credit score doesn’t necessarily make you a bad borrower. Whereas a bank will see you as a higher risk and will generally not even consider your loan application based on this. A Private Lenders has a lot more flexibility. This presents a lot more freedom when taking out a loan.
At the end of the day, both banks and private lenders come with their advantages and disadvantages. If you find yourself in a position of bad credit and unable to take out a bank loan, then the flexibility of a private lender could be well worth it. It opens up more avenues when it comes to taking out a loan and offers a more personalised experience.
If you are looking to take out a loan, then speak to the experts at Capital Mortgage Group. We are here to find the right loan for you.
If the risk of future rate rises is causing you concern about your ability to manage your mortgage repayments, or you just want to explore your borrowing options, don’t wait, get in touch with us now.
As indicated by the RBA Governor, the likelihood of further cash rate rises in the coming months and potential years ahead is almost a certain guarantee.
So, if you want to look at getting yourself into the best possible position to manage your mortgage repayments, your family budget and minimise your financial risks, get in touch with us today so we can explore all your finance options.
Our experienced brokers have access to the latest loan facilities being offered by lenders and can assist you with making the right decision to suit your personal situation. From new loans to refinancing and fixing the best rates, to private lenders for your property development deals, we have the knowledge and expertise to help you find the right loan.