Why commercial loans can be a better option than residential?
The past couple of weeks have seen further changes to the major bank's product lines off the back of increased scrutiny they've been exposed to via the royal commission.
Last week CBA confirmed they would be stopping their low doc residential loan product and this week Westpac and St George confirmed they would be calling stumps on their SMSF loans.
I think we’re going to see more of this over the coming months and it all has to do with the banks putting a price on the cost for them to process these types of loans versus the profit they receive from them.
When we talk about cost associated with loans, we’re really talking about the compliance requirements it takes to not only provide recommendations but then to submit, process and approve a loan.
Financial planners have experienced this over that past 5 years post their FOFA reforms and what we see now is a whole segment of the Australian population who are in desperate need of financial advice but unable to obtain it because the cost to provide this advice outweighs any potential profit to run a business. Sadly, we may be seeing the beginning of the same thing in the finance industry.
However, the same does not hold true for commercial loans and that is because they are unregulated…
WHAT'S THE DIFFERENCE BETWEEN REGULATED AND UNREGULATED LOANS?
Now I know when you see the word ‘unregulated’ you might also think of words such as ‘cowboy’, ‘dodgy’, ‘scam.’ But that’s far from the case.
Regulated loans fall within the National Consumer Credit Protection Act (NCCP). This legislation is designed to protect consumers by ensuring that both lenders and brokers are making reasonable enquiries into a borrower’s circumstances to ensure that the loan they are applying for meets their needs and objectives.
Whilst NCCP regulation is a great thing for the consumer, sometimes the interpretation of the Act can be misconstrued and what ends up happening is too much red tape and no actual benefit.
Commercial loans where the borrower is a company and the purpose is business or commercial are not regulated by the NCCP. The government deems borrowers who fall under these categories are sophisticated and therefore less of a risk.
It doesn’t mean they don’t have legal grounds to stand on if the lender does not act in their best interests. At the end of the day, the main thing that dictates your legal standpoint is the Loan Contract itself. This holds true whether you’re applying for a regulated loan or not.
For non-regulated loans, because there is not a requirement for the banks to be over-the-top with their processes, what tends to happen is these loans are processed quicker, have less strict servicing metrics and can sometimes be cheaper.
Case in point, CBA’s relatively new product called the ABCD Commercial loan – funny how his loan has popped up after their regulated low doc loan has been phased out!
With this loan, income is verified off 12 months BAS (i.e. what was formally a residential low doc loan), rates are 4.8% - 5.2% (deals are risk rated individually) and loans are assessed within 24 hours.
I had a client recently who accessed $900K worth of equity from a residential property they had which formed the deposit for a development site they are looking to purchase. I considered doing this on a residential low doc basis but not only were the rates higher, the process would have taken much longer and it may have not have even been approved due to the level of cash out we were asking for.
Just food for thought in what is an ever-changing market.