From Thinktank’s business development manager, Lauren Ryan
The non-bank lending market has been garnering consistent headlines in recent weeks, as growing economic divergence puts the focus once again on credit quality. As it is with most professional service businesses, finding an area of specialisation and knowing your client better than anyone else is key to long-term success.
Nowhere is this more important than in the incredibly diverse world of non-bank mortgage lending.
With the tailwind of a strong property market and the gradual exit from more complex lending by the major banks, the sector has attracted significant amounts of capital.
But not just anyone can work efficiently in this sector. Delivering the best risk-adjusted returns for investors requires a laser-like focus on a few key areas, according to Thinktank, a specialist commercial and residential property lender.
Having commenced operations on the cusp of the Global Financial Crisis in 2006, Thinktank has consistently placed a premium on only financing quality borrowers with carefully qualified commercial and residential property as security.
At Thinktank success is put down to four key pillars; a focus on quality, knowing your client as well as anyone can and a conservative and active approach to managing every relationship.
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For non-PAYG and self-employed borrowers, it can be incredibly difficult to secure finance through the major banks, regardless of the strength of their balance sheet or business. It is therefore the ability to understand these clients better than anyone, that has afforded Thinktank the ability to establish a $5.5 billion and still growing loan book from this cohort, with little in the way of issues over nearly twenty years.
A strong external presence and outbound sales and credit team is central to the ability to get to know self-employed borrowers better, to structure lending arrangements to fit the circumstances and most importantly, know how and when to act when circumstances change, just as they did during the pandemic and the GFC before that.
Genuinely knowing your client extends the ability to more accurately price for risk. While the broad loan to valuation ratio (LVR) cap of 80 per cent is applied across the business, this is further reduced as the size of the potential loan grows to limit the risk to the investors funding the business.
A reflection of Thinktank’s focus on limiting risk is the fact that the commercial loan portfolio carries an LVR of just 62 per cent, and the residential loan book 70 per cent. Thinktank reiterates the importance of this conservative approach in limiting the reduced risk of default that comes amid the inevitability of economic and property cycles.
While every lender, bank or non-bank does its best to avoid defaults, growing challenges in the economy means the probability of default will continue to be a feature of lending. How a lender acts early on in these situations is a key determinant of a successful outcome, which is typically measured in either recovery rates, or the ability of a borrower to recommence payments.
In this regard, Thinktank’s approach differs markedly from the major banks, as when a borrower misses a payment, their collections team is triggered to contact them straight away, regardless of whether they are ahead of their scheduled payments. This contrasts with other lenders who may only send a letter seven or 14 days following a missed payment or not even make contact at all if the loan is ahead of the scheduled balance.
Where it turns out to be a case of hardship, through which data suggests as many as 50 per cent of arrears cases are due to illness, accident or relationship breakdowns, ‘early engagement can often contribute to getting the borrower quickly back on track’.
It is Thinktank’s opinion that ultimately, the aim is ensure the debt is cleared by the borrower in all possible cases rather than contributing to a deterioration of the situation that requires the lender to step in and take control of the sale of the property.
It is this success and approach to only partnering with better quality borrowers offering superior property security, that has supported Thinktank’s ability to establish global institutional and investor backing. This is evidenced by the latest oversubscribed $750 million residential mortgage-backed securities auction, which attracted 21 institutional investors and over $1.1bn in bids.
