If you're looking to invest in peer-to-peer lending and finance borrowers who have opted for a non-bank, short-term lending solution, you're probably feeling a little apprehensive about the security and risk involved with this kind of investment - and naturally so. There can be a stigma attached to short-term borrowing and first-mortgage secured loans and as an investor you want to be certain that repayments will be met.
In our experience, there are a number of reasons why our clients consider taking out a short-term mortgage. Some of which might surprise you. In this blog, we deep dive into some of the more common reasons that loan borrowers seek out short-term mortgage solutions.
1. Business Owners that don't yet have their Accounts Ready
When you're starting out in business or are recently self-employed, often, this is when you're in most need of capital injection to finance your start-up. However, banks typically require a full two-year report of financials to prove income in order to finance a loan.
This is a contradiction that can be challenging for many new business owners who are forced to seek alternative options that don't require such a stringent check of their previous income records. Many borrowers will have adequate equity in a property that can be used as security to help fund thier venture.
2. Borrowers who have some Defaults on their Credit Reports
When it comes to credit reports, a full five-year history is reviewed and unpaid debts or bankruptcies show up on record. It's important to keep in mind that a lot can happen in five years and often a case of bad credit can be easily explained by unfortunate circumstances - it doesn't mean that the borrower is a 'bad person'
For example, we've seen defaults happen for a variety of reasons:
- illness leading to loss of employment
- divorce or separation
- the loss of a family member
- Business failure
- Unexpected redundancy
Often, short-term loans afford people with circumstances like this a little breathing space to get them back on track and into a sound financial position. As responsible, regulated lenders, we do our due diligence to ensure that any borrower is able to make their loan payments.
Of course, if a borrower with a poor credit history does happen to default on payments, you (the lender) are protected as the debt is suported by a frst registered mortgage over a scurity property. You can take a look at our FAQs around risk, here.
3. Property Investors in need of a Cash Injection for a Project
You've probably noticed that banks typically offer mortgages with a loan term of between 25 and 30 years, which is quite a significant commitment and suited to home owners. Banks prefer this type of mortgage, because it's a guaranteed stream of interest on their investment over a longer period of time, which in turn means they make more money.
For a lot of property investors this structure of a loan doesn't suit, as they're looking to quickly buy, do-up and on sell for profit. Simply put, they need a short term loan to get the job done, which they can pay off quickly with profit generated.
The same goes for larger developers doing small to medium subdivisions or multi-property construction. We've been told directly from our borrowers that fit this description, that banks have too many hoops that the borrower has to jump through and take too long to make decisions - in which case, a short-term loan is the perfect solution.
4. A Borrower who has Committed to Buying Another Property Without Having Sold Theirs First
Lending to this type of borrower is called 'open bridge financing'. This means that where banks usually prefer the existing property to already have been sold and
awaiting settlement before the purchase date of the new property (closed bridge financing), we're able to provide a solution.
While on face value it might seem counter intuitive to commit to buying before having first sold your home, there are a number of reasons why this might occur. For example, the borrower may wish to have time to do-up their current home before they sell it, perhaps they've seen the perfect property that they don't want to miss out on, or simply have a property that takes a long time to sell such as a lifestyle block.
5. Debt Consolidation
Sometimes due to unforeseen circumstances borrowers may find that they have a number of high-interest credit cards and monthly hire purchas e payments, that they'd like to consolidate in to a single, simple, lower interest payment. In the long term, this option often will save the borrower money on interest over time and simplify their debt payment process.
Once their payments have been consolidated with a lender like Southern Cross Partners and they have a clean track record of payment, they'll be eligible to refinance with banks once they have shown good account conduct.
6. Pulling Equity from Property to Business
In order to get a business loan from a bank with the intention of investing the money solely into your business, borrowers are required to show financial projections for the business and account history. Plus, a loan for a start-up business or a new business purchase comes with risks, which means that the banks can charge a higher rate on interest that has little competition.
Using the equity from an exisitng 4367property or a block of land already owned against a business loan reduces the risk for both the borrower and the lender and allows for significantly decreased interest rates that are favourable to the borrower.
7. Paying Tax Arrears using Property as Security
Quite commonly people accrue tax debt if they're self-employed or own a business and their taxes are unpredictable. If the tax debt is not paid promptly, they can incur penalties and interest from the IRD that can quickly spiral out of control.
The problem is that banks simply wont lend to pay off tax arrears debt, including GST owed, which leaves non-bank lenders as the only option for paying the immediate debt and leaving room to focus on making money rather than paying it back.
The Bottom Line
As you can see, there really are a number of reasons why a borrower would opt to take out a short-term mortgage loan over a long-term, bank option. Plus, more often than not, unfortunate circumstances or an opportunity to make money are the driving factors - not simply a poor track record.
If you'd like to know a little more about the types of short-term loans we lend, or how you can make an investment, don't hesitate to get in touch with our friendly team below.
