When Bank Finance Does Not Fit: Private Mortgage Finance for Property Owners
Banks remain an important source of property finance, but traditional bank lending does not suit every borrower, property or transaction.
A borrower may own substantial property assets yet fail conventional servicing requirements. A commercial acquisition may need to settle faster than a bank can approve it. A business owner may need to release equity from property without satisfying a standard bank credit model. An existing lender may also decide not to renew a facility even though the borrower has continued to perform.
In these situations, private mortgage finance can provide an alternative.
Private lenders, mortgage funds, high-net-worth investors and other non-bank capital providers can assess a transaction primarily on the underlying property, loan-to-value ratio, purpose, exit strategy and overall risk rather than relying solely on the rigid serviceability tests used by mainstream banks.
What is private mortgage finance?
Private mortgage finance is a loan secured by Australian real estate and provided outside the traditional banking system.
Depending on the transaction, security can include:
- residential investment property;
- commercial property;
- industrial property;
- retail premises;
- development sites;
- rural or englobo land; and
- other acceptable real estate.
Private property loans can be secured by a first mortgage or second mortgage and are generally used for business, commercial or investment purposes.
Prudential Finance does not arrange consumer-regulated loans.
Why do borrowers use private property finance?
Private finance is not necessarily a substitute for bank finance in every situation.
Its principal advantage is flexibility.
A private lender may be prepared to consider the strength of the property and the proposed exit instead of applying a standardised banking formula.
This becomes particularly valuable where the borrower has a sound commercial transaction but one or more circumstances fall outside traditional bank policy.
1. A bank will not provide sufficient funding
A borrower may have reached an existing bank exposure limit or require a higher loan amount than the bank is prepared to approve.
Private lenders can sometimes provide additional leverage where the security and transaction support it.
2. The property needs to settle quickly
Property transactions do not always operate according to bank processing times.
An acquisition may have a fixed settlement date, a refinance may be approaching maturity, or another commercial deadline may make speed critical.
Private mortgage loans can generally be assessed and documented more quickly because decision-making is less institutionalised.
Prudential Finance’s existing private property finance network includes facilities that can typically settle within approximately two to four weeks, with faster solutions available for appropriate urgent transactions.
3. Traditional financials do not tell the whole story
Strong property owners sometimes have complex corporate structures, irregular income, development profits, retained earnings or other circumstances that make conventional serviceability difficult to demonstrate.
Some private lenders use an asset-backed lending approach and can consider transactions where conventional income verification is not the principal credit determinant.
4. The borrower has a credit issue
Defaults, judgments, historic credit impairment or prior financial difficulties do not automatically prevent private property finance.
The lender will instead consider the circumstances, current position, value of the security and how the facility will ultimately be repaid.
5. An existing facility is approaching maturity
One of the most important uses of private finance is replacement capital.
A borrower can be completely up to date with repayments and still find that an incumbent lender no longer wants to extend a facility.
Lender appetite changes.
Funds alter concentration limits. Credit policies tighten. Certain property sectors fall outside new lending mandates.
The borrower’s property has not necessarily become a poor asset simply because the existing lender wants its capital returned.
A private refinance can provide additional time to sell, complete a project, stabilise an asset or arrange longer-term finance.
6. Equity needs to be released from property
Businesses often hold substantial equity in real estate while requiring working capital elsewhere.
A property-backed business loan can potentially release part of that equity for legitimate commercial purposes, including:
- business expansion;
- acquiring another property;
- paying creditors;
- purchasing stock or equipment;
- project costs;
- refinancing other debt; or
taking advantage of a time-sensitive commercial opportunity
7. The transaction is simply too complex for a standard credit policy
Some transactions require judgment rather than a credit-score algorithm.
A private lender can often assess:
What is the property worth?
How much is being borrowed?
What is the purpose?
What can go wrong?
How will the loan be repaid?
That can produce a substantially different outcome from a conventional bank assessment.
How much can be borrowed?
The appropriate loan-to-value ratio depends on:
- location;
- property type;
- property condition;
- borrower strength;
- loan purpose;
- first or second mortgage ranking;
- term; and
- proposed exit strategy.
Prudential Finance currently facilitates private property loans from approximately $300,000 to $500 million+, subject to the individual transaction.
Indicative leverage can extend to approximately 75% of property value for suitable transactions, although actual gearing is determined by the lender after assessment.
First mortgage or second mortgage?
A first mortgage has first-ranking security over the property and ordinarily offers the strongest security position to the lender.
A second mortgage ranks behind the first mortgage lender and therefore carries greater risk.
Second mortgage finance can nevertheless be extremely useful where a borrower does not want to disturb an attractive existing first mortgage but requires additional capital.
The correct structure should be determined by the cost of the total capital rather than by simply looking at one interest rate.
Interest rate is not always the most important number
Borrowers naturally focus on rate.
But in private finance, the cheapest quoted interest rate can become irrelevant if the lender:
- cannot approve the required amount;
- cannot meet the settlement date;
- changes its position during approval;
- requires excessive amortisation;
- imposes unsuitable covenants; or
- cannot accommodate the proposed exit.
The correct question is:
What funding structure produces the best commercial outcome for the borrower?
That requires considering the interest rate, establishment costs, leverage, term, conditions, flexibility and probability of settlement together.
What does Prudential Finance do?
Prudential Finance has more than 24 years’ experience arranging property debt and equity.
Our capital network includes private lenders, mortgage funds, high-net-worth investors and institutional capital.
Rather than approaching one lender with one credit policy, Prudential Finance can assess the transaction and determine which part of the private-capital market is most likely to provide the appropriate structure.
For straightforward transactions this may be a first mortgage.
For more complex situations it can involve:
- second mortgage finance;
- short-term property finance;
- commercial property finance;
- construction finance;
- mezzanine finance; or
- another structured-capital solution.
Is your property loan approaching maturity?
Do not wait until a facility has expired or a lender has issued a default notice.
Borrowers generally have more refinancing options before the transaction becomes urgent.
If you have a business, commercial or investment property loan expiring within the next six months, Prudential Finance can assess potential replacement funding and establish whether private capital provides a viable solution.
Discuss your property finance requirements confidentially with Prudential Finance on 1300 550 669 or email Hello@pru.com.au.
Recommended internal links:
Private Property Loans → primary money page
Short Term Property Loans → urgent transactions
Commercial Property Loans → commercial security
Mezzanine Finance → additional gearing
