Private lender home loans in Australia

In the current market, there are numerous banks and lenders offering home loans to Australians, but if you do not fit the standard lending criteria, then securing a home loan can be challenging. There are a number of so-called ‘private lenders’ on the market who advertise that they cater to borrowers whose needs or circumstances fall outside the norm. If you are considering seeking out this kind of financing, then it is important to do your research carefully and be aware of the potential risks.

What is a private lender?

Private lenders are typically specialist finance companies, investment firms or even individuals. They exist outside of traditional lenders, and offer finance to individuals seeking to borrow money for a variety of purposes, including property purchases.

Loans from private lenders tend to differ from traditional loans in several key ways – they typically have higher interest rates, and will generally be offered for shorter terms, as they may often be used by people who require finance in a hurry.  Private lenders are not bound by the same strict lending criteria as traditional banks and lenders.

They also tend to be secured, meaning that you will be required to use an asset you own as collateral for the loan, and the lender will have the right to repossess this asset should you be unable to make your required repayments.

How do private lender home loans work?

In general, there are four main types of home loans that you might typically expect private lenders to offer in Australia. These are:

Bridging loans

Bridging loans are short-term loans that borrowers typically take out when they want to buy or build a new home before selling their existing property. They are usually interest-only home loans that are repaid once you sell your old home. Bridging loans can come with a higher rate than your regular mortgage, and a key risk is that if it takes longer than expected to sell your home – or it sells for less than expected – you could be left with a shortfall on the money owed on a bridging loan.

Caveat loans

A caveat loan gives the lender an interest in your property, which means you are using your property as security for a loan. A caveat loan can be a very quick way to get a loan, often with loan approval in a matter of hours, which can be attractive if you’re in urgent need of finance. In addition, the loan terms can be very short, often just 2-3 months, and you can usually expect to pay a higher interest rate compared to a standard home loan.

Bad credit loans

Bad credit loans are typically sought out by borrowers who have a poor credit history, such as failing to pay bills on time, or defaulting on previous loan repayments. Having a few negative items recorded in your credit history means you pose a greater perceived risk to home loan lenders. Reflecting this, bad credit home loans typically come with a higher interest rate – and potentially higher fees, to compensate the lender for taking on more risk. On the other hand, if the borrower is in a position to consistently meet the repayments, a bad credit home loan can be an opportunity to start afresh, and gradually repair their credit history, which could mean being eligible for a traditional home loan further down the track.

Second mortgages

A second mortgage involves taking out a home loan on a property where there is already a mortgage in place. In general, mortgages have priority according to when they were lodged. So a first mortgage will typically take priority over a second mortgage. A key risk is that if the worst were to happen, and you were forced to sell your home, you may still owe money on the second mortgage.

How do I get private finance?

An online search can help identify a variety of private lender home loans in Australia. Alternatively you could speak with a mortgage broker, who may be able to help you get in touch with a private lender.

Before committing to a particular loan, it’s a good idea to consider not just the interest rate on offer, but also any fees as well as special conditions associated with the loan. With this in mind, it could be worth comparing the offerings of a number of lenders before choosing one.

That said, as an individual homebuyer, it may be challenging to secure a home loan via a private lender.

Mortgage broker Ray Hair told Canstar that private lenders are governed by responsible lending laws when funding the purchase of residential properties by individuals, and that consumers have the protections of the National Consumer Credit Protection Act (NCCP).

Mr Hair said that, for these reasons, most private lenders are unlikely to be interested in funding residential property purchases unless the borrower is a company, trust or self-managed super fund (SMSF).

The potential pros and cons of private lender home loans

As with any financial product, there are potential advantages and disadvantages that should be considered, which include:

Potential benefits of private lender home loans

• Speedy settlements: The approval process can be very quick and involve less paperwork compared to a traditional loan. This can be useful if you need finance fast.
• A good credit history may not be essential: Borrowers with a slightly tarnished credit history can be rejected by traditional banks, but may be eligible for a loan with a private lender.
• Specialised loans: The types of loans offered by private lenders may not be widely available through mainstream lenders.

Potential risks of private lender home loans

• Higher interest rates: The interest rates on private lender home loans can be a lot higher than mainstream mortgages simply because the lender is taking on more risk.
• Fewer options: If you’re shopping among private lenders, you will likely have fewer options available to you than you would if you were comparing mainstream lenders.
• Shorter loan terms: The short-term nature of many private lender loans brings the risk of something happening that derails your ability to pay back the loan on time.
• High upfront costs: Some private lender home loans will require an establishment fee, which can be 2-5% of the loan amount or more, and these costs could be significant.

Are private lender home loans safe?

As with any financial product, it’s important to do your research, compare your options and carefully assess the costs and whether you can meet the repayments and other conditions of the loan. It is also worth keeping in mind that traditional banks and lenders do still offer loans to self-employed borrowers and others who may not fit the traditional borrower profile, so you may wish to consider this as a potential option.

Bear in mind, too, that a home loan of any sort, including one from a private lender, is a big financial undertaking. You may risk losing your home if you fail to keep up with your loan repayments. Therefore, if you have a poor credit history, it may be worth thinking carefully about whether now is the right time to apply, or whether you may be better off saving your money until you are more confident you’ll be able to manage a home loan financially.

Do private loans affect your credit?

“With respect to credit reporting, the use of private lenders doesn’t result in adverse credit reporting but could lead to traditional lenders taking more time verifying repayment of private loans and the reasons it was required,” Mr Hair told Canstar.

He added that while the use of private lenders doesn’t necessarily immediately impact your credit score, “it may impact a subsequent lender’s assessment of your credit history and current position.”

“Private lenders are not participants in Open Banking,” he continued, “so private loans may not be as readily identified, or the repayment history rated. The reporting of defaults and arrears is not mandatory so it will vary from private lender to private lender.”

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