Amid lending crackdown, surge in number of short-term borrowers with exorbitant fees and interest rates

The crackdown on home loans by the big banks has led to a surge in the number of short-term lenders springing up to attract buyers locked out of traditional loans, and charging exorbitant fees and interest rates. 

Home owners are now being advised to sell their own home before they buy a new one or enter sale contracts with a “subject to finance” clause to avoid buyers agreeing to purchase but then being unable to pay. 

It comes as bridging finance — an interim loan for someone has already bought but has not yet sold, so has an asset but not cash — becomes harder to obtain amid the regulatory clampdown.

New players have entered the market to lend to buyers at all price ranges, said James Gerrard, financial planner with FinancialAdvisor.com.au.

Some home owners who bought before they sold spent up to six months trying to find a bridging loan and get it approved, Mr Gerrard said.

He said many private lenders charged interest rates of about one to 2 per cent a month, which could accumulate to 24 per cent a year, and had establishment fees of up to $50,000.

While the fees may seem steep, Mr Gerrard said it was a price many were willing to pay to avoid being sued if a sale fell through due to a lack of finance.

In Victoria, if a sale falls through because a buyer is unable to get a bridging loan, they can lose their deposit and may also be sued by a vendor if the house later sells for a lower price or if the vendor chooses not to sell. This can equate to hundreds of thousands of dollars.

“I think people need to be cautious in the current market. Selling before you buy is much more prudent,” Mr Gerrard said.

Managing director of investment firm AIG Capital Ken Peng said savvy investors had approached him to offer up their cash for short-term or bridging loans, chasing the high returns on offer.

Over the past 10 to 12 months, his company has lent between $30 million and $50 million for terms of up to 18 months.

He focuses on the higher end of the market in NSW and Victoria with clients looking to buy before they sell.

“We’re not the only one who are doing this,” Mr Peng said.

Sandra Sacco and husband Luke bought their dream home in Fairfield this year before selling a home they owned in Alphington.

Ms Sacco said she was nervous about buying before selling in a softening market, but the home was in an area the couple loved and they needed to act quickly.

“It was just the street – we absolutely loved that pocket,” said Ms Sacco, whose husband is an agent with Nelson Alexander. Eventually their own home settled before they got the keys to their new place.

Jarrod McCabe from Wakelin Property Advisory advises clients to sell first or ensure buyers have approved finance. 

When the market was booming, people would buy before selling as they could make money by waiting for their original home to grow in value, he said. The profit they made by waiting outweighed the costs of paying interest on a bridging loan.

“We’re pretty adamant with our clients to get their finance worked out before making an offer,” Mr McCabe said.

The tighter lending environment is also changing the apartment market.

Henry Kalus, partner in law firm Kalus Kenny Intelex, advises buyers in new developments to make their contracts subject to finance.

If developers see off-the-plan sales fall through because buyers don’t have finance, they may have to re-market the units and may not be able to achieve the same prices.

“I think developers are trying a bit harder to qualify their buyers before they sell,” Mr Kalus said.