Lending gap between mainstream and non-bank lenders closing as interest rates rise

12 August 2022
Lending gap between mainstream and non-bank lenders closing as interest rates rise

Commercial property developers should shop around for finance as Reserve Bank interest rate hikes mean the cost of lending from a non-bank lender becomes a more favourable option.

Omega Capital General Manager Noni Martin says the gap between the average cost of lending by mainstream lenders versus non-bank lenders has narrowed considerably over the past two months.

“When you look at the pace that the mainstream banks have tightened their lending conditions and increased their interest rates, you can clearly see a more measured response from non-bank lenders to inflation and deteriorating property market conditions.”

She says previously the cost of non-bank lending saw property developers exhaust most of their banking finance options before even considering a non-bank lender. But, now the narrowing gap between the two is prompting developers to weigh up the possibility of alternative finance sources from the start.

“When you take that price difference into consideration alongside the flexibility you get through a non-bank lender and then the shorter time horizon to draw and then repay a non-bank loan, it becomes an attractive option for developers,” says Noni.

She says many non-bank lenders aren’t as heavily impacted by the Reserve Bank’s Official Cash Rate rises and their lending rates are now more competitive with the mainstream alternatives.

“Many non-bank lenders aren’t borrowing to fund their loan books; they are sourcing their money from high-net-worth individuals and institutional investors,” says Noni.

“While competition and an overall lack of funds means non-bank rates are rising too, their cost of funds is not directly affected by the Reserve Bank’s rate hikes, and they are becoming a relatively more affordable option for commercial property developers.”

She says mainstream banks are also facing a shortage of qualified property specialists, many who shifted to the private sector non-bank lending market during the property boom.

“A shortage of specialist staff means commercial property borrowers are also struggling to get the service they need out of the mainstream banks and facing long turnaround times to access lending,” says Noni.

Tighter lending restrictions on commercial property lending continues to be a challenge when borrowing from the mainstream providers, says Noni.

She says that they are still seeing many transactions that would have comfortably qualified for Bank funding six months ago but have been declined in the current environment.

“With all of this in mind, property developers should be shopping around and weighing up the average cost of lending between mainstream and non-bank lenders. They may find the flexibility and speed of a non-bank lender is worth the difference,” says Noni.