How Real Estate Private Lenders Can Help Borrowers Amidst Rising Interest Rates

blocks of rising interest rates

For the first time in decades, fears of high inflation levels and rapidly rising interest rates are weighing on the minds of traditional lenders. The rising cost of labour, energy, and raw materials are putting pressure on banks and asset managers thus creating uncertainty in the market. Statistics from around the world in 2022 make for a stern warning.

In June, the United States and the United Kingdom saw inflation jump to a staggering 9.1%. According to Reuters, figures for the June quarter due later this month are likely to show that Australia’s inflation is already around 6%.

The latest data from the Australian Bureau of Statistics revealed that the Consumer Price Index (CPI) rose 2.1 per cent in the March 2022 quarter and 5.1 per cent annually. In July, the Reserve Bank of Australia (RBA) raised interest rates by another 50 basis points to 1.35%. This interest rate increase followed June’s 50-bps and May’s 25-bps hikes. Westpac chief economist Bill Evans noted sentiment had now tumbled almost 20% since December.

With the gloomy economic conditions, institutional lenders will be subject to increasing regulatory oversight. Private lending, on the other hand, will continue to grow away from the traditional banking industry.

The rising interest rates changes the game for borrowers but at Vado Private, we believe the market will favour those who stay disciplined and remain true to their underwriting principles.

So how does Vado Private differ and how can your clients benefit?

We Don’t Conduct Serviceability Tests

We don’t assess a borrower’s capacity to service and amortise a loan over a 15-30 year loan term. Accordingly, net profit figures, living expenses and other servicing metrics don’t impact an application.

Instead we focus on:

1. Ability to meet the interest payments for the terms of the loan (supported by an accountant’s letter).
2. Ability to identify a palatable exit  strategy to repay the principal on or before the loan maturity date. 

Private Lenders Are Not Impacted by Regulatory Changes

Credit will tighten and there’s a great chance for regulators to step in and impose further restrictions and covenants on the banks. This means that banks that once dominated the landscape with their size and scale will likely grapple. There is evident increase in regulatory oversight and a heightened focus on returns on economic and regulatory capital.

As borrowers continue to look for competitively priced debt, this would trigger a dislocation of the Australian loan markets. Private lenders are now at the forefront of those who can fill the consequential gap between supply and demand.

Throughout the pandemic, Vado Private has demonstrated a spirit of partnership in working with borrowers as they seek to manage the impact of rising interest rates. Outcomes may still be incredibly uncertain. Majority of these borrowers use private debt simply because they understand the true cost of time and capitalising on opportunities.

If you are currently looking at options, contact us to start a confidential chat.