Private lenders (or investors) in today's market need to look strongly at the borrower's ability to repay the loan. It is simply not enough to think "well, there is security, we can whack on a caveat if it goes wrong." They need to look at their overall strategy with lending as well as each individual deal.
On a business-wide scale, we recommend the implementation of a Risk Appetite Statement.
Private Lenders and Risk Appetite
As a private lender, you may do hundreds (or dozens, or one) deal a year; it may feel completely unnecessary to prepare a risk appetite statement and review it regularly. It is nevertheless, like a business plan, crucial part of your business strategy and without it, things can go amiss.
Things to consider in your RAS:
- liquidity issues - how much money do you need in the bank at any given time and what happens if funds from your borrowers are late? Are you capitalising interest or receiving regular payments? Are your maturity dates linked to the development being finalised?
- how often you will monitor this document and your policy and when the next review date is
- what are your fraud and corruption review mechanisms - verification of identity, references, auditing, etc
- cyber-attack risk and relevant insurances and policies
- what is your due diligence process and how strongly do you adhere to it
- have you over invested into one particular borrower or their developments?
A part of the due diligence process needs to include the following:
1) paying careful attention to the documents the borrower has provided you. We ask to look at their financial documents and/or tax returns. We review the information posted with ASIC and obtain a credit rating for the borrower (if they are a company). We prepare solicitor's certificates if you are taking a personal guarantee and liaise with their solicitor to ensure the document is promptly and properly executed.
2) the short term risk versus reward. With the advent of PEXA there is no reason why second or subsequent mortgagees ought not be registered mortgagees. Banks will make the title available when there is an appropriate Priority Agreement allowing the registration of your mortgage. If you are refinancing the property, even for a few days, there is no reason not to pay out the old mortgagee and be registered on title.
What we can do for you:
1) title searches and title alerts
2) searches from public register including the council valuation, PPSR, planning, etc
3) organising an independent valuation of the security property - and being careful to make sure that what is being valued is in fact what is on the ground at the time
4) reviewing leases and how that may affect your rights as mortgagee
5) if the property is a part of development, reviewing the planning restrictions/uses upon your instruction
Due diligence is a part of the service that we offer a private lender. We prepare all the relevant documents for transaction and attend to the registration of the relevant security. Speak to us now about your personal or private lending matter.
