Obtaining finance from a non-bank lender? What you should know before you accept the initial offer of finance

A couple were struggling to secure lending from a bank to upgrade their property and their mortgage broker advised they should look at obtaining funding from a non-bank lender (often referred to as a second-tier lender).

An offer of finance was received from a non-bank lender and the couple signed their acceptance of the offer with their mortgage broker and sent a copy to their lawyer.  

Upon reviewing the offer document signed by their client, the lawyer advised that the conditions of the offer and timeframe to complete the transaction were unreasonable.  

They had been given just three working days from the receipt of the loan documents to settle the transaction; and if the couple decided not to proceed with their borrowing there were significant break fees to pay.   

As it transpired the couple decided to back out of the transaction altogether, upon having the terms of their borrowing explained to them. 

However, they had already committed to the finance company simply by signing the initial letter of offer presented to them by the broker.

Loan offer letters from non-bank lenders (that often require your signature) are complex and they record onerous obligations.  Such letters require a thorough review by your legal advisor prior to being signed by you and subsequently committing to the finance company’s loan facility agreement.  

Generally, there is a two-step process to obtaining finance.  Firstly to obtain a letter of offer for finance stating the bank or lender is prepared to have you as their customer, and the second step is you will subsequently sign the loan facility agreement.  

Note that when you receive a letter of offer for finance from a bank, you are not obliged to go through to the next stage of committing to that bank for your finance requirements.  You may choose to go with another bank altogether.

However, this is different to many non-bank lenders.  The non-bank lender’s initial letter of offer for finance will lock you in to committing to their company if you sign that letter, and it can be very costly to extract yourself once you have accepted their offer.

Here are some common features and costs for an offer for finance from a non-bank lender that will lock you in prior to even signing the loan facility agreement:

• Document fee charge – often in excess of $2000;
• Mortgage broker fee – a percentage of your borrowing, but if you are borrowing, for example, around $700,000 the mortgage broker fee can be in excess of $10,000;
• Lender fee – this can be in excess of $16,000, depending upon your level of borrowing;
• If you repay your loan within the first 12 months of borrowing, you may be charged in excess of 30 day’s interest plus a further administration fee of around $250.

(Please note that these are general examples only and such fees will differ from company to company – it is also dependent upon your level of borrowing).

These fees (excluding the last bullet-point) can often be charged even if you decide to not proceed with the finance company but you have already signed the company’s initial letter of offer for finance with the broker.  

It goes without saying that the interest rate charged on the principal of your borrowing is significantly higher than a commercial bank’s interest rate, so prior to committing to borrowing of this nature, it is very important you seek legal advice prior to accepting a non-bank lender’s offer for finance and prior to signing a letter of offer with your mortgage broker.  

Always seek guidance and advice from your experienced property lawyer to ensure you are not caught out.