Home Loans: Non-confirming loans

Over recent years, new participants have entered Australia's lending market offering loan alternatives for those borrowers who don't qualify for loans from mainstream lenders such as banks, building societies, credit unions, finance companies and mortgage originators.

This alternative market is also called the 'sub-prime lending' or the 'non-conforming loans' market.

In the past there have been limited choices for such borrowers, with finance companies and solicitor-backed loans being the only alternatives.

Out of this market has grown the 'low-doc' loan, offered to self-employed borrowers and others who are unable or unwilling to supply full documentation of their income.

Low doc loans have exploded since 2003 and some estimates suggested by mid 2004 that they account for 10 per cent of all new home loans.

Other categories of the non-conforming market include loans for those with a poor credit record and new arrivals in Australia, non-residents and retired borrowers.

Prospective borrowers need to carefully weigh up the pros and cons of this alternative avenue of finance.

In order to lend to such borrowers, lenders charge a higher interest rate in recognition of the greater risk.

This may amount to thousands of dollars over the life of a loan.

Lenders usually also impose stricter repayment conditions or may require financial counselling.

However, one or two years of on-time loan repayments under these arrangements helps demonstrate creditworthiness and establish a good credit record.

Borrowers previously failing to obtain funds using traditional forms of finance may use the alternative loan market to regain access to mainstream sources of credit.

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