As the big banks clamp down construction lending amid fears of an overheating housing market, third-tier lenders have stepped up to rescue cash-strapped developers who are in danger of dragging out their projects by at least six months.

"Banks are not doing anything at all, it's quite a problem for the sector," said Michael Holm, executive chairman of the largest Australian non-bank commercial loan manager, Balmain Corporation. "So at the moment, we are really seeing good returns on loans in the low loan-to-value range."

Balmain is following the high interest rate - low LVR strategy, wherein developers have to produce as much as 50 per cent equity before lending is considered. This goes against the banks' model of lending large parcels of money on lower interest rates. Balmain prefers smaller developments in strong suburbs, as well as projects in growth corridors where there is a proven demand for housing.

But despite the huge fees, Melbourne-based Chinese group lender Zank & Co. said its loans had been a 'good thing.'

"One client's mortgage application was rejected by a bank two weeks before the settlement date. He could not find any other financial institution that would release funds in time. We helped out this client with the settlement," a spokesman said. "We also lent to a commercial property developer at the construction stage. Their capital was partially freed up to fund the next project."

Other known lenders include Chifley Securities, Short Term Advantage, Northwest Commercial, and NWC Finance. The actual number remains unknown because it is still an unregulated sector.

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