Episode Summary

In this episode of the Fintech Fun podcast, Chris Titley chats with Michael Ragavan, founder of Our Leg Up, a revolutionary financial service aiming to tackle wealth inequality by making homeownership more accessible. Michael shares how Our Leg Up enables aspiring homeowners to purchase properties with just a 5% deposit, eliminating the need for lenders' mortgage insurance and providing competitive interest rates.

He discusses the platform’s unique partnership model that connects equity-rich investors, banks, and aspiring homeowners, all while mitigating financial risks. Michael also touches on the challenges of educating the market, the role of partnerships in scaling, and the company’s global aspirations. Tune in to hear how Michael’s innovative approach is redefining the Australian dream of homeownership and how AI is playing a role in streamlining the process.

Key Takeaways

00:00 - 00:17: Introduction and Michael’s live check-in from Mexico.

00:17 - 01:07: Origins of Our Leg Up – Tackling wealth inequality and barriers to homeownership.

01:07 - 01:47: The changing landscape of the Australian dream and how Our Leg Up fits in.

01:47 - 02:48: The unique partnership model connecting investors, banks, and aspiring homeowners.

02:48 - 03:25: Investor benefits and how returns are structured.

03:25 - 04:26: Geographic reach and the potential for global expansion.

04:26 - 05:43: Risk mitigation and preparedness for economic shocks.

05:43 - 06:41: Building and scaling the business with a lean team.

06:41 - 07:57: Scaling through partnerships and educating the market.

07:57 - 08:48: Leveraging AI for customer support, risk assessment, and productivity.

08:48 - 11:02: Personal interests: Soccer, drumming, and FIFA on PlayStation.

11:02 - 11:46: Looking ahead: Plans to support 50-100 property purchases in 2025.

11:46 - 12:23: Funding milestones and goals for growth in 2025.

Resources Mentioned

Our Leg Up: Platform enabling aspiring homeowners to purchase property with a 5% deposit.

AI in Financial Services: Used for risk assessment, customer support, and secondary analysis.

Basel III Framework: Underpinning the scalability of Our Leg Up across 100+ countries.

Carnatic Drums: Michael’s early foray into music and stress relief.

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Hi, it's Chris Titley here. As part of the Fintech Fun episode, I'm joined by Michael Raghavan, founder of Our Leg Up. Michael, thank you so much for joining us. And I know you're joining us live here from Mexico today.

Yeah, that's right. That's right. Just in Cancun for a few days. Yeah, thanks for the invite.

Excited to be here.

Michael, absolutely. I'm curious to know, for the listeners out there who know nothing about Our Leg Up, can you go back to the origins, the history of the business, and what it does?

Yeah, sure. So formerly I was a mortgage broker, investment banker, and an investment advisor.

I quit all that about three years ago to start building Our Leg Up. At a high level, we're on a mission to diminish wealth inequality, and the number one driver of that in Australia is not owning a home. For most houses out there, it's the largest asset, most important wealth accumulation vehicle, but there's a big barrier standing in the way.

And that's saving a 20 percent deposit. So that's why we're building Australia's surrogate bank in Melbourne. It means aspiring homeowners can purchase with as little as a 5 percent deposit, at the same interest rate as a 20% deposit, and they save on lenders' mortgage insurance. So they're getting in five, ten years faster, saving tens of thousands in the process.

Awesome mate. And obviously with COVID, we saw a bump in property prices and it has become much more unaffordable for the Australian dream. What is the Australian dream now? Do you think it's unachievable or achievable?

We see that the ownership rates are decreasing and it's essentially the first generation where we'll have fewer people own a property than their parents.

Of course, that's not great in terms of comparative wealth and financial security. But I think there are new solutions coming into the market. And what matters is which ones align with you. The government's done a few things. Banks try to help. But I think it's these new financing models and affordability models that are going to make a difference and keep the Australian dream alive.

There's a lot of moving parts to Our Leg Up, I'd assume. In terms of who the customers are, can you give a bit of a snapshot of how you've built this business and how you're going about managing all those moving parts?

Yeah, sure. So it did feel a bit complicated early on, but what we got down to was a coordination between established homeowners.

So essentially investors who are acting as part of that surrogate bank, mom and dad, lenders that we partner with. And then of course their customers being aspiring homeowners. What we end up doing is taking registered charges from the investors. And so the value proposition for them is they're able to make a return on inaccessible equity sitting in their property without any capital outlay.

So that's the world's first, and it took us 18-24 months in terms of financial engineering and all the legal hurdles. But essentially we take these charges and we allocate them to our partner lenders. So that when they go off and do low deposit lending, individually and in aggregate, the LVR of the loan sits below 80 percent and that's where they get their benefit from.

So for the banks, we allow them to offer these reduced interest rate home loans with less risk and improved margin. And of course for the aspiring homeowner, which is their customer, they're able to purchase a property for tens of thousands less because of the better interest rate and fewer fees.

Right. And from an investor point of view, are you targeting a particular number or a return, or can you do that? Or is that allowed?

Yeah, yeah, sure. So it's not a fixed income product. The return is more akin to a dividend return paid out quarterly, across cycles, it's about 4 percent per annum. In terms of who we are targeting at the moment, it's very much for sophisticated investors with equity in their property.

And then eventually, hopefully, we can make it available for retail investors, but in terms of launch, it'll be limited to that.

And in terms of the geographic spread of Our Leg Up, are you aiming to be in a particular state, city, or even potentially have global aspirations?

Yeah, sure. So we are starting off in Australia and it will depend on the footprint of the lenders that we partner with.

And so we're happy to be across the country. I've done our modeling for that. And of course, the aspiring homeowners need to pass the bank's credit policy anyway, before we're able to support the loan, because we're very much a service for the bank that ends up benefiting the aspiring homeowner. In terms of aspirations, I think there are a few things.

Sure. This is the first use case for the inaccessible equity, but we really want to be an exchange that unlocks the inaccessible equity as a force for social good. And so we're also looking at green home loans, corporate debt, commercial debt. And because it's built on the Basel 3 global banking framework, it is applicable across over a hundred countries.

Right. Excellent. And I suppose every now and then we have some macro shocks and things don't go to plan and we saw it in 2008 with the GFC and then 2020 with COVID. How are you prepared for something like this? In terms of your modeling and in terms of the understanding of the products that people have that things don't go a bit pear-shaped.

Yes, you're right. So in the Hayne Royal Commission, there was a crackdown on guarantor home loans. And rightly so because of the financial risk it placed on guarantors without any financial reward. So when we were thinking about building out this product, there were sort of two things. One, it needed to be low risk enough for us to place our parents in.

And the other one was that it needed to provide a decent return, not just charitable intent. So I think the 4 percent per annum, that's essentially across cycles and it's on lazy equity. So it's essentially 4 percent more than what you can currently get. And then in terms of the risk profile, the high-level takeaway is that 1 in 10 of the loans supported would need to default, foreclose, and must be liable for the maximum amount of negative equity for any of our investors to lose a dollar net.

And so that's a magnitude more than what happened in the US during the GFC. And it's because we've built out five key risk mitigating mechanisms. And we essentially go through that process with our investors, making sure they understand the risk profile before they sign the loan.

And Michael, in regards to building out your team and also the growth of your own business, can you talk about that, some challenges and also some wins that you may have had?

Yeah, sure. So in terms of building out the business, I mean, we've been in incubation for about three years. October 21 is when we incorporated, and out wrote us our first check. Then we did a small round off the back of that. And it's largely been that round that's been funding us all this time.

So we're pretty lean. We're about five FTEs across eight people and we're yet to generate revenue. And so, it's been quite a roller coaster of a journey. We've had to keep quite lean and have fractional employees here and there that helps spur the business along and make sure we have the right expertise at the right time, whether that's legal, financial, regulatory, or development partnerships with banks.

But we are on the cusp of monetization. So I think this idea will be in market next year and generating revenue. And so from that point on, we'd be able to scale the team out a bit more, but until then, we've been pretty lean.

And Michael, what's the ask for the community out there? Is there anyone out there that you'd like to hear, listen to this podcast that should reach out to you? What type of people are you targeting?

Yeah, sure. So perhaps a couple of things. One is that we love to talk to people, either in banks or non-banks around home lending, you could help us scale partnerships on that side.

And the other thing is, right now we're going through, we've been building out the amount of equity commitments we have largely directly. So we have about $40-$50 million worth of home loans. But we'd like to scale through partnerships with wealth managers, brokers, rental companies. So yeah, people in that space would love to chat as well.

How important is that partnership model for you in regards to the amount of people that can talk about your product, distribute your product, and understand your product and then be a part?

You're right. So one of the hurdles we anticipated was educating the market because we don't want to seem like we're selling magic beans.

Because we're not, there's of course risk involved. And it's helping someone understand that. And so right now the minimum commitment is about $250,000 worth of equity and for someone to understand that they want you to chat to them for at least sort of half an hour to an hour. We were able to get about $20 million without spending a dollar on customer acquisition, but moving forward, we're not going to be able to spend that much time for each customer.

And so we want financial advisors or brokers, essentially trusted advisories that we can educate about the products. We're able to see if it's suitable for their customers and bring them on. And we've got a referral model to make sure that everyone gets a piece of the pie for that.

And then it wouldn't be a podcast in 2024 without talking about AI, mate. AI and financial services and AI when it comes to prop tech, what's your views in terms of threat or opportunity?

Opportunity for sure. I've noticed that our developers are more productive. And just building out the platform for doing secondary risk assessment.

So that's one place we can use it. The other is of course, customer support. And then the other place is even with our risk assessment modules, being able to make those a lot more comprehensive through AI. So those are probably the three areas we're looking at at the moment.

And Michael, you're in Mexico at the moment. When you're not talking about modeling property prices or modeling yields or investments or whatnot, do you get a chance to switch off? Are you on holidays at the moment or are you working from Mexico?

That's a good question. So I'm accompanying my wife who's going to be in the US to do a research presentation.

And so Mexico was a quick stop before we went there. It is a combination between a holiday and a bit of work. That's just the reality of being a founder. Sometimes you have these natural ebbs and flows. And I think towards the end of December, start of January, there's a bit of a natural lull, so we'll take advantage of that, but otherwise generally working.

In terms of what I tend to do outside of modeling these exciting scenarios, one would be playing soccer. I've done that all throughout high school and uni. The other one's playing music, so I'm a drummer. I quite enjoy that as well. And the last one is probably, it's themed on a church.

Yes, and so on the soccer front, do you get annoyed when people call it soccer and not football?

It's a good question. I call it soccer. But I think because I'm from Australia, I do get annoyed when people call it football, because my reference for football is very different.

Yeah? What's your football? Is it league or union or Aussie rules?

Aussie rules.

Aussie rules? Yeah, no, for sure. Mine too. And then on the music, the drumming, where did that come from? A bit of early childhood?

Yeah, that's right. Around six years old, I think. Initially started out playing the Carnatic drums, and then also just regular drum kit.

And I've been playing that essentially throughout uni, even a little bit after uni, playing with the music academy, playing for churches, things along those lines. I've always enjoyed that, and I find it quite good in terms of stress release.

And what about watching soccer? Do you watch soccer or are you a soccer player?

I'll admit I'm not much of a watcher, mainly playing in real life and then also a bit of FIFA.

Yeah, right, on the PlayStation?

On the PlayStation, yes.

And favourite player or team that you play with on the PlayStation?

It's only a little bit controversial, but Real Madrid.

Oh, well, not really. I mean, it's a well-known brand, I suppose. One of the global...

It's a polarizing team.

Maybe if you're in Spain as well. And Michael, we do this interview in 12 months' time. We repeat this and look back on this interview, where do you think the business would be, and what are the plans?

Sure, so the plan is to be live in the market by the middle of the year and support roughly 50 to 100 property purchases. And so we currently have the capacity to support about 500, but I think within the six-month span, the goal is to support 50 to a hundred.

So hopefully we'll be able to look back and say we're close to breaking even at that point.

Amazing. And then on the funding front, are you looking to get some funding yourself or are you hoping to bootstrap your way through?

Yeah, it's a good question. I think that the next major milestone will be once we're out in the market.

When we initially raised about three years ago now, there were five milestones we wanted to hit. We hit those, but we got to a solid value inflection curve and then we've been raising off the back of that. And so that's due to close by the end of this year and I don't anticipate needing to raise following that unless it's for perceived growth opportunities.

Excellent, Michael. Well, mate, thank you so much for giving us an understanding of Our Leg Up, how the business began through a problem that you see, which sounds like it's not going away, and in regards to allowing people to alleviate a little bit of the cost of pressure of the cost of living as well, which is a bit of a crisis going on as well.

All the best in the coming year, a big year for you as you mentioned in regards to the launch in 2025, let's hope it's a prosperous year and looking forward to following the progress and catching up.

Definitely. Thanks. Thanks.