Non-bank mortgages: Not as scary as you might think.

You may have seen in the news recently that there's been a huge uptake in non-bank lending in New Zealand over the past year or so. I've certainly seen the need for non-bank lending increase amongst my clients. Over the past six or so years the general feeling amongst my clients when the need to consider non-bank lending has arisen has been one of caution or flat-out unwillingness to look at it - and fair enough, it's not an area most Kiwis have experience or understanding in, and historically non-bank interest rates have been much higher than what banks offer. So, what's changed?

It's probably worth explaining what a non-bank lender actually is. In the lending world, we refer to three different tiers of lenders:

First tier

First-tier lenders are banks. They typically offer the lowest interest rates, their products and services are typically not the only service they offer, and long-term lending (i.e. 30 year mortgages) are the norm. Generally speaking, this is where all mortgage holders want to be, but lending rules are strictest and, particularly with the recent CCCFA changes and a tightening in bank appetite to approve lending, loans can often be harder to obtain and there can be a lot of hoops to jump through.

Second tier

Generally speaking, these lenders offer long-term 30-year mortgages with lending options not that indifferent to what first tier lenders offer, with loans still being fully assessed much the same way as banks operate. The key difference is that these lenders often charge a slightly higher rate in exchange for being able to be more flexible with their lending criteria and take on a little more risk. So, for example, a bank may say 'no' to an application because they won't rely on someone's work bonus or overtime as income, as an example, but a second-tier lender may be willing to accept this, which can be the difference between a deal working and not. There are a large number of lenders in this space, and all typically specialise in their own niche areas, with rates often around 1% (ish) higher than first tier lender interest rates.

Third tier

This is generally short-term specialist lending for people requiring out-of-the-box solutions. Often this lending is considered high-risk by the lender, so rates can be a lot higher than first-tier lending. Bridging finance fits into this category.

So, now you understand the difference between the different lender types, why has there been such an uptake in second tier lending? Well, the answer is fairly simple. Banks have been hard-hit by the CCCFA changes, interest rate rises and also just a general softening in appetite to take on higher-risk loans, which has resulted in a lot of people being unable to get quite reasonable lending requests across the line. Second tier lenders have stepped up to help, with flexible solutions often making the difference between a 'yes' or a 'no' to an application.

Second-tier lenders have been particularly helpful in coming to the rescue of clients that had committed to buying a new-build investment property one-two years ago, and were then finding that banks weren't approving their lending as they now deemed it to be unaffordable. I've had a handful of clients where we've been able to provide good, practical long-term lending solutions to ensure they've been able to settle on their property commitments.

The funny thing is - in many instances, second-tier lending is actually cheaper than first-tier options at the moment. Non-bank lending isn't as tied to the OCR as first-tier lending is, so rates haven't risen as sharply as they have with banks. A prime example is a loan I've just recently processed - main bank floating rates were around 6.84%, and the second-tier floating rate for my client was 5.89%.

So - just because your bank may say 'no', it doesn't mean there isn't an affordable, practical solution out there for you.

It’s worth noting this isn’t personalised financial advice, and is intended as an informational guide only. Do not act on anything contained in this blog without first seeking independent financial advice that takes your personal goals, considerations and position into account.