Non-Bank Lenders Explained
This article is part 1, part 2 can be found here.
Non-bank lenders have been squarely in the spotlight ever since the Reserve Bank of New Zealand doubled the LVR requirement for buying an already existing property as a rental.
The RBNZ was compelled to make this move because in order to increase inflation to the level it is mandated to do so it was going to have to cut interest rates, which has since come to pass. In a heated market lower lending rates is rocket fuel to house prices, hence the artificial hurdle we now have. This implies also that the RBNZ didn't see the property market cooling off on its own very soon, the fundamental drivers of strong population growth, not enough new housing and very low-interest rates have not changed.
Anyway, the central bank can only dictate terms to registered banks and as you have undoubtedly seen by now, there are other companies out there who lend on housing.
The original article became so large that I've had to split it up and this is part one. Over the next couple of weeks we will cover:
- Who are non-bank lenders? (this article)
- Case studies of investors using non-bank lending
- How new build finance works
Who lends money on property in New Zealand
I was in Tauranga a couple of weeks ago and I sat down to speak with David Hart, one of the directors of Mortgage Supply and I asked for a snapshot of what lending options there are in New Zealand for property investors.
1. Registered Banks
A registered bank operates under rules set by the RBNZ, whose primary function is to maintain stability in prices (read: inflation). Banks must follow RBNZ policy (such as LVR restrictions and responsible lending rules) and issue quarterly disclosure statements.
Main players: A complete list of registered banks in New Zealand is listed here. For residential investment purposes the list is traditionally: ASB, ANZ (largest lender), BNZ, Westpac, TSB, Kiwibank, The Co-operative Bank and SBS.
Most common loan product: Secured house loans as first mortgage.
Loan length: Typically up to 25-30 years.
Lending rates: For first mortgages, OCR + approx. 1.5-2.5% depending on term. Currently, rates sit between 4-5% depending on the lender and loan length. Loans can be floating or fixed for periods between 6 months and 5 years (although some banks offer special longer term rates).
Current LVR rules:
- Existing residential investment: 60%
- Own home: 80%
- New build residential: 80%
The above LVR restrictions are intended to be applied across your entire portfolio with the bank you seek lending from.
2. Near Bank (AKA "Second Tier") Lenders
It may be easier to think of these as “1.5 tier” lenders because there isn’t really that much of a gap. They have their own large funding lines and function like a bank with regards to evaluating and approving a loan, with slightly higher carded rates.
These lenders have traditionally serviced a few large groups:
- Business owners and self-employed people whose incomes don't match with the mainstream banks “one size fits all” criteria for evaluating income
- People with a black mark against their credit rating
- People who want to borrow at a higher LVR than a regular bank will lend on
There are some limitations on how much they will lend on a house, however, that is well over $1million in most cases and should not affect the majority of investors. Non-bank lenders do not currently need to adhere to RBNZ LVR restrictions, although are mindful of them and do operate under all other regulatory requirements, especially the responsible lending code.
Main players: Currently Resimac and Liberty.
Most common loan product: Secured house loans as first mortgage.
Loan length: Typically up to 25-30 years for first mortgages, 1-5 years for other lending.
Lending rates: First mortgages: Usually 0.5% higher than mainstream banks for owner occupiers and 1% higher for investors
Current LVR policy:
- Resimac: 80% lending on first mortgages (although they can go higher). [Sep 21 Update] Resimac today released a statement that they are wary of having too high a proportion of investment properties on their books and are asking borrowers to bring over their home loans also. Contact your broker about this for details.
- Liberty: 70% lending on first mortgages
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3: “Third Tier” (Asset Lenders)
Some main players: DVR, Cressida Capital, Avanti Finance, Southern Cross Finance
Common loan types: Short term (1-2 years) financing to achieve a specific investment goal such as a renovation or property conversion (i.e., fixing a leaky home).
- Priced to the loan required and risk level (security). Upwards of 7-8% is typical and it can go to credit-card rate levels
- Usually, come with a high loan processing fee and brokers will charge a fee as the lender generally does not pay commissions to the broker
LVR restrictions: N/A
These institutions typically do not seek a long loan period because they know that with the rates they charge their risk increases with time. That shapes how they lend and they usually seek to be "in and out" in a defined time span.
Personal Loans or JV Loans
I won’t dive too much into how these work because it is up to the individuals involved. Everybody has heard stories of family and friend lending gone wrong so here are some best practices:
- Have a lawyer draw up a loan agreement and repayment schedule
- Agree on an interest rate and late fees. Remember you pay income tax on interest earned so make sure you cover your own costs
- Agree on early and late repayment scenarios
- Be clear on how the loan is secured, if any (a caveat on a property is common)
- Keep it as short-term as possible, these things can interfere with personal relationships if they drag on!
In a market where there is still clear upside if you buy well, a "resimac" rate of 5.5% is still lower than almost any other bank rate in NZ history. If you buy well or improve your property you should plan on being able to refinance back to a main bank in the medium term. So a non-bank lender like Resimac offers a trade-off, secure the property for half as much capital as a standard bank and pay a slightly higher rate in the interim. In Part 2 I will share a number of case studies and examples of how investors are using non-bank lenders effectively in today's market.
One thing that has become clear to me in the last few weeks is that Mortgage brokers are even more valuable in a "high bank LVR" world. With alternative lending now more important for investors, I could make a lot of calls and put my own funding package together, but I’d rather be out there chasing the next property deal and I can't keep tabs on different banks nearly as well as the professionals.
Mortgage brokers are going to become more and more useful as they simplify everything. From the perspective of an investor, I fill in a single form and enjoy the massive added benefit of having someone shopping around for the best rates for me, so I can keep my focus where it needs to be - in the property market.
PART 2 (case studies)
David Hart from Mortgage Supply contributed to this article.