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Who are non-bank lenders and some examples of folks using them

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  • Who are non-bank lenders and some examples of folks using them

    Howdy PT'ers

    Below are a couple of articles I wrote about non-bank lenders, part one is a run down of who is out there and part two has some case studies. There's a third one still to come on new build finance. I hope these are useful for some folks on PT in these confusing times.

    Cheers

    Nick

    ####


    Part 1:

    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. Overall we will cover:
    1. Who are non-bank lenders? (this article)
    2. Case studies of investors using New Build Lending
    3. How new build finance works (still to come)


    First lets look at 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.

    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:
    1. Existing residential investment: 60%
    2. Own home: 80%
    3. New build residential: 80%


    The above LVR restrictions are intended to be applied across your entire portfolio with the bank you seek lending from.

    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


    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).

    Lending rates:
    • 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


    Characteristics:
    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:
    1. Have a lawyer draw up a loan agreement and repayment schedule
    2. Agree on an interest rate and late fees. Remember you pay income tax on interest earned so make sure you cover your own costs
    3. Agree on early and late repayment scenarios
    4. Be clear on how the loan is secured, if any (a caveat on a property is common)
    5. Keep it as short-term as possible, these things can interfere with personal relationships if they drag on!


    Summary
    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 How Investors are Using Non-Bank Lenders

    Today’s article is Part 2 of our mortgage series, specifically focusing on non-bank lenders. This is aimed at investors who want to take advantage of low-interest rates and strong population growth yet feel cut out of the market by LVR restrictions recently put in place by the Reserve Bank.

    In Part 1, we looked at the different types of lenders in the market and what they can offer. Today I am sharing some examples of what this looks like “in the wild”.

    I checked in with Peter Norris at Squirrel for his take on alternative lenders.

    "The biggest reason for using the non-bank has been deposit size. These companies are not subject to the rules and therefore are able to lend at up to 80% for rental properties, which means clients are able to get 1-2 more for their portfolio or even just get one when they thought they couldn’t. Interest rates for these aren’t too bad at all with most sitting around 5.5%. Even if this was to be long term, it's not a bad rate and is certainly manageable. The exit strategy is the client getting to 60% LVR and moving it to a main bank. This would be through renovations or through general capital gains."

    Peter's comment about the rate is bang on, it is easy to look at alternative lenders and declare them “expensive” because their interest rates are a shade higher than banks and forget that the current carded rates for Resimac are cheaper than just about any lending rates in New Zealand’s modern history.

    Let’s dig into some actual case studies to see just how people are leveraging non-bank lenders.

    EXAMPLE 1: Buy and hold with a Non-Bank lender
    Resimac’s carded rate for 5 years is about 5.5%. ASB’s special rate at the moment is 4.7%. There are two very important things to realise before wringing your hands over not getting the lowest possible rate…

    Resimac’s rates are very, very, very low. As far as I know the only rates lower in recent history are the mainstream banks current rates. If you were offered a rate in the 5’s at any time before 24 months ago you would have jumped at it.

    This difference in lending rates (on first mortgages) is a lot smaller when compared to the relative value increases when you improve a property or through capital gain.

    A difference of 0.075% amounts to $3,750 extra per year for a $500,000 loan. Interest is tax deductible so at a 30% tax rate the actual difference is closer to $2,500. If the property goes up in value MORE than $2,500 or half of a percent in that YEAR, you are ahead and that capital gain becomes equity which means you can eventually refinance back to a main bank.

    I am not saying “blindly trust capital gain”, you still should ensure you can cover the holding costs on that property from rental income received, yet historically property prices have risen on average in New Zealand by around 5 - 7% each year.

    EXAMPLE 2: Buy a property a bank won’t lend on and fix it
    This is a true story from David Hart at Mortgage Supply; a couple wanted to buy their first home in Tauranga and the market was rising rapidly. They found a leaky home that was available at a significant discount, $450K vs $650K for surrounding homes. At a repair cost of $100K, this looked like an opportunity. The problem was none of the main banks would lend on a leaky building.

    In this case, even Resimac turned their nose up at the property, so David arranged a third tier lender to fund them for the property through the reno. You'll recall from Part 1 that most 3rd tier "Asset Lenders" are looking for short-term projects. The buyer went through with the renovations, the house was passed by council and was able to get mainstream lending to take over the loan.

    The numbers:
    • Interest: 12mo at 8% on $450K + $1K in fees: $37,000
    • vs Bank: 12mo at 5% on $450K, no fees: $22,500
    • $37,000 - $22,500 = $14,500 extra paid on interest for 12mo
    • Equity created: $100,000


    Because the property was now worth $650K and was their own home, the bank offered up to 80% LVR ($520K) on the finished house, so with a total spend of $550K to date (plus interest, but they lived in the property so saved on rent), they effectively secured a home with only $30K of their own cash.

    Great result.

    EXAMPLE 3 – Buy a property and add value

    Peter Norris from Squirrel sent through this example; at Christmas last year a client of his purchased a house in Forrest hill, North Shore for $630,000 (CV $570,000). The property was in a run down condition ready for a full renovation.

    After an "extreme makeover" renovation which cost $63,000 and included adding a third room, the property was revalued at $860,000 in February 2016, which translates into a net equity increase of $167,000 for two months’ work.

    The client borrowed 80% of the purchase price and funded the renovation himself. At the end, the LVR was 58% which allowed him to get it back to a main bank (at the time Auckland was 70% LVR) and pull back some of the cash they put in.

    Summary...
    The actual “pain” of having to pay a slightly higher rate for a short while to secure a good investment is negligible over the life of owning the asset. Investors should have a plan to move to a main bank and a timeline in mind before they purchase and discussing that with a mortgage broker is a sure way to go.

    What’s more, it is a painless opportunity to explore! Simply contact a mortgage broker and fill in an application form, it is no more complicated than it would be going directly to a bank, easy.
    Last edited by Nick G; 24-09-2016, 01:31 AM.
    Free online Property Investment Course from iFindProperty, a residential investment property agency.

  • #2
    Awesome post mate. According to some figures non Bank applications up 300% since July. Pre GFC this market was estimated at $80 million a month. I wonder what it is today.
    www.ilender.co.nz
    Financial Paramedics

    Comment


    • #3
      Any special reason you've skipped over Credit Unions? One example here.

      Comment


      • #4
        Oh nice catch, I'll go back and add that in when I can, thanks.
        Free online Property Investment Course from iFindProperty, a residential investment property agency.

        Comment


        • #5
          Nice post Nick, thanks for posting. I currently use asset lending for trading but find that this is fairly risky due to the current Auckland market I work in fairly slow, I am taking a very cautious approach to buying anything as profits can diminish very quickly at a 9% interest rate. What are the chances a 2nd tier lender would lend short term?

          FH
          "DEBT BECOMES IRRELEVANT WITH INFLATION".

          Comment


          • #6
            You'd probably want to go direct so you don't pay broker fees. There will likely be some sort of a sting for selling early but it should be less than the 4% delta on bank rates, right? They'll have it all documented. Or if you also take your PPOR over maybe they'd waive that since they keep some lending.

            I think you want to have a plan B regardless and line that up at the start, so if you can't sell within 20 - 30 days can you refi to a 5% rate lender and hold in the meantime? A few years ago I held a property empty for a few months while my former parter tried to sell it and it's even less fun in reality than it sounds.

            Shameless promotion >> we work with a few traders to sell their properties and it works quite well because we usually only need 2-3 weeks or so. Many traders will give us a listing towards the end of their project for a few weeks until it's done, tidied up and staged etc. After all, trading is about speed.
            Free online Property Investment Course from iFindProperty, a residential investment property agency.

            Comment


            • #7
              Originally posted by Frezzinghot View Post
              Nice post Nick, thanks for posting. I currently use asset lending for trading but find that this is fairly risky due to the current Auckland market I work in fairly slow, I am taking a very cautious approach to buying anything as profits can diminish very quickly at a 9% interest rate. What are the chances a 2nd tier lender would lend short term?

              FH
              Nick beat me to it! Non Bank lenders (2nd tier) won't deal directly with the public, only via the broker channel and like the Bank they have 27 month clawback periods in the commission terms so any Broker arranging this ends up working for nothing. Plus the lender ends up losing money too hence short term loans costing 8% plus and fees, everyone likes to win!
              www.ilender.co.nz
              Financial Paramedics

              Comment


              • #8
                Originally posted by brokerman View Post
                Nick beat me to it! Non Bank lenders (2nd tier) won't deal directly with the public . . .
                Not sure what tier Credit Unions are on, but they will deal direct with the public. There's only a handful of CUs left, now, though.

                Comment


                • #9
                  Or lawyer loans and peer to peer lending - worth a mention too?

                  cheers,

                  Donna
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                  • #10
                    Originally posted by Perry View Post
                    Not sure what tier Credit Unions are on, but they will deal direct with the public. There's only a handful of CUs left, now, though.
                    Good point however same scenario, if they lend at close to bank rates and the loan is repaid within months, they lose money.
                    www.ilender.co.nz
                    Financial Paramedics

                    Comment


                    • #11
                      Originally posted by donna View Post
                      Or lawyer loans and peer to peer lending - worth a mention too?

                      cheers,

                      Donna
                      Yep, nominee money at mid 7's with 1.5% to 3% fees. Peer to peer not really into First's......yet!
                      www.ilender.co.nz
                      Financial Paramedics

                      Comment


                      • #12
                        I looked at an outfit recently that offered second mortgages through peer-to-peer lending. A more boutique offering than Harmoney/Squirrel and lower rates - not a fee mill.

                        It all looked really good until I saw in the fine print that I was unlikely to get funding unless I made all of my details available to all of their registered lenders. There was a 1% penalty on the interest rate if you chose not to disclose and a warning that not disclosing was offputting to the lenders.

                        Fair enough the eventual lender getting your name, but all registered lenders? It was a deal-breaker for me and I didn't finish the application process.
                        My blog. From personal experience.
                        http://statehousinginnz.wordpress.com/

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                        • #13
                          Recent examples of non Bank solutions

                          1. First home buyer 90% LVR with $45,000 consumer/car finance. Serviced well and genuine savings via Kiwisaver
                          2. Refi of two investment properties to 80% for Kiwi living in Australia to fund build over there
                          3. Purchase of rental property to 80% using topup with current Bank on owner occupied for deposit
                          4. Refi of owner occupied to 80% to clear consumer debt and IRD

                          Banks would not do any of the above
                          www.ilender.co.nz
                          Financial Paramedics

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