Hannah McQueen is a financial advisor, chartered accountant, personal finance author, and founder of allow me – financial strategy and coaching.
OPINION: One of the workarounds that has been suggested since tough new lending rules began to make it harder to get a mortgage is second-tier lenders.
In my experience, this may provide a useful alternative – but mentioning “second tier” may elicit an interesting response from some people.
The major banks feel familiar, while to most people the tier-two lenders seem like an unfamiliar quantity. Are they loan sharks? Are the interest rates exorbitant? Is this the Wild West of the lending landscape?
Let’s start the beginning. Second-tier lenders are a subset of “non-bank” lenders that do not require a Reserve Bank license to operate.
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The public cannot deposit money into an account or term deposit with them, so they must raise the funds that enable them to lend money in other ways.
They are a disparate bunch – different second tier lenders focus on different types of loans. Some specialize in business loans, consumer loans, debt consolidation – and some, like Bluestone, Resimac, Pepper Money and Liberty Financial, focus on residential mortgages.
Typically, second tier lenders charge application fees and other fees when withdrawing the loan, which you are probably not used to when dealing with banks.
These fees can vary widely – from a few hundred dollars to one to two percent of the loan amount, which can be in the thousands. These costs are added to the mortgage, rather than paid in cash.
Also, if you’re conditioned to the idea that the bank offers a cash contribution when you take out a mortgage, that’s not on the table with a second-tier lender.
Interest rates tend to be higher because the loans they make are considered riskier, but often the difference is negligible.
For example, at the time of writing, a one year “special” rate at our largest bank ANZ if you have a 20% deposit is 3.85%, while a one year fixed rate at the lender of second level Bluestone is 4.49% cent.
So it’s higher, but not exorbitant. The riskier you are as a loan finder, the higher the rate – much like the premium banks often charge for low deposit loans.
In the past, the typical scenario where you considered a second tier lender was when you had a bad credit history, but credit agreement and consumer finance law rules make it more of an incentive to explore the option.
For example, I’ve had clients who, at age 58, wanted to purchase a $750,000 investment property that would require an additional $200 per week.
They had a mortgage-free house and a surplus of $1,000 a week, so heaps of equity and strong cash flow. They wanted a $650,000 mortgage. One bank only loaned them $550,000, while a second offered them $650,000, but wanted it repaid within 12 years, making repayments unaffordable.
So we looked elsewhere. A non-bank lender agreed to lend them the $650,000 interest-only for 10 years, making the cost of owning the property comfortable.
The interest rate was only 0.25% higher than that offered by the bank, but the lender charged a fee of 1.5% of the loan amount, which was added to the loan.
Sure, that’s a real cost, but the alternative was that the sale would fail and they wouldn’t be any closer to resolving their pension gap.
Non-standard applications can also be difficult to get approved by the bank.
For example, a client wanted to subdivide his property. They had ample cash, sufficient equity and only needed the loan for about a year before the section was sold and the loan paid off.
The transaction was going to bring them a decent profit. But three weeks and dozens of emails and phone calls later, there was still no firm offer from the bank, except for an indication that interest rates would be higher. higher than those available in a non-banking alternative.
Customers were nervous about using anything other than a bank, but ended up feeling so frustrated that they were willing to explore other options.
They ended up with better repayment terms and a lower interest rate from a non-bank lender – and were relieved to be able to move forward in a fraction of the time.
I am not an attorney for any bank, or any non-bank for that matter. I’m all for getting the job done, and sometimes, especially in today’s environment, that can force you to explore unorthodox solutions.