The Benefits of Second Tier Lenders
When potential customers hear that they may qualify for second tier lending to fund their property or project, they often instantly think the worst. I regularly hear remarks such as “Why am I not good enough for a main bank like ASB, BNZ, Westpac or ANZ?” and “How much are the fees going to be? Isn’t the interest rate significantly higher?” Many clients in this position want to know if there are catches, and how these lenders get their funding. Some even want to know more about the lender themselves as they haven’t heard of them before.
However, finding out that you could borrow from a non-bank lender like Resimac, Avanti, Select, Bluestone or Basecorp can actually be good news and a stepping stone to realizing your financial dreams! I’m going to play myth buster here on second tier lenders and run through why they can be a perfect solution for a number of situations.
Firstly, non-banks love good security. This could be an asset like your family home, or one of your investment properties. A number of these companies only look at the fact that you have equity in your property so that if the worst case scenario were to arise, the exit strategy would be to sell the security. Their primary focus is on what you can offer as collateral as opposed to can you repay this lending in full over the next 20 to 30 year period like the main banks, which of course comes with stringent affordability and/or servicing standards.
These lenders are typically a bit more expensive and are traditional asset lenders who do not test servicing at all. Interest rates are around 8 to 9% with establishment fees of 1 to 2%. They’re ideal for a bridging solution where you have a problem that needs a short-term fix until you can find a more permanent solution like selling your house. The cost can be a bit more expensive with a 2% establishment fee, however it is better to pay say $40,000 in fees, than be forced to fire-sell a property which could result in a loss of $300,000.
Many people looking to buy are in between jobs, they may not have a steady income, might have just started a new company that doesn't have a full set of financials yet, or possibly have had a few troubles keeping up with GST and PAYE due to their rapid expansion and using government funds to buy more product or stock. Main banks can struggle with these situations and deem them too high risk to lend. This leaves them on many occasions unable to offer appropriate solutions that suit that customer’s needs and situation, and ultimately unable to lend to these clients. A number of non bank lenders like Resimac however, can accept or mitigate these risks. They also assess loan serviceability based on interest-only, instead of principal and interest, which effectively gives the customer more borrowing power. As a general rule these options like Select, Bluestone and Resimac are on the less expensive end of the spectrum with interest rates around the 6% (plus minimal establishment fees) depending on the loan to value ratio and what the customer can provide as evidence of income.
When assessing working capital facilities, traditional lenders can be very demanding when it comes to the paperwork and proving what the customer is going to spend the money on - there needs to be a very good reason for borrowing. In the non bank space however, this is much less restrictive and the customer does not have to justify every little detail.
We all know that life can be tough sometimes and we all face challenges that can cause us to struggle financially. But the good news is that even when this happens, it doesn't mean that it’s impossible to get a home loan! I often come across things like an old car loan showing as being in default but paid, a telecom bill showing in collections but has actually been paid, or an old bill outstanding with a collections company with an ongoing dispute. Non banks lenders can look past this and still approve funding even if you are in dispute regarding a particular collection on your credit report.
Yes, non-bank providers may charge additional fees and the interest rate may be slightly higher, however if this is built into your costings and budget, and it results in acquiring that new asset or completing that project that will in turn provide you with that financial freedom, it could be well worth the marginally higher cost. Many of these lenders will also let you build any extra fees into the loan itself so you don’t have to come up with any up front payments, which can make things more manageable. Ultimately it all comes down to the opportunity cost, but in my professional opinion there are so many benefits to second tier lenders that enable many customers who would be unable to borrow otherwise to build their property portfolio, get into their first home or finance a much needed asset.
If you've been told "no" by the banks, speak to our team about how a second tier lender might be right for you! Click here to book an appointment.
