All home loans are mortgages, but not all mortgages are issued by banks. Last year in New Zealand, around 1.6% of mortgages were issued by non-bank lenders. While that’s not a huge amount, it’s still a large sum of money: $67m from a total of $4.2bn.
But what are the benefits of borrowing for a home from a non-bank lender, and are there any additional costs involved? Canstar explains the pros, cons and costs of non-bank mortgage lending in New Zealand.
What is a non-bank lender?
There are 27 registered banks in New Zealand. This means they can hold people’s money and offer accounts such as savings and transaction accounts and term deposits. All NZ banks are registered with the Reserve Bank of New Zealand (RBNZ) and are highly regulated to ensure their customers’ money is in safe hands.
Non-bank lenders are financial institutions that offer credit and loan products, such as mortgages, that are not funded by other customers’ deposits. Instead, non-bank lenders rely on wholesale funding markets, securitisation, private investors, and other sources to finance their mortgage lending activities. While non-bank lenders still have to comply with the Credit Contracts and Consumer Finance Act (CCCFA), which promotes responsible lending, they are far less regulated than banks.
For example, their lending doesn’t have to comply directly with loan-to-value ratios (LVRs), which limit lending to people with low deposits. And non-bank lenders won’t be affected by the RBNZ’s proposed debt-to-income (DTI) restrictions.
Although non-bank lenders are subject to the same regulations as other borrowers when securing warehouse funding from NZ banks.
→ Related article: What Are Debt-to-income (DTI) Ratios?
Because non-bank lenders have more flexibility in their lending procedures, they are often more accommodating of home buyers who have been rejected by the big banks and their one-size-fits-all approach to mortgage lending.
For example, when authorising a home loan, a bank will delve into an applicant’s employment history. If the applicant is self-employed, the bank will want to see their financial accounts for at least two years, and will check to ensure all their tax liabilities are up to date. Also, the bank will use the applicant’s lowest-earning year as the benchmark for their borrowing potential. This can cause problems for self-employed home buyers.
Non-bank lenders are also more willing to lend to borrowers who have less-than-perfect credit histories, and those with unique financial circumstances.
However, this greater willingness to take on riskier loans does mean that non-bank lenders tend to charge higher fees and interest rates than the big banks.
Advantages of non-bank lenders:
- Fewer regulatory burdens and corporate structure constraints compared to big banks
- More flexible lending criteria, for example more accommodating of self-employed borrowers who might lack the paperwork required by the big banks
- More willing to lend to those with unique financial circumstances and borrowers with imperfect credit histories
- Potential for more personalised customer service and niche product offerings
Disadvantages of non-bank lenders:
- Higher interest rates and fees
- Don’t offer the suite of financial products offered by the big banks, e.g. credit cards, savings accounts and online banking
- Lack the recognition and brand presence of the big banks
- Perceived lower financial security and safety compared to traditional banks
About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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