How Safe is it to Borrow from a Non-Bank Lender?

moneyWhen borrowing from a Bank or non Bank lender, who receives the money? The answer is obvious – the Borrower does.

So as that’s the case, then the Lender (regardless of whether its a Bank or non Bank) has the risk and not the Borrower.Interestingly here in NZ many people think borrowing from a non Bank source can be risky.

Most people in NZ can borrow from a Bank and as we have a few to choose between, it would make sense for everyone to shop around. Especially as a Mortgage is, for most people, the biggest financial commitment they make.

In reality Kiwi’s simply don’t shop around. They just go to their own ‘Bank’ and accept what is offered or if declined simply do nothing.

This is quite different in other parts of the world. In the US 90% of mortgages are sourced by independent Mortgage Brokers, in Australia it’s close to 70% and here in NZ it’s under 25%.

BANKS AS PROFIT CENTRES

All Banks here in NZ subsidise their ‘low’ rates by cross selling other products such as Insurance, Personal Loans and Credit Cards. These are not always in the best interests of the Customer, as there is no choice. Most borrowers can be swayed by the Bank telling them that this ‘deal’ is the best and so they accept it without comparison.

The 3 Big Banks here have specific links with Insurers with ASB offering Sovereign products and ANZ offering OnePath. The loyal Customer who doesn’t shop around for their Mortgage deal, becomes an easy target for a profit hungry Bank to sink their claws into.

BENEFITS OF USING A MORTGAGE BROKER

By arranging your Mortgage with a Bank using the services of a Mortgage Broker, you can protect yourself from having the in-house products for Insurance and Medical that the Banks are always very keen to sell – it helps their profitability after all! A Broker will advise from an impartial point of view as all Lenders and Insurers pay about the same in commission so it’s you the Customer who comes first.

So what if you can’t borrow from the Bank – is it more risky to borrow from a non Bank?

In the main, non Bank lending is priced for risk, which means that the Lender takes into account the individual circumstances of the customer and tailors a product to match. One even rewards good paying customers by reducing their rates annually and the aim is to return to ‘Bank’ rates as soon as possible.

BUT ARE THEY SAFE?

A common question and one which is widely asked and often wrongly answered. The answer is yes. The same rules apply to non Bank Lenders as apply to Banks. If you fulfill your part of the contract, i.e. pay the correct amount etc, there are no greater risks at all. The Global Financial Crisis (GFC) has prompted a huge amount of new legislation protecting Consumers, these apply to all mortgage Lenders.

WHAT ABOUT MY DAY TO DAY BANKING?

It stays wherever you want it as non Bank lenders don’t insist on any particular Bank or account.

ARE THERE DIFFERENT TYPES of NON BANK LENDERS?

Yes there are broadly two types – Mortgage and Short Term Loan. For Mortgages there are three, Resimac, Sovereign and Liberty. All are funded by Banks in the main and offer a range of products to suit individual circumstances. So in effect its the same money (it comes from the same source) but it just has a different label.

For Short Term there are a lot of Finance Companies and many of these are also funded, at least in part, by mainstream Banks. Westpac, ASB and BNZ are very active in this market.

ARE THESE SAFE?

Yes they are, new Consumer protection laws apply to all Mortgage Lenders. When non Banks lenders such as GE, Pioneer and Nationwide left the market in 2008 and 2009 no borrower had to sell up because their Lender was no longer trading.

WHAT ADVANTAGES ARE THERE TO BORROWING FROM A NON BANK LENDER?

A lot! If a Bank says “No” there is a reason. Banks only make money by lending money, so if they say “No” then it’s time to look elsewhere. By borrowing from a non Bank lender you will have freedom of choice as to your supplier for any other Insurance or Banking needs and not feel intimidated to take the in-house offering made by the Banks.

Customer Service
With the Banks we’re all numbers, some just larger or smaller. With a non Bank Lender we’re people and that counts for a lot.

What about poor credit history?
This happens a lot and in many cases it’s not the fault of the borrower. Family issues, loss of income and illness can all play havoc with an uninsured Mortgage or Loan. The Banks in the main will not help but the non Bank sector will.

Inability to prove all income
Many Self Employed people find this difficult, particularly when only Self Employed for a few months. Banks generally want larger deposits and at least two years trading. Non Bank lending starts at only six months trading.

Reserve Bank restrictions
As we all know many young Kiwi’s feel locked out of the property market because of these. Non Bank lenders can help here too with up to 90% LTV and higher, if the income fits.

Refinancing large debt
Banks won’t do this, non Banks will

More expensive?
Whilst they can be if poor credit and arrears are present, Sovereign and Resimac for example have great rates.

So if the rate is higher is it worth it?
This depends on what you are trying to do. If getting a foothold in the Auckland or Christchurch markets is a priority, then definitely yes!

Even a 2% over the ‘Bank’ rate is a small price to pay for the improved value expected in the coming years. When refinancing if it means you can live within your new budget and clear the debt, then surely it’s a good thing, although be aware you may end up paying more in the long run.

The Law
The Property Law Act of 2007 covers all lending by any type of Lender on Residential property. This means there is a clearly defined legal path if a loan goes wrong by you getting into arrears. It happens and if it looks like it’s going to happen to you, act now. Don’t wait and bury your head in the sand, communicate with your Lender and in 90% of cases there is a solution.

Choice
In many Countries there are dozens of Lenders. In NZ it’s different, Banks control over 95% of the mortgage market and so control what we spend on our Mortgage and Personal Loans and Credit Cards. They also dictate on where we place our Insurances. This can’t be healthy. Non Bank lending is increasing but compared to the 2006/2007 levels estimated at up to $80 million a month there are a lot of people out there who simply do not know this type of lending exists.

So as the Borrower has the money from the Lender, there is no risk, perceived or otherwise in borrowing from a non Bank source.

Common customer profiles for non Bank Lenders
Low deposit or fully gifted deposit
Poor credit history
Short term Self Employed
Arrears history
Construction finance
Bridging Finance
Second Mortgages
If this looks like you then we need to talk!

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