What is non-bank lending, and is it right for me?

Back in the day, when it came to getting a loan, the banks were pretty much your only option. If you didn’t fit their lending criteria, well, tough luck.

But the growth of New Zealand’s non-bank sector in recent years has changed all that, complementing more traditional offerings, and helping to meet the needs of borrowers who don’t tick the banks’ boxes.

Despite often being referred to as “second-tier” lenders, non-banks have a lot to offer – particularly in terms of added flexibility – and sometimes at very similar rates to the banks.

So, here’s what you need to know about the different non-bank loan options out there. 

Near-prime lending

“Near-prime” non-bank loans have a lot of similarities with bank home loans. Think 25 to 30 year terms, interest only payment options (in addition to the usual principal and interest), minimal loan fees – and all at pretty similar interest rates.

Unlike regular bank home loans, though, near prime non-bank loans can be suitable for all sorts of different purposes. They’re also a great home loan solution if you’re looking to consolidate debts, are recently self-employed, or are a good borrower who for whatever reason just doesn’t meet bank standards.

Near-prime loans usually offer more flexibility when it comes to LVR and servicing requirements, and rates are typically 1-2% above what’s on offer with the banks, depending on your risk profile (although this will vary from lender to lender).

Generally, you’d look at getting a near-prime non-bank loan with the aim of refinancing to a bank when possible in the next 24-36 months to get back on sharper rates.

Short-term lending

When we say short-term lending we’re talking loan terms of anywhere up to three years – with the most widely available being 12 months.

As a general rule, most lenders will only do this sort of loan for non-personal purposes, which means things like lending to trusts and companies to fund investments or other transactions. The sorts of situations where non-bank lenders can be really useful include equity releases, bridging loans, business cashflow loans, second mortgages, and construction lending, to name just a few.

When it comes to rates and fees, you’ll pay a premium on top of what you’d get at the bank, but for that you’ll get a bunch of added benefit and flexibility. Non-bank lenders usually require significantly less information as part of the application process, have less stringent servicing and policy requirements (like LVRs), and you’ll have the ability to capitalise interest too.

Short-term non-bank loans are a great interim solution where the intention is to refinance to one of the banks in the longer-term – including scenarios where you’re looking to consolidate debt, are waiting on up-to-date financials, or waiting on a property to sell to improve your ability to service debt.

There are a quite a few lenders in this space and having to navigate their different policies and ever-changing liquidity positions (how much money they have to lend) can be tricky. This means it’s often best to have an experienced adviser on-hand to help you through the process.

If you’re keen to go it alone, or even if you do get an adviser on board, here are the key things you’ll need to wrap your head around when looking at short-term lending.

• Understanding any fees up-front: There are a few different types of fees associated with non-bank loans, including lenders’ legal fees, monthly fees, and establishment fees. Establishment fees in particular are one to watch out for. When the letter of offer is signed, that usually constitutes an agreement to pay the establishment fee in full regardless of whether you proceed with the loan. Make sure you’ve reviewed the offer in detail, and sought quality advice if needed, before signing and returning it to the lender.
• Capitalised interest structure:
  • Some lenders draw down the full interest amount up front and then use this to pay your monthly interest costs. This means you’re paying interest, on your full interest amount, from the outset!
  • Some lenders will instead add your interest to your loan each month, as it’s incurred, which will save you a significant amount in overall interest costs.
• Early repayment fees: Some lenders don’t charge them, others will charge either 30 or 60 days interest for early repayment – so this is worth noting if there’s a chance you’ll repay early.

Construction lending

Let’s start with a quick look at the different fees that make up your total borrowing costs.

• Interest rate: charged on a per annum basis, usually capitalised and added to the loan. This is charged on the amount drawn down at any one point.
• Line fees: set either on a monthly basis or on a per annum basis, and added to your loan monthly. Line fees are charged against your total approved limit for the duration of your loan – essentially you’re paying your lender to hold that money aside for you even when you’re not using it, for up to 12 months. Thing to note here: 0.25% monthly = 3% per annum, don’t be fooled!
• Establishment fee: Charged on the full limit approved and added to the loan.

Every lender structures their pricing differently, so you’ll want to look at all-up pricing, including the interest rate, line fee and establishment fee together, to get the best comparison.

How do non-banks stack up compared to banks on construction funding?

Banks are significantly cheaper when it comes to construction and development funding, but the extra costs involved in meeting their criteria will largely offset any price benefits. They’ll usually require you to have a Quantity Surveyor, and may also expect you to use a project manager, panel valuers and panel builders – which all adds up.

Banks can also be very risk averse and will generally want you to have a large equity position in the project, strong projected profitability, and a minimum 50-75% of proposed debt covered by pre-sales.

As an estimate the all-up pricing through the banks currently is around 11%.

The industry for non-bank construction lending has grown immensely over the past decade, with lots of different funding options out there. Again, their pricing is often more expensive than the banks’ but you’ll get a lot more flexibility in return, including:

• Less equity required
• Some lenders don’t require QS (saving you money)
• Either no pre-sale requirement or minimal pre-sale requirement.
• Most don’t require any panel builders (will still undertake due diligence on builders they aren’t familiar with)
• Some lenders don’t even require a registered valuation

As an estimate the all-up pricing through the non-banks is currently around 11-15%.

There are many different options out there in the non-bank lending space – and having an adviser on hand to help you compare and weigh up all the benefits and risks can take a whole lot of stress out of the process. Get in touch today to talk about your borrowing needs, and which options could be right for you.

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