Second Tier Lenders vs Bank – Which One Am I Better Off With in NZ?

LM b W

Laine Moger

Journalist and Property Educator for 6 Years
Introduction

Second tier lenders have an unfair reputation as being a bit “dodgy”.

Not only is this reputation untrue, but it can put up an unnecessary barrier for investors looking for a viable and professional alternative to the main banks.

Let’s set the record straight. Second tier lenders are tightly regulated, professional and responsible lenders.

Yes, banks will usually have more attractive rates and are ultimately cheaper. But you have to meet their tight lending criteria to reap the benefits.

In this article you’ll find out what exactly a second tier lender is and whether or not they could be an option (or solution) for you and your portfolio.

Also, second tier lenders are the exact same thing as non-bank lenders. We have used the term non-bank in the video below.

The Differences

Why Is A Second Tier Lender ... Not A Bank? What Are The Differences?

Banks and second tier lenders will lend you money to purchase a residential property. That could be for you to live in yourself or as an investment. But there are some key differences.

#1 What’s on offer

It’s quite simple, a bank can call itself a bank because it is registered with the Reserve Bank of New Zealand. Second tier lenders are not registered.

Banks will also offer a range of financial products like credit cards, term deposits, overdrafts or transaction accounts. Second tier lenders don’t do any of that extra stuff. So, don’t rock up to a second tier lender looking for a credit card.


Second tier lending

There are around 20 to 30 second tier lenders available in New Zealand that property investors can use. And the industry is growing.

Some of the more commonly used second tier lenders you might have heard of are:

  1. Resimac
  2. Liberty
  3. Bluestone
  4. Squirrel Money
  5. Avanti Finance
  6. Pepper Money

#2 Types of Products

Although they won’t like us saying it, all the main banks – like Westpac, ASB, ANZ and BNZ – are very similar.

They offer similar rates and mortgage structures.

Second tier lenders are different. They’ll come up with different mortgage types and structures for different borrowers.

For instance, Basecorp is really good for people who flip and trade properties. Whereas First Mortgage Trust works well for developers. Resimac is sometimes a good fit for long term buy-and-hold investors. More on how this works below.

#3 Approach to Lending

Second tier lenders lenders take a pragmatic approach. That means they assess loan applications on a case-by-case basis. Because they are small they can create specific services and products for specific segments of the market the main banks don’t serve.

There aren’t any hard and fast rules about who they will and won’t lend to. This is different for banks, who can live and die by some of their lending criteria.

But it’s important to note both institutions are governed by the same laws.

So, the second tier lenders are not the cowboys you may have heard - they are consummate professionals tightly regulated by consumer credit governing bodies.

Best Fit

Who Are Second Tier Lenders Most Suited For?

Traditionally speaking, second tier lenders were the Plan B option for borrowers who didn’t meet a bank’s lending criteria.

They worked (and still work) for people who:

  • Have bad credit
  • Have a variable income e.g. contractor or small self-employed business person
  • Have low deposits.

But stricter lending conditions, in the form of debt-to-income ratios, LVRs and the recent CCCFA changes, means more people are failing to meet the tough criteria the main banks set.

This means the main banks are rejecting more people than they have in the past. So more Kiwis are turning towards their second tier counterparts.

So, the real answer to this question of who is suited to a second tier lender is: Any borrower, really.

If you can get approved by a main bank, you’d typically go with them. But, if you can’t get through their lending criteria, that’s cool. It’s time to talk to a second tier lender.

 
Money Explained

How Do Second Tier Lenders Get Their Money?

Many investors scratch their heads and wonder: Where do second tier lenders get their money from? This is one of the big differences between banks and second tier lenders.

A bank will get money from term deposits. An investor might give them $100,000 and the bank will pay a 2% interest rate. Then they might lend that money out at 4% to a borrower.

Second tier lenders are different. They’ll often:

  • Get money from a high net worth individual (someone with a lot of money), or
  • Borrow money from the main banks.

So a second tier lender might borrow money from a bank like the Commonwealth Bank of Australia and then lend that money to you at a higher interest rate.

Of course, it’s a bit more complicated than that and there are some big words that even we struggle to pronounce. But, before you start quoting The Big Short, don’t stress – this is all safe, legal and regulated.

 
Interest Rates

Don’t Second Tier Lenders Charge Sky-High Interest Rates?

Traditionally it’s been thought that second tier lenders, as the second-tier solution, charge substantially higher interest rates. That’s not always true.

It really depends on you, your situation, and how much risk you pose to the lender.

That’s because second tier lenders work on risk-based pricing.

So if you’re a discharged bankrupt and have multiple unpaid bills, then you’re seen as higher risk. That means you’ll be charged a higher interest rate.

On the other hand if you pay your bills on time, have a regular income, but have been turned down by the bank because you eat too many takeaways, you’re lower risk. So, you’ll be charged a lower interest rate. In second tier terms, you’d be known as a “prime customer.”

In this instance it is likely you would see similar if not better interest rates from a second tier lender.

Check out the below comparison. Here is an example of an Auckland couple, earning $190,000 annually, looking to buy an $800K townhouse. The interest rates they were offered by ANZ and Pepper Money were very similar.

Non Bank Lenders Kain 1 060

But, there are other fees and charges?

Interest rates aren’t everything when it comes to borrowing.

And second tier lenders do have additional charges, which you must consider when making your decision.

For instance, a second tier lender will often charge:

  • An establishment fee of $950-$1,500. These are sometimes waived
  • Monthly fees of $10 or so per month, depending on the second tier lender
  • Default loan fees, if you don’t pay the mortgage on time.

Additionally, a bank is likely to give you a cashback when you take out your mortgage. For instance, one of the main banks currently offers a $3K cashback when securing a mortgage. This is useful for paying your legal fees when purchasing a property. You miss out on this if you go with a second tier lender.

So the difference in establishment fees could be $4k – The $1k establishment fees and missing out on a $3k cashback.

Mortgage Brokers

How Do I Find A Good Second Tier Lender? Do I Still Use A Mortgage Broker?

Yes, it is still in your best interest to use a mortgage broker. Why? Because there are up to 20 non-banks. A broker will go a long way to finding you the right one for your situation.

This is similar to a main bank. For example, ANZ will not currently take into account income earned from overtime but Westpac will, so nurses applying for a mortgage are generally more suited to Westpac.

Similarly, BNZ currently has policies more favourable for women on maternity leave who are about to return to work.

The same rule applies to second tier lenders. From the outside two might look similar, but once you get behind and look at their lending policies one can be better than another, depending on the situation.

A mortgage broker will steer you in the right direction.

Conclusion

So … is Second Tier Lending The Way Of The Future?

Second tier lenders are going to become more common.

Currently, only 2% of New Zealand’s mortgage market is made up of second tier lending. But in Australia this figure is much higher at 20%.

New Zealand is likely to follow suit.


Non Bank Lenders Kain 1 017 1

So, if you are struggling to get a mortgage approved at a main bank, make sure you ask your mortgage broker about second tier options.

Financially speaking, the pros to second tier lenders are:

  • Easier to get loan approval
  • Interest rates can be on par with mainstream banks if you don’t have a more high-risk financial situation.

Whereas the cons are:

  • Additional fees apply
  • Interest rates can be higher for the more “risky” lenders.

Yes, you’ll pay extra, but if you want the lending and can’t get it elsewhere, that’s the price you may have to pay.

Can Opes Partners Help Me?

Who are Opes Partners and can they help me?

What is the 3-Step Opes Coaching Programme?

1. Plan out your property investment portfolio

The first step in the programme is to co-create a plan using our MyWealth Plan software. We built this software specifically to help Kiwis create a financial plan in under an hour.

You'll leave this 1-hour session with a written down plan. Pen to paper.

2. Pick properties that fit with your plan

Once you've created your plan in step #1 – your property partner will go out and find properties that fit your plan. They'll search through projects from up to 58 developers to find the best ones for you.

When you meet again, you'll review the top picks, go through the analysis, crunch the numbers together, and then decide which ones to hold with the developer.

3. Dig into the details – Confirm it's the right property for you

Once you've selected a property, you'll work for 10 days to make sure it's the right property for you. So you'll work with your Property Partner and Client Relationship Manager to dig into the details of the property.

You'll go and look at the development and be introduced to mortgage brokers, solicitors, accountants, and property managers. Their sole job is to help you figure out if this property works for you.

And you’ll have access to all the resources, tools, and data … so when confirmation day comes, you have confidence you know you’re making the right decision.

Who is the Opes Coaching Programme the right fit for?

  • You understand the concept of property investment, but who wants help putting it into practice.
  • You want a “Done for you” property investment service, so you can be a hands-off investor.
  • You are someone who has at least a 10 year investment time horizon.
  • And finally, you’re ready to become a property investor.

Who is the Opes Coaching Programme is NOT the right fit for?

  • You’re more into the smell of paint or the colour of a wall than the numbers that stand behind an investment property.
  • You only want investments that are hands-on, so you can save a few dollars here and there.
  • You have plenty of time on your hands and want to do the property investment process yourselves.
  • You’re looking for an overnight success and want to get rich quickly.

What does it cost to work with Opes Partners and go through the programme?

It’s free. Complimentary. No Cost.

Why?

The developer pays us a marketing fee when you confirm that the property is the right fit for you. Very similar to the way a mortgage broker gets paid by the bank.

Now it's important to note that we are paid the same fixed rate no matter what property you invest in.

If it’s a $500k apartment in Christchurch or a $1.3 mil 3-bedroom townhouse in Ponsonby – we get paid the same rate.

That's important because then we can recommend the right property for you, and there's no incentive to recommend you invest in a more expensive property, just so we get paid more.

I want learn more about how Opes can help me

Learn more about the Opes Coaching Programme Here

LM b W

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.