COMMENT: With the big banks being hit so hard by the new CCCFA rules, more and more borrowers are looking outside the box to fund their next home purchase. For the uninitiated, the range of choices that borrowers have in this sector is surprisingly vast.
Commonly known as second-tier lenders or non-bank lenders, these companies are not necessarily exempt from the CCCFA regulations; in fact, the senior management is as liable as anyone else for the $200,000 per breach fine for irresponsible lending. However, the reasonably flat staff hierarchy means that the assessor of a mortgage application may be directly reporting to the manager whose head is, figuratively, on the chopping block. This allows for a much more flexible, case-by-case approach to each application. Comparatively, banks may have seven or more layers of staff between mortgage assessors and the directors so a much more stringent “line in the sand” approach is (understandably) being taken from them.
While the big banks vary a little in their lending policies but are relatively similar in the type of customer they are seeking, the non-bank lenders all tend to have their own particular target customer. Some specialise in customers with credit impairments, others specialise in helping small to medium size developers. Some provide mortgages to major towns only, others provide caveat loans for very short-term borrowing.
It’s for this reason that comparing interest rates between second-tier lenders is a lost cause. Non-bank lenders that take high-risk clients charge high-interest rates. Others have policies just outside the main banks and will have comparatively low rates. The interest rates of the lenders reflect the risk they are willing to take.
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For anyone falling just outside of the bank’s criteria because of the new CCCFA-induced policies, interest rates at second-tier lenders will be higher than the banks, but not as high as you might think. You can find fixed-term rates of around 0.7% higher than what the banks offer from a lender who is much more willing to look at your application based on your specific merits rather than a conservative set of generic policies.
Mortgage Lab founder Rupert Gough: “Second-tier lenders don’t tend to give the cash contribution that banks do.” Photo / Fiona Goodall
There are a few other costs to bear in mind too. Second-tier lenders don’t tend to give the cash contribution that banks do (often quite a few thousand dollars) and there can be a fee of around $500. All of these additional costs need to be taken into account.
So who would you use a second-tier lender? As an example, let’s say a couple is approved with a first-tier bank to purchase a property for $850,000. They’re struggling to find a property that meets their needs but there are some at the $1 million price mark which a second-tier lender would allow them to purchase. They may decide that a slightly higher interest rate - for example, 4.2% versus 3.65% - is worth the opportunity of purchasing a house that will suit them for a longer time as their family grows in size.
It’s important to note that not everyone will agree this is worth the additional cost. More conservative buyers will say that purchasing a house at the bank-approved price of $850,000 is the right path. It purely comes down to each individual’s decision.
Also important to note is that the second-tier lenders are still applying similar stress tests to the lending as the banks. Can you afford this mortgage if rates go towards 7% in the next few years? Do you have enough income to pay this with money left over at the end of the month? The difference is that these lenders can accommodate the notion that you may not buy as many takeaways once you have a mortgage whereas larger banks are currently hamstrung by the risk around the new regulations.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
