Tighter lending rules and changing market conditions have pushed some property owners into using the more expensive second-tier lenders instead of sticking to the stricter mainstream banks.
In the past two years, non-banks such as finance companies, credit unions, building societies, even the bank of mum and dad have increased their market share to 10% – up 2%, according to figures from OneRoof's data partner Valocity.
In the first quarter of 2023, some 19% of mortgages raised by property investors were funded by second-tier lenders, up 6% on the same period in 2021.
Non-bank lenders also issued 1.9% more mortgages to first-home buyers and 1.8% more to owner-occupiers over that same period.
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Squirrel Mortgages founder John Bolton said people wouldn’t generally be chasing non-banks for high-cost lending in the current market unless they absolutely had to.
But some people had no choice and that included developers and builders who were struggling and had to resort to second-tier lenders for funding because the main banks wouldn’t lend to them.
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“They are not getting pre-sales, which means they can’t get their developments going and they don’t want to stall on projects where their money is stuck and it’s just costing them an arm and a leg right now.”
Other property owners usually ended up re-financing in a second-tier market because they had hit financial trouble and wanted to buy some time, he said.
“When I think about the non-bank sector, it is generally an event that’s triggering them to be there and that could be debt, divorce, some kind of business issue or a start-up or simply that they can’t service their loan.”
Squirrel Mortgages chief executive says people only use the higher-cost, second-tier lenders if they have no choice. Photo / Supplied
Valocity senior analyst Wayne Shum said the introduction of the Credit Contracts and Consumer Finance Act had made it harder for some people to be approved for home loans by banks, so they turned to non-banks who made it easier.
Using a non-bank lender also comes at a cost. Most main banks are offering a two-year fixed rate of 6.5% while non-banks' rates start from around 7%.
Shum said non-bank lenders were also more willing to give interest-only loans which were popular with investors. They were also being used by owner-occupiers who purchased when interest rates were low and were now struggling to pay principal and interest once they had re-fixed at higher rates.
Borrowers with bad credit history, who did not have enough documentation proving their income or needed a high loan-to-value ratio also had a better chance with non-bank lenders.
Tella chief executive Andrew Chambers said often people who were self-employed could not get a home loan with the main banks because they looked at the business financials over a two or three-year period and worked out an average income so were using non-banks that were more lenient in certain areas.
“So you can have one shock year and it can really impact your ability to borrow and obviously we've had that with Covid a little bit.”
While some non-banks have much higher rates, Chambers said “near-banks” like Resimac and Pepper Money were getting quite close to bank home loan rates which was also making them more attractive to borrowers.
But while second-tier lending has grown slightly, Hastie Mortgages owner Campbell Hastie said it still only made up a minuscule part of the market because of the higher fees.
The increase in first-home buyers and owner-occupiers using second-tier lenders was due to the tougher LVR restrictions, he said, but with plans underway to loosen up the rules Hastie expects their market share to shrink again.
“It’s cheaper to do it via a bank so that market share will probably swing back to the banks.”
Hastie said it was important to look at the non-bank lenders’ fees because some offered rates close to what the banks were, and others were “bottom of the barrel lenders for real emergency situations”.
“That’s probably something to look at, just to make sure the lender you are thinking of is tailored to your purpose. And you will probably get a good indication about whether that lender is fit for your purpose by looking at the cost – if there’s a big fee, it’s probably for a difficult situation.”
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