With Loan to value ratio (LVR) restrictions imposed by the Reserve Bank and Banks moving away from aggressive pricing practices we have seen a surge in the use of Non-bank lenders. What are the advantages and disadvantages of non-bank lenders?
The Reserve Bank has stipulated that Banks are to be limited on what they can lend to clients who have less than 20% equity in their owner occupied home. Non-Banks are not restricted by these rules. This means that a Bank may not be able to lend at a particular time to a client who has less than a 20% deposit. However a Non-Bank who is not under the same restrictions may go as high as 90 – 95% depending on the situation (client profile, location of property etc.). This has meant that we have been able to place more clients with smaller deposits giving them the option to get in to their first home.
Banks are restricted on the LVR they can go to on a rental investment property. They can lend no more than 60% - again this is due to the Reserve Bank restrictions (why this is in place we do not know given there is an extreme housing crisis not only for people wanting to own their own property but people needing rental accommodation). However Non-Banks are not under the same restrictions and can lend to a higher level – 80% and sometimes even more. This has meant that property investors are able to purchase more rental properties with less deposit (or equity).
Previously Non-Banks were a lot more expensive than banks. The reason for this is that they were taking on a higher perceived risk. Generally clients would only go to a non-bank if they couldn’t get their loan approved by a bank. As such higher risk clients were going to non-banks. But now as the Banks are restricted to what they can do even with high calibre clients – the non-banks are taking on less risk. As such they are lowering their pricings on their loans.
The real concern with Non-Banks is that they don’t necessarily have the same credit ratings or financial stability. This is where people get in to trouble. They are more concerned about getting the loan than reading the fine print or doing the research to ensure that their lender is indeed financially sound or indeed ethical. With the Global Financial Crisis, while there are stringent laws to police these, it still pays to do the research. You can do this research yourself and there are many sites to assist you with this or you can advise your Mortgage Broker who can provide the options with the Non-banks and give you an outline of Credit ratings and financial history with Non-banks as well as the traditional Banks.
