Beyond The Banks – Alternative lending options in a restricted market

Under increasing external pressure from the Reserve Bank, and internal pressure from credit-tightening measures, banks are limiting borrowing. This in turn has led to a huge increase in demand for loans from non-bank lenders. 

With LVR restrictions from the Reserve Bank along with major banks shying away from bridging finance, mortgage advisers must think outside the box to meet their client’s financial needs.

Many are turning to alternative lenders in the non-bank space such as Core Finance.

What is a second mortgage?

A second mortgage is exactly what it sounds like – another mortgage that sits behind the first mortgage secured against the same property as your main mortgage. Second mortgages are a good solution when the bank or first mortgage provider has said no and the clients require

extra funding to cover business or personal expenses but are not able to increase the primary mortgage. They are available from specialist lenders like Core Finance and are normally quicker and easier to arrange than a standard mortgage, as the application criteria are often less restrictive than that of a mainstream bank.

Most second mortgages are short-term with flexible terms and interest rates. They are generally structured as interest only, or the interest can be capitalised short term to assist with cash flow. While they normally attract higher interest rates than standard mortgages, they are not as expensive as other lines of credit like personal loans or credit cards. By taking out a second mortgage this allows the client to retain the bulk of their debt, their first mortgage, with a bank or mainstream lender at the cheapest rate and also ensures they maintain their relationship with the bank.

Why use a second mortgage?

Second mortgages have a stigma of their own. They’re often seen as being a high risk option for people who have made bad financial decisions. But for people looking to invest in a second property, pay off short term debts, or finance a business, a second mortgage can be a sensible choice. Using a second mortgage unlocks the equity in your client’s home or investment property, freeing up capital to meet your client’s financial and investment needs.

Unlike traditional mortgages, which may have terms of 20-30 years, second mortgages are usually short – six months to one year are common terms. This lets borrowers cover their financial shortfall or fund their business launch before longer term finance is approved, in most cases from their bank. They are a good option for people who have a long term plan and know where their finance is coming from, but need to bridge a gap in the timeline.

Of course, refinancing the whole debt to a non-bank first mortgage lender is another option, but often fees and interest rates make this very expensive and the client loses their relationship with their bank. On the surface this would seem to solve the problem for the client, but what is the long term impact of taking the client away from a mainstream bank? 

Higher interest rates, higher fees, reduced product offering, and challenging getting them back into a bank for lending in the future. Like other non-bank lenders, Core Finance is not subject to the RBNZ LVR lending restrictions. We have less restrictive lending criteria and do not require consent from the bank before lending. This gives us flexibility, and the ability to help people out when they need it most.

First Mortgagee Consent and Deed of Priority

A professional opinion “By granting a second mortgage a borrower is breaching the negative pledge covenant to the first mortgagee.  That is a covenant that requires them not to give another mortgage or charge over the property without the mortgagee’s approval.  If this is broken then the first mortgage is in default. This may have negative consequences which could result in the first mortgagee calling up its mortgage. Whether they do will depend on the circumstances. So long as the first mortgage is not in financial default many mortgagees would rather not trigger default action. The borrower needs to make a decision as to whether to do this. If they wish to take this risk the borrower should advise their lawyer that they are aware of their obligations but wish to proceed. In this case they should instruct their lawyer not to contact the first mortgagee.  Lawyers are obliged to act on their client’s instructions so if a borrower

says no,  then the lawyer is acting outside the scope of his/her instructions if the lawyer contacts the first mortgagee. 

Granting a second mortgage is not breaking the law, but it may be breaking the terms of the first mortgage.” Jonathan Flaws, Sanderson Weir Core Finance does not require consent or a Deed of Priority from the first mortgagee.

When to consider a second mortgage

• Short Term Bridging Finance - Second mortgages should be used as a short term measure. For example, when clients need to borrow against their house or investment property to get through a period of uncertainty, like cash flow problems, setting up a new business or for help with purchasing an expensive item, knowing they can pay it back quickly. Alternative lenders are able to help meet these short term needs.

• Growing an Investment Property Portfolio – With the banks capped at 60% growing your portfolio can be difficult. Non bank lenders are not subject to the RBNZ LVR lending restrictions and can assist above the 60% threshold.

• Business Finance - Working capital for the self-employed. Whether it is for the purchase of a new business or to inject cash flow into an existing business or tidy up GST/Tax arrears, these types of loans are difficult to get from a bank. A second mortgage is a good solution to finance the client into a position where they can refinance back to their mainstream lender.

• Debt Consolidation Loan - Unfortunately, there are always unforeseen circumstances which may cause a client to need some breathing space. For instance, if they get sick, the loss of a partner or redundancy. A second mortgage can help tidy up any outstanding personal loans and arrears on the first mortgage. Plus, with loans being consolidated they will pay less interest in the long term.

Core Finance specialises in providing 2nd Mortgage finance secured over residential and commercial property.

To speak with a specialist lender give Grant a call on 0800 667 366 or drop us an email to grant@corefinance.co.nz.