Often people think that there must be something wrong when you use non-bank mortgages; however there are a lot of people that know the advantages and therefore may select a non-bank option in preference to getting a mortgage with a bank.
And that’s even when they know that it will be more expensive.
Why Property Investors Use Non-Bank Mortgages
In New Zealand the banks can be quite inflexible in a number of areas, and that’s where a non-bank broker can help too.
The banks are limited by rules that have been introduced by The Reserve Bank and yet non-bank lenders are able to design options that might sit outside of the bank criteria.
LVR Rules – one of the biggest restrictions for property investors is the requirement to have a larger deposit. The current rules require someone to have a 35% deposit on any purchase of an existing property for investment. That’s a deposit of $175,000 on a property purchased for $500,000 and that restricts the ability of property investors to build a portfolio. Using the same deposit ($175,000) a property investor could use a non-bank lender where the rule is to have a 20% deposit and therefore buy property worth $875,000 which can mean a better property or multiple properties.
Income – most banks are quite tough on scaling the rental income and therefore require your own income too when calculating what you can afford. This often restricts property investors to just one investment property where an investor knows that they can afford more than one.
Test Rates (Interest Rates) – the banks use test rates which are higher than the actual interest rates, and they also test affordability using a principal and interest repayment calculation. Most property investors will use fixed rates and interest only lending at least when they first get started, and this is a huge difference. It’s understandable that banks want to be cautious, but in many cases these calculations are so far away from reality and they put the handbrake on people that are trying to buy a few properties.
These are three areas where banks make it hard for property investors, and where property investors often use non-bank mortgages.
What’s Your Goal?
The ultimate goal for most property investors is to create a passive income using rental properties.
That will generally mean having more than one investment property and therefore it can be frustrating when the bank tells you that you can only have one or two properties. The bank are telling you that you cannot create the future (the goal) that you want and in your mind and budget it makes no sense.
Using a non-bank lender may be more expensive, but if it means that you can set your future up then it may be well worth the effort at least for the short-term.
You can always refinance bank to the lower cost bank finance in the future as your property values and rent increase.
