It’s fairly well publicised that a non bank mortgages are more expensive than a bank mortgage, but many people still believe that it’s worth it.
As a specialist in non bank mortgages I explain why so many people still use these, and also provide some detail on how you should assess if these are a good option for you.
The Cost Considerations
In my opinion people will often look at non bank mortgages the wrong way.
You probably already know that non bank mortgages are more expensive than a typical bank mortgage, and this is both the interest rate that you get charged and the fees too.
Firstly, and most obviously there is the interest rate which can be higher. You may be paying a 1% – 2% higher interest rate for what we call a ‘prime’ non bank mortgage, then the ‘near prime’ could be a little bit more expensive. Then depending on your situation, a ‘specialist’ mortgage can be quite a bit more expensive.
Then the other costs you need to consider are the fees. Where the banks tend not to have application fees and sometimes even will pay you money to join them if you stay for over 3-years, the non bank mortgage providers know that you are unlikely to remain with them for too long.
Given the non bank mortgage providers do not have the advantage of time to make money from you, they will instead have higher costs. You need to consider the application fees they charge plus any advisor fees that may be payable.
Why Are Fees Higher For Non Bank Mortgages?
People accept that interest rates would be higher with a non bank mortgage, but some people are surprised that the fees are.
But when you think about the fees, one of the main reasons that a non bank lender has fees whereas a bank does not is most people plan to be with a non bank lender for a short period of time until they can refinance to a bank. Both banks and non-banks make some money on the interest rate margins (difference in what they charge and the cost) but when they onboard a new loan there are considerable costs and we’re told it can take more than 2-years for the banks to break even, so when the non bank lenders know that quite a few borrowers will be with them for less than 2-years they are forced to charge fees.
Most mortgage advisors that work with non bank lenders will try to make sure that the pathway back to a bank is as quick as possible. This means that you’re on the more expensive interest rates for the least possible time, and that does not help the non bank lenders make money from interest rates alone.
Of course the fees are normally payable upfront and are often included in the lending so you do not have to come up with the money for these when you can least afford it. You still need to consider the cost for the fees, but at least you do not have to find the money as it’s generally built into the deal.
How To Justify The Costs
If you’re considering buying a property or refinancing a property and needing to use a non bank lender, the real question is not what the immediate cost is, but it’s more about what the total cost is with being with that lender over the time that you need to be with that lender.
You then need to weigh up the cost for the finance versus the lost opportunity for not buying or existing costs if refinancing.
When buying it is fairly simple to asses the costs – you can work out what the cost is compared to a bank for the period you need the non bank mortgage, and the decide if you can either justify that cost now. You might look at getting a discount on the purchase price equivalent to the total cost or to at least compensate to some degree. Or you might consider that the extra costs are justified when compared to waiting the year or two by which time the price that you would pay make be quite a lot more.
Recently we financed a couple using a non-bank mortgage to purchase a new home. They could not get bank finance as they were purchasing off family at a reduced cost, but also had considerable short-term debt. We managed to get the non bank lender to fund the purchase plus refinance the debts so it enabled them to buy a home and pay off all of their debts.
It was a short-term solution, and 6-months later we refinanced them to bank mortgage.
When refinancing you need to consider the direct financial comparison (existing costs vs new costs) and then also consider the benefits that may be non-financial or at least not directly.
Recently we refinanced a person using a non-bank mortgage. It was to refinance the existing bank mortgage and to provide extra money ($250,000) for business and IRD debt. He was paying high interest and repayments on the business and IRD debt and had gone into arrears with a default listed too. The interest rate was 10.35% and fees of approx $7,000 but overall it meant that the monthly repayments were less and there is a plan to get this refinanced back to a bank in 15-months when his credit report will be clear and financially he will be in a better position with no other debt.
The total interest cost in this case was less than what he was paying, so the real extra cost is the $7,000 in fees and the solicitor costs.
Our client was very happy with the non bank mortgage as it meant he had no stress and could concentrate on his business, plus he knows that this is a short-term solution to resolve his financial issues.
The key is to consider the overall costs and the timeframe that you plan to have the non bank mortgage for.
It’s quite a simple process and something that as a non bank broker I always discuss with people before they commit to any non bank mortgage
Is A Non Bank Mortgage Right For You?
Only you can answer this and there is really no right and wrong – it’s going to be purely based on your individual situation.
The non bank lenders are there for a reason. Often they can be extremely helpful, allowing you to purchase or refinance a property at times when a bank is not an option you can use.
There are numerous times when a bank will not fund a particular property, person or project. You may have gone through some difficult times with income or have some bad credit and therefore, a bank will not currently look at you as a as a good prospect to lend to.
Sometimes a non bank is the only viable option for getting finance, but it’s always good to have a plan to get a bank mortgage too.
