Banks vs. non-bank lenders—who offers better mortgages?

Banks vs. non-bank lenders—who offers better mortgages?

For many New Zealanders considering taking on a mortgage, a bank is the only lender that comes to mind. But just because banks are more well-known, doesn’t necessarily mean they have the best loan option for everyone. We’re going to look at the pros and cons of banks and non-bank lenders so you can weigh up your options.

Home loans with banks (aka first tier)

Pros:

• More established
  Many people feel more secure with a bank which has been around for a long time, as an established financial institution feels more reputable. Most customers already have a relationship with a bank before they even start thinking about a mortgage so it can also feel more familiar.
  
• Lower interest rates
  The Reserve Bank of New Zealand (RBNZ) sets the Official Cash Rate (OCR), determining the price of borrowing money. This influences the interest rates banks charge their customers for mortgages. Banks can borrow from the RBNZ at a rate of 0.25% higher than the OCR, and can lend at a rate of 0.25% lower than the OCR. (Source: Mortgage Lab and RBNZ)
  
  Non-bank lenders tend to be funded by investors and shareholders, which means their interest rates aren’t dictated by the OCR. Since they don’t have the RBNZ to fall back on, their investors and shareholders carry more risk. To make up for this risk, non-bank lenders usually charge higher interest rates. (Source: Simpler and Prosperity Finance)
  
  Learn more about the OCR and how it affects mortgage interest rates here.
  
• More products and services available
  As well as mortgages, banks can offer you other financial products like savings and checking accounts, credit cards and KiwiSaver schemes so that all your finances are in one place. This can make tracking your finances a lot easier, and moving money between your accounts much more convenient. (Source: Canstar)
  

Cons:

• Strict lending criteria
  Because banks are tied to the RBNZ, they are subject to its regulations. In response to rising house prices, the RBNZ has tightened up its lending criteria, specifically the Loan-to-Value Ratio (LVR) restrictions. (Source: RBNZ) This can make loan approval difficult for some people, plus it can feel like there are a series of boxes that need to be ticked rather than assessing each person case-by-case. (Source: Simpler)
  
• Rigid loan terms
  Because banks are so heavily regulated, there isn’t much flexibility with their loan terms. Often fees are associated with making additional or early repayments (known as break fees), which can make it harder (but not impossible) to pay off a home loan any faster. Any fees will be outlined in your contract with the bank. (Source: Consumer Protection)
  
  You can read more about lending fees here and see our tips to pay off your mortgage faster here.

Home loans with non-bank lenders (aka second tier)

Pros:

• More flexible lending criteria
  For people that don’t fit a bank’s lending criteria, they may be able to find a non-bank lender who can help. Because non-bank lenders aren’t regulated by the RBNZ, they tend to be less rigid in their analysis of your income, expenses and account conduct, so they’re more accepting of people who are self-employed, have smaller deposits or bad credit. (Source: Canstar)
  
• Less conditions
  Often, banks will require things that non-lenders don’t, like pre-sale, QS reports and fixed-price contracts. These things can involve additional costs, which at times can actually outweigh the savings gained in smaller interest rates. (Source: Prosperity Finance)
  
• More flexible loan terms
  For people that have irregular income, or want to make more frequent, or larger repayments, the flexibility offered by non-bank lenders can be really helpful. Many non-bank lenders won’t charge fees for additional repayments, so at times it may be possible to pay off a mortgage faster with a non-bank lender.
  

• Faster turnaround times
  Most New Zealand banks will take 2–3 weeks to process a loan, whereas non-banks only take 2–5 days. If you’re in a rush to get pre-approval for a certain property, you might have more luck with a non-bank lender. (Source: Prosperity Finance)
  

Cons:

• Higher interest rates
  Being smaller than banks as well as independently owned means that non-bank lenders are more vulnerable to changes in the market. The longer the loan terms, the higher interest rates tend to be. (Source: Prosperity Finance)

Both banks and non-bank lenders have to follow the lender responsibility principles in the Credit Contracts and Consumer Finance Act 2003 (CCCFA) as well as the Fair Trading Act 1986 and the Consumer Guarantees Act 1993. The CCCFA protects consumers by outlining lender obligations like ensuring the loan is suitable for the borrower, that they can afford the repayments and that they understand the terms. It also outlines rules around how much interest a lender can charge among other things. Before taking on a mortgage with anyone, it’s a good idea to read up about your rights as well as your own obligations. (Source: Consumer Protection)

At the Lending People, we work with some of New Zealand’s most trusted lenders. Before pairing you with any lender, our advisers assess your unique circumstances and get familiar with your goals. Then they’ll choose the lender with the best rate, and best loan structure to suit you. To see what kind of loan our advisers recommend for you, get in touch for a chat.

This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular loans or insurance policy. Information on the website does not consider your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans. Find out more about The Lending People and how we may be able to help you.