LVR restrictions turning more buyers to non-bank lenders

Friday, 26 November 2021

Tighter loan-to-value restrictions and tougher credit rules might push some first-home buyers to non-bank lenders, brokers say.

John Bolton, managing director of mortgage broking firm Squirrel, said he had seen demand for non-bank home loans go “through the roof” in the last few weeks.

“We are seeing a lot more deals declined by banks now, that would have been approved only four weeks ago,” Bolton said.

Reserve Bank figures show loans from non-bank lenders rose from $2.97 billion in September 2019 to $4.6b in September this year.

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Squirrel chief executive John Bolton said in the last few weeks, more prospective home loan buyers had been denied by banks, leading more than ever to approach the non-bank lender.

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New loan-to-value restrictions (LVR) rules introduced on November 1 mean that banks can lend up to only 10 per cent of new loans to borrowers with a deposit of less than 20 per cent.

Bolton said the tightening of the LVR restrictions was part of the reason, but more to blame were changes to the Credit Contracts and Consumer Finance Act making it harder for mortgage borrowers, which had altered the behaviour of the banks.

Sam Stubbs, chief executive of Simplicity says that as KiwiSaver matures, and consumer mindset shifts away from the banks, non-bank lenders will take up a higher portion of the market share.

“The banks have just become a lot more conservative really, really quickly. There is a credit crunch going on, it is getting harder and harder to access funding,” Bolton said.

Squirrel is also a lender, and the demand for Squirrel home loans has had the company “busting at the seams”, he said.

Squirrel launched a mortgage investment fund allowing investors to invest directly into home loans and get a share of the interest.

Bolton predicted non-bank lenders could write 10 per cent to 15 per cent of all home loans within the next two years, if they were able to expand their businesses to cope.

Sam Stubbs, chief executive of Simplicity, said demand for its home loans had greatly increased in the last few weeks due to the changes in behaviour of the banks.

Simplicity had $200 million in outstanding applications for home loans, and the number was growing, Stubbs said.

Infometrics chief forecaster Gareth Kiernan says the Reserve Bank is keeping a close eye on the non-bank lenders, certainly a lot more than 15 years ago.

Non-bank lenders could take more of a market share of home loans, all that was needed was a shift in mindset for the average New Zealander, he said.

“There is a strange phenomenon in New Zealand in that people think that borrowing from a bank is inherently safer. But, of course, once you have borrowed the money you have borrowed the money, and it doesn’t matter who you have borrowed it from,” Stubbs said.

The New Zealand market was abnormally weighted towards the four big banks controlling an outsized portion of household debt, he said.

But as the capital in KiwiSaver grew and consumers chased higher yields, non-bank lenders would continue to take more of the market share, Stubbs said.

Gareth Kiernan, chief forecaster at Infometrics, said something similar was seen in the

loan market when the Reserve Bank first introduced the LVRs in 2013, as well as 2015 and 2016.

“It just is a change to watch in the overall risk profile of the lending activity. Obviously the banks are watched more closely than the non-bank lenders. But having said that the Reserve Bank does keep a very close eye on the non-bank lenders, certainly a lot more than 15 years ago,” Kiernan said.

But the biggest impact of the changes came on the price of consumer mortgage repayments, Kiernan said.

“This means people are forced to pay higher interest rates than would otherwise have been the case. It certainly fits with the risk profile of those lenders, and the costs they take on to access the funding as well,” Kiernan said.