How To Survive Your Mortgage In a Recession (Part 2)

by | Apr 4, 2020 | Mortgage News

Why ‘Non-Bank’s’ Will Be The Lifeline That Many (Unusually) Strong Borrowers Will Need in 2020.

A ‘No’ could easily be a ‘Yes’. With rates from 3.39% fixed for 2 Yrs and 3.49% variable rates, some non-bank lenders are more competitive than the main banks!

Last month we talked about the strategies to implement to prepare for some potentially tough times ahead. These were things like going on Interest Only, topping up the Mortgage to clear high-interest debt and managing cash flow for those with a tight budget.

However, in the super fast-paced world of finance, banks have made it clear they are tightening up on lending criteria and will only continue to do so.

Being at the coalface what was easily an approval early this year is now often a ‘No’. Even for relatively unaffected industries and essential workers!

This is understandable for borrowers looking at renovations or a new motor vehicle but these same strict rules are taken into consideration for credit used to consolidate high interest short term debt!

Yes, you read that right! 

When overall someone is easily going to be better off, credit is not guaranteed to be offered. 

Say Sally wants to consolidate her Credit Cards, Car Loan and Hire purchase payments because by doing so Sally will be saving $400 weekly.

Banks are assessing not just the new lending required to consolidate this BUT her existing Mortgage as well according to the newer more strict criteria. This works the same whether we approach her current bank or another.

Add to the equation some unlucky circumstances like John and Mary below and you’ll find what was once an easy ‘Yes’ is oftentimes an unlucky ‘No’.

So besides simply applying for a Mortgage deferral or going interest only – which to their credit (pun intended) the banks have been great at during the last 4 weeks of lockdown… Is there a more proactive approach?

Needless to say, for those who are still locked onto a high-interest rate swapping it out by Refinancing for a better deal and extending the Term could be a smart move! 

Yet alone the massive effect on ones weekly cash flow that smart debt consolidation will allow you to achieve.

Case Study

John & Mary (names changed) were in such a position recently

  • $550,000 Mortgage (LVR of 68%) with a Main Bank at 4.40% with a 23 Year Term remaining. $731 weekly payments
  • $8,000 Car Loan with $200 weekly payments
  • $7,000 Credit Card approx $50 weekly payments
  • $8,000 Gem Visa with $55 weekly payments
  • Total $1,036 weekly

Unfortunately an application to refinance to Westpac and to be fair all of the other main banks declined their Mortgage application. 

They were unable to offer any credit for any purpose. In short this was due to their ‘account conduct’. 

Quite simply the payments on their Gem Visa and Credit Card had been late over summer due to the family being out of Internet range camping for 3 weeks. 

Yes they were still within their set credit limit but late payments were a big no go. Typical Box Ticking.

We pushed and pushed to no avail! despite the fact John and Mary had 30% or more equity and great stable incomes and had never ever missed a Mortgage Payment banks weren’t budging.

Non-Bank Lending

Luckily instead one of the top non-bank lenders, were happy to take them on board with zero fuss. They saw the greater picture and saw the fundamentals that John & Mary were great borrowers that had simply been just a little bit careless over the summer break.

John & Mary are stoked.

Their weekly payments have gone from $1,036 to just $606! 

At first John and Mary seemed hesitant. “What is a non-bank” they quickly realised the opportunity was too good to miss.

John and Mary now have their Mortgage at a lower rate than before, have cleared all of their short term debt and topped up their loan by $20,000 to act as a safety buffer which allows them to finally sleep at night.

Furthermore, by driving all of their savings into the Redraw facility, they are now on track to pay off their mortgage 8 Yrs faster saving over $180,000 in interest!

Key Non Bank Features

  • Rates from 3.39% fixed for 2 Yrs or 3.49% for the floating rate (John & Mary went with a mixture) 
  • A stress or test rate of a more realistic 6.00% (instead of 7% plus) 
  • No box-ticking assessment criteria instead. Each app is assessed on its individual merits. 
  • Funding lines from the main banks – not private investors . This usually means greater safety for borrowers with a much lower chance of them going under.

Longer Loan Term Is Your ‘Insurance Policy’.

I always preach to all my clients having a longer loan term is your safety net for troubled times! Never have truer words been spoken.

By all means don’t aim to pay off your loan over 30 Yrs! Aim for as short as possible.

Did you know you can have a 30 Year mortgage but have it actually paid off much sooner e.g within 8 Years or so?

Yes, even with non-bank lenders if you structure your loan correctly (which is where we really earn our keep) you can pay off your mortgage much faster which saves you a ton in interest.

Yet your safety net is that you may revert back to the lowest repayments possible if needed.

In times like these, this should be everyone’s priority. Plan for the worse, hope for the best!

Furthermore if something drastic happens like a loss of income, major accident or illness or Covid 19, John & Mary have $20k to draw upon as a ‘just in case’ and better yet can revert back to a much lower contracted minimum repayment on their home loan.

Better yet within their redraw facility, they are not being charged any extra interest for this privilege of having $20k ‘available credit’. 

But you can imagine how peaceful it is for them knowing it is right there if they need it!

As you can see it’s no wonder why non-bank lenders and smaller banks are rapidly growing in popularity.


FAQs with Non-Bank Lenders

  • Are they safe? Reputable non-bank lenders receive their fixed funding lines from main banks, not private investors. Non-banks survived the GFC and are still here to stay!
  • How do I bank with them? The great thing is, your everyday transactional bank accounts will stay put. Only your Mortgage will switch. They specialise in Mortgages and that is all!
  • Why are they so much more lenient? They are by no means irresponsible. Like all providers of Credit here in NZ, they must always abide by the ‘responsible lending code’. They are however a lot more open to understanding what really is happening (from us on your behalf) on the greater picture of it all. Usually, what they want to hear is how after a few months-years will you be in a better position because of this.
  • But their interest rates are much higher? In NZ we now have more than four ‘Tier 1’ or prime Non-Bank lenders. Meaning their rates are the same or just slightly higher than the main banks yet their ability to help is far far greater. 3.39% fixed to approx 5.80% depending on the Lender. Each Lender has a different appetite and niche.

If you want us to quickly and easily explore your options such as these don’t hesitate to reach out! We always see if you qualify with main bank lending first and foremost.

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