First-tier vs second-tier lenders

Happy young couple meeting with a mortgage broker in her office

If you’re looking to buy a property, you can get a mortgage from either a first or second-tier lender. While they both perform the function of providing financing, there are some major differences between the two types of lenders.

What are first-tier lenders? 

A first-tier lender is a Bank, such as ANZ Bank, ASB Bank, HSBC, Kiwibank, Bank of New Zealand,  TSB & Westpac. In essence, a loan from any of these Banks will be very similar. They all fall under the same regulations and closely align their interest rates to the rate set by the Reserve Bank of New Zealand.

For example, when lending to first home buyers, banks are generally unable to lend to anyone who doesn’t have a 20% deposit – a restriction put in place by the Reserve Bank of New Zealand. In fact, since the 1st of October 2013, banks have been limited in the amount of 90% mortgages (deposits of 10%) they can accept. For investment mortgages it’s now 65% maximum from the Banks but don’t despair!

What are second-tier lenders? 

Building societies and credit unions are classified as second-tier lenders by the Ministry of Consumer Affairs. You might know them as non Bank lenders. Essentially, second-tier lenders can offer loans to help buyers secure a mortgage with a lower deposit. It allows buyers to take a personal loan out and put it towards their deposit as long as it all services. They also lend to those with bad credit and to self-employed people with no financial accounts.

What’s the difference? 

The main difference between a first-tier lender and a second-tier lender is the deposit amount they can accept for home loans. A Bank requires a much larger deposit than non Bank lenders – 20% for owner occupied or 35% for investment. In contrast, a non Bank lender requires only a 10% deposit – so you require only half or a third of the deposit amount that a Bank requires.

For example, if you’re looking to buy a $500,000 property in Wellington, a bank requires a deposit of $100,000 while a mortgage broker, using a non-Bank lender only requires $50,000. And if that $500,000 property was in Auckland and a rental, you would have to provide $50,000 equity to get a home loan from a Bank, while still only providing $100,000 to get a home loan from a mortgage broker.

The main tool that mortgage brokers use is called a high loan-to-value (LUR) mortgage.

What is a high loan-to-value mortgage? 

A high loan-to-value mortgage allows you to get a larger loan for a lower deposit. iLender can provide you with a home loan when you provide a 10% deposit. This allows you to enter the property market much sooner and capitalise on the rise of housing prices. These high loan-to-value loans are becoming increasingly popular, as young people look to secure their future and begin climbing the property ladder. For investment property as little as 20% is needed.

What does this mean for me? 

Non Bank lenders lend! So make the property market much more available to you. If you are self-employed with no financial accounts, have only a low deposit, or have poor a credit history, you can still obtain a loan and enter the property market. To really understand what these lenders can offer it’s important to call a qualified broker such as iLender and get the facts.

About iLender

At iLender we put your best interests first and not the Bank - our advice is impartial as all Lenders who we do business with pay about the same in commissions.

Although we are Auckland based Mortgage Brokers, we help customers everywhere in New Zealand and overseas with buying property in New Zealand, as we are very much about online and giving advice here and now!

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