For most investors, a trusted bank provides a reliable source of financing when it is time to buy another asset. But increasingly, banks are more selective about which investors they will support, even breaking off long-standing relationships over serviceability concerns.

Banks have tightened up even more following the Covid-19 crisis, opting to focus on existing customers and sticking to conservative lending limits. While credit conditions leave investors frustrated, there are a growing number of alternative financing options beyond the banks.

Some, like second-tier lenders Resimac, Bluestone, and Pepper Money, provide a similar service to mainstream lenders, with interest rates only slightly higher than their banking peers.

Other alternative lenders operate with an entirely different business model. Peer-to-peer (P2P) lenders, such as Southern Cross Partners and Squirrel Money, lend with retail investors’ funds.

According to advisory firm KPMG, second-tier non-banks grew lending by 10% last year. Data from the Financial Markets Authority shows P2P lenders saw a 73% increase in registered borrowers last year, and a 12% increase in the total value of loans.

With more banks turning borrowers away, which alternative finance provider is the best fit for your next purchase? Do P2P lenders suit your investment needs for short term funding? Or do second-tier non-banks provide a more attractive solution?

Peer-To-Peer Flexibility

The peer-to-peer market is relatively new in New Zealand. Most companies have struggled to gain traction in the market so far, and earlier this year, P2P operator Harmoney announced its withdrawal from the sector, moving to a wholesale funding model.

Harmoney struggled to turn a profit but other P2P companies are still in the market. Zagga, launched in New Zealand in 2017, has funded loans worth $33 million in New Zealand. Southern Cross Partners is the largest P2P lender in New Zealand and has provided home P2P loans to investors for four years.

Cliff Carr, chief executive of Southern Cross Partners, says his company typically provides loans to borrowers turned away by the banks. He expects more borrowers to turn to alternative finance options as banks tighten up during the Covid-19 outbreak.

“Banks are being very good at supporting their existing borrowers, but they’re not looking to do much new lending at all,” he says. “A lot of lenders in the non-bank space have also changed their conditions and funding has dried up. So we are seeing a big increase in loan enquiries.”

Southern Cross effectively lends on a short-term bridging basis. It provides loans for 12 to 24 months, with most above the $1 million mark. Interest rates range from 6.99% to 9.99%, based on risk.

The P2P player provides the initial funding before selling slices of the loan to retail investors. The company provides loans to investors who will have an “exit” pathway to refinancing with a bank later on.

Carr says P2P lenders can be more agile than their banking peers at the moment. “Banks are rigid. Perhaps a customer is carrying slightly too much debt, they might have four or five investment properties and a good LVR position, but their bank won’t advance funds on other properties.”

Southern Cross also lends on construction builds and development projects. The lender offers financing to complete projects before they are refinanced with a bank.

“We’re very fluid and flexible,” he says. “We can look at the potential value of a development before it is completed. If it’s an unusual loan or structure, we can go and talk to the borrower to discuss it. We’re not box-tickers.”

‘P2P lending is a different option from banks and non-banks in that the source of funds is different. That allows us to take a slightly different perspective of credit risk’ JOHN BOLTON

Carr believes P2P lending can thrive during the Covid-19 crisis, as banks tighten available credit, and non-banks face funding pressure.

With retail investors seeking yield, he expects P2P platforms like Southern Cross to remain well-funded. “Appetite among our P2P investors has been insatiable. That’s the beauty of our model. We’re not reliant on bank funding.”

Squirrel’s John Bolton agrees. Squirrel has lent $10 million in its P2P mortgage book over the past three months.

“We use P2P for low risk lending where the banks aren’t comfortable enough and where the client need doesn’t fit with one of our traditional property development lenders,” he says.

Bolton says P2P firms can take a different view of risk and may be more flexible for some investors. “P2P lending is a different option from banks and non-banks in that the source of funds is different. That allows us to take a slightly different perspective of credit risk.

“Our focus is on rapid innovation into niches that are under-served by the major lenders,” he adds. “With our technology, we can develop innovative products relatively quickly.”

Crowdfunding Sites Emerge

While P2P lenders offer debt financing, those looking for co-investment or equity raising opportunities could be tempted by the crowdfunding market.

A host of crowdfunding companies have launched in New Zealand in recent years, but they have struggled to gain traction so far.

The Ownery, a property crowdfunding business launched in 2016, offered Kiwi investors the chance to buy a small equity stake in a property. The offering did not receive sufficient demand, and the company does not have any current listings on its website.

Meanwhile, The Property Crowd launched in April last year. It planned to sell investors a slice of residential rental properties or small commercial buildings, enabling them to benefit from capital growth and rental income.

The Property Crowd first offered investors the chance to buy a stake in a house in Auckland’s North Shore. However, the company later withdrew the offering.

According to its website, The Property Crowd plans to help housing providers, developers, and property managers raise equity for housing projects. The company was unavailable for comment.

Other innovative funding products have emerged this year. Real Estate Together, launched in February, allows investors to co-invest alongside first home buyers in brick and tile units. The company organises and manages the tenancy and charges a fee for its services.

Non-Banks Build Market Share

Investors looking for a home loan closer to a traditional bank product may find a second-tier lender an attractive option.

Non-bank lenders have established a strong footprint in New Zealand over the past couple of years, aiming to capitalise on credit restrictions. Australian companies Resimac and Bluestone, and private equity-backed companies including Pepper Money, have ramped up their New Zealand mortgage lending capabilities.

Non-banks increased their lending by nearly 10% last year in New Zealand, according to advisory firm KPMG. While non-bank lenders initially targeted customers who had been turned away by the banks, they have begun to take on more prime borrowers in 2020.

In the wake of the Covid-19 crisis, non-banks including Avanti and Resimac have cut interest rates and offered payment holidays and deferrals to existing customers.

Resimac New Zealand head Luke Jackson believes second-tier lenders should be one of the first options for investors, with loan rates close to the big banks. Resimac’s two-year mortgage rate for owner-occupiers, at 3.39%, is the same price as ASB and Kiwibank’s specials, as of April 16.

“We’re picking up stuff that doesn’t tick their boxes as well as competing with the banks,” Jackson says.

Resimac has several loan products to suit investors, and allocates rates depending on a customer’s risk profile. It caters for prime borrowers as well as people struggling to get financing from their bank.

Jackson believes non-banks can help investors in need of a quick home loan decision. He says traditional lenders are burdened by slow turnaround times, particularly in a time of crisis.

“Our turnaround times [for application decisions] are much better than the banks’ timeframes,” he says. “We have human underwriters that make pragmatic decisions and look at loans on a case-by-case basis.”

‘In this market, you need lenders who look at loans on a case-by-case basis’ LUKE JACKSON

“Non-banks can provide a more flexible option to investors in turbulent times. In this market, you need lenders who look at loans on a case-by-case basis. You need a pragmatic lender who can look at each deal, and that’s where we come into our own.”

Non-banks will continue to thrive in New Zealand amid the Covid-19 crisis, Jackson adds. It comes as mortgage advisers say banks are less willing to take on new customers or refinancing's from other banks.

With a wealth of options to pick from, investors need to weigh up interest rates, the structure of the loan, and how long they need financing for. Experienced mortgage advisers say second-tier nonbank lenders are a strong alternative to traditional trading banks.

NZFSG’s head of growth Bruce Patten says non-banks are very close to the mainstream banks and a great alternative. “For example, the ones that don’t quite meet the criteria but still want to do something. They are an attractive option, especially going forward, as I see a number of mainstream lenders tightening up even more.”