Down but not out for mortgages

When Torbay resident Mac Isherwood set up as a self-employed computer software engineer he knew that it would be difficult to get a mortgage on his next home.

Like 250,000 people nationwide, Isherwood didn't fit the mould that banks are looking for when they dish out mortgages. In Isherwood's case, his accountant had done a good job of showing the Inland Revenue that he didn't - on paper - earn much money.

Other potential borrowers fail as soon as they get through the bank's revolving doors because they have a blemish on their credit records.

The National Bank, where Isherwood held his bank accounts, was willing to lend, but wanted him to jump through hoops for the money.

"They wanted a lot of information from my accountant and at one stage started asking for a guarantor. I said to them that I was 38, married with children and I didn't need a guarantor."

Isherwood had been introduced to Cairns Lockie, one of more than 20 non-bank lenders in this country, by his solicitor when building a previous house.

"The thing that we were really really impressed with was that they were really fast and made it so easy [to take out a loan]."

The market in New Zealand is young with non-conforming mortgages appearing from virtually nowhere in the past few years, says KPMG's Financial Services Group chairman Andrew Dinsdale.

Although getting a mortgage has become much easier in the latest boom, the banks don't want square pegs in their round holes and often reject those who can't prove their income or may have taken a financial wrong-turn in the past.

Typically, banks use automated credit-scoring computer programs to decide whether they'll lend to you - preferring to let the small specialist lenders fight between themselves for the spoils, says Dinsdale.

However some of the mainstream banks such as the ANZ have also taken a leaf out of the minnows' books and launched their own non-conforming mortgages for the self-employed, credit-impaired and new immigrants without a financial track record in this country.

Kim Lyons, director of mortgage broker NZ Mortgage Finance, says typical scenarios where non-conforming mortgages suit borrowers are where people fall outside tick-box lending. Examples:

* Credit-impaired mortgages where borrowers have black marks against their names at Baycorp.

* Self-employed people and seasonal and part-time workers who do not on paper appear to have the income to meet the mortgage payments. With this type of loan, instead of providing audited accounts to prove your income, you state yourself what you expect to earn. These loans are called no financials, self-certificated loans, no docs or low docs. * 100 per cent mortgages where someone such as a new immigrant or university graduate wants to buy a house but doesn't have a deposit.

* So-called "wrap mortgages" are also available where the wrapper buys the house and "sells" it on at a higher price, charging a premium on the interest that they're paying to the bank.

The buyer does not become the official owner of the property until the mortgage is paid off. The Ministry of Consumer affairs has warnings about such mortgages on its website.

One group that has benefited hugely in the new free-for-all for non-conforming customers is the person with a black mark against his or her name at Baycorp. Two factors have changed this:

* The rapid growth in new lenders offering products aimed at non-conforming borrowers - companies such as Liberty Financial, Bluestone Mortgages and Pioneer Mortgages.

* The rise of the mortgage-broking industry. Brokers are often able to argue the toss for a customer who may have been turned down if they'd fronted up at the bank directly.

Many of those people who approach banks and are turned down don't know of alternatives, says Peter Wood, general manager of Bluestone Mortgages.

Currently only 1 per cent of New Zealand mortgages fit into the non-conforming category compared with 8 per cent in Australia, 14 per cent in Britain and 20 per cent in the US.

What that means is that would-be homeowners who were locked out of the market in the past now have a chance of owning their own des res.

Few people fall completely out of the system, says Wood. Only those who simply don't earn enough to service their debt and those who are both credit impaired and whose properties are not up to scratch and may need work in order to sell them in the event of a mortgagee sale.

Because the lenders are taking a risk on the borrower, they usually require the property to be better than average.

Like most people who take out non-conforming loans, Isherwood had to pay a premium for his mortgage. The lenders do it to cover the greater risk of their customers not paying.

The premium often amounts to 1 per cent or or more.

What's more, says Lyons, you'll often pay an arrangement fee of $1000 with some of the lenders of last resort.

Also, exit fees tend to be higher. (If you break the loan - especially during a fixed period - the company simply claws back the profit it would have made from you during the rest of the period in the guise of exit fees.)

At Bluestone, says Wood, the average life of a mortgage is three years.

Once borrowers get a track record of repayment, they become acceptable for mainstream lenders.

"The fact they have been paying higher interest rates than they would at the bank makes them a more attractive proposition," Wood says.

Also, black marks against your credit record are wiped clean after five years, which means providing you keep your credit card out of trouble in that time, you'll have a chance with the banks again. Another downside of non-conforming loans includes the loss of "free banking" with your bank if you get a mortgage elsewhere.

But on the other hand that can also give you flexibility to become a rate tart - changing lenders for a better rate.

With non-conforming mortgages you're usually limited to an 80 per cent mortgage, says Lyons.

This may be even lower, if, for example, you're both self-employed and have impaired credit.

And Shelley Hughes, a Baycorp spokeswoman, notes: "It is also important to understand that a credit provider may decline an application for credit even if overdue accounts, court judgments or bankruptcy information on a file show that they have been paid in full or settled."