Second chance at loans

By JANINE OGIER

Don't panic if you're rejected by the bank - these days you can still get a mortgage.

If you don't meet the banks' strict criteria because you're self-employed or you have a bad credit history, then the growing non-conforming mortgage market may provide your finance. And it doesn't involve a loan shark.

In the past three years the non-conforming mortgage market has jumped the Tasman and established itself here.

People who were previously forced to pay the sometimes-exorbitant interest rates charged by third- and fourth-tier money lenders or solicitor nominee companies can now access finance from non-conforming mortgage companies at 1 to 4 percentage points above the variable rate.

Sure it's still more than the going rate at the local bank, but that's the premium for non-conformance.

Borrowers with a dodgy credit rating or self-employed people unable to prove their income are the main candidates for non-conforming loans.

Also, recent immigrants, part-time or seasonal workers and older people wanting to access equity in their homes often don't make the grade for a mainstream lender.

The products available vary from a loan requiring just personal information and a property valuation to a mortgage requiring a self-employed income declaration. They cover home loans or working capital or debt consolidation. The products are sold direct by the lenders and through mortgage brokers.

"Generally the banks won't look at these people. They are not prepared to take the risk," Andrew Dinsdale, chairman of KPMG's banking group, says of the typical non-conforming borrower.

Banks electronically assess loan applications up to $100,000, which doesn't allow for individual circumstances to be taken into account.

Bluestone Mortgages was set up by New Zealander Alistair Jeffrey in Australia in 2000 and Peter Wood established the company in New Zealand in November 2002.

Bluestone and the other non-conforming lenders evaluate each loan application.

Wood says that means personal circumstances such as divorce, redundancy, illness and other mitigating situations that might have led an unwary consumer to accumulate credit unworthiness are considered.

"Nine out of 10 of our customers have been rejected by mainstream lenders. We are prepared to take a risk on the borrower," he says.

Privately owned New Zealand lender Cairns Lockie regards non-conforming loans as mortgages for people with an impaired credit history. These attract 2 to 3 percentage points above the prime rate - the rate banks charge their best commercial customers.

They also offer no financials prime loans, known in Australia as "low doc" loans, to self-employed people with an income declaration.

These attract only 1 percentage point above the prime rate and are estimated at around 10 per cent of the New Zealand mortgage market, according to company director William Cairns.

He says self-employed people can find it difficult to secure bank loans because of lumpy cashflow, or improper accounting, or a large cash component in their business, or the operation of several businesses creating difficulties in tracking income, or even overseas income.

The non-conforming mortgage market has grown through demand.

"New Zealanders are big spenders and we do take on a lot of credit," says KPMG's Dinsdale.

"More New Zealanders are becoming self-employed and those people are demanding mortgages," says Cairns.

Bluestone estimates 250,000 New Zealanders are potential non-conforming loan customers, with 10 per cent of Kiwis having an impaired credit rating.

Small lenders have been looking for new products to set them apart from the mainstream lenders, says David Tripe, director of Massey University's Centre for Banking Studies.

The emergence of the non-conforming market "is a sign of the ongoing fuel for property investment and property price rises", he says.

If there's a property crunch it will be the quality of income that determines payment ability. The fact that the non-conforming lenders require up to 25 per cent deposit or existing equity in a property gives a buffer, Tripe says.

"There's always the risk that somewhere down the track there is going to be a crunch in the property market and exactly who is going to be impacted we will have to wait and see," he says.

Non-conforming loan applications require the same information as mainstream forms - income verification such as a pay slip or tax assessment, ID, estimated living expenses, savings record and credit check.

Difficulties keeping up with a credit card bill any time in the previous five years can come back to haunt potential borrowers when banks turn them down, as can dodging telephone or electricity accounts and hire purchase agreements.

While the mainstream lenders are unforgiving about such displays of a lack of financial management, the non-conforming lenders offer borrowers a second chance, says Brian Berry, chairman of the Mortgage Brokers Association.

Self-employed customers are required to estimate their income in a certified document.

Bluestone's Wood says the certified estimates are then given a "reasonableness" test, applying what the firm regards as a reasonable annual income for the declared profession.

There's a certain amount of trust involved, with the lenders taking your word for it about income, but it doesn't mean these companies will lend to anyone.

Habitual defaulters with a lack of credible reasons for missing payment on bills need not apply. And bankrupts won't be considered.

Rules on what the mortgage will cover can be strict for non-conforming loans.

For instance, Bluestone mortgages aren't available to invest in apartments, every mortgage must be backed by a registered valuation and the house must be in a built-up area - 10,000 homes within 10km.

"We take our risk on the borrower, not the security," Wood says.

Cairns Lockie rejects borrowers if the security is not up to scratch - for instance a house in a poor state of repair - or if the borrower is refinancing other loans but is hampered by a change in circumstances, William Cairns says.

Also, the properties underlying the non-conforming loans must be insured.

There's a higher likelihood of arrears for non-conforming loans, which is not surprising considering the customer base.

Cairns says in his company's experience no financials customers have no trouble keeping up with their payments, while non-conforming borrowers are unreliable as they have let people down in the past.

An advantage of loans from non-conforming lenders is the higher loan-to-value ratio than that offered by finance firms or solicitor nominee companies, Tripe says.

Bluestone has an loan-to-value ratio of up to 85 per cent, while Cairns Lockie loans up to 90 per cent of value in Auckland and Wellington.

Both "low doc" and non-conforming loans are an intermediary service. The lenders operate with an understanding that borrowers are likely to refinance to a lower rate with a mainstream bank once their credit record is clear or they have two years of financials records as proof of income for their company.

"It's not a long-term facility," says Wood.

Therefore, non-conforming loans come with hefty break clauses - or deferred establishment fees - because of the cost of finance in the early years of a mortgage.

For example, Bluestone's break penalties are 6 per cent for the first year, 5 per cent for the second, and 4 per cent for the third. After that, there's no charge for changing lender.

The mortgages also attract establishment fees, unlike many offered these days by mainstream lenders.

The establishment fee for Cairns Lockie borrowers depends on the individual, but 0.5 per cent of the total borrowed is usual for a "low doc" mortgage and non-conforming loan fees can be as much as 3 per cent.

No financials mortgage customers are treated the same as mainstream prime loan clients as they have a good credit history.

Berry from the Mortgage Brokers' Association says the upfront fees vary from a minimum $600 to 3 per cent of the loan amount.

Brokers' fees may also be passed on to borrowers in the case of non-conforming loans, whereas a mainstream lender might cover the fee in the case of a normal mortgage, Berry says.

In Australia banks have jumped on the non-conforming loan bandwagon, but Dinsdale doesn't think that will happen here.

"The banks have their side of the business and these guys have their side. I don't think you'll end up with mixing and matching."

Berry says the smaller size of the New Zealand non-conforming mortgage market may also put off the mainstream banks.

Non-conformists

Bluestone

* No financials mortgage 8-11.85%

* Non-conforming mortgage 7.49-11.65%

* (Until March 31 Bluestone is offering a one-percentage-point discount for the first year of a loan)

Cairns Lockie

* Prime rate 6.9%

* No financials mortgage 7.9%

* Non-conforming mortgage 9.75-11.25%