What Is Second-Tier Lending and How Can Investors Take Advantage?
by Sue Irons | General, Property Investment Education
If you are an investor wanting to grow your property portfolio, then second-tier lending as a finance strategy needs to be on your radar.
Over the last 12 to 24 months the New Zealand property market has seen a range of unique conditions. Everything from exuberant growth right across the country, to stricter lending laws taking place and now the rise of interest rates.
The combination of these, and other market factors has left many property investors scratching their heads and wondering how exactly they’ll take the next step in building out their portfolios in 2022.
WHY SECOND-TIER LENDING IS BECOMING POPULAR
Those who have bought or held property over the last couple of years now have a healthy parcel of equity sitting in their portfolios. But the challenge isn’t having equity, instead – it’s actually being able to use it.
See, it’s all very well and good owning a property that has seen high levels of capital growth, but if you don’t actually then use that equity to purchase again, then the value of that property is nothing more than a vanity metric.
You can learn more about equity and how it works here.
The number one issue we’re seeing property investors run into right now, is not that they don’t have the capital to reinvest – it’s strict lending laws and rising interest rates that are limiting people’s ability to tap into their equity.
Accessing money from a traditional bank is becoming harder, and it’s becoming more expensive too. But there’s one major opportunity available to property investors at the moment that could change the game completely – it’s called second-tier lending.
WHY YOU NEED TO BORROW MONEY
First, let’s briefly explore why we need to lend money in the first place.
Lending money to invest in real estate binds property investment together. Without taking on debt or risk, the average person will seldom advance financially in life.
Put simply – without borrowing money, we as investors would be limited and completely stuck.
The idea is to use someone else’s money – eg; the lender’s money – to build a property portfolio that will grow in value and create a passive income for later on in life.
WHAT EXACTLY IS SECOND-TIER LENDING?
So, what’s second-tier lending anyway? First, we need to understand what first-tier lending is.
These are essentially the main big banks – ANZ, ASB, Bank of New Zealand, Kiwi Bank and Westpac.
You’ll also find Co-operative Bank, Rabobank and TSB in this cluster.
Under the Reserve Bank all of the main banks are governed by specific regulations and have rules that they must adhere to. Also, because they are influenced by the Reserve Bank, they all follow the leader when it comes to the rise and fall of interest rates.
However, second-tier lenders are different. They are not controlled by these same regulations and therefore have a lot more flexibility in who they can lend to. Building societies and credit unions are classified as second-tier lenders – they are basically non-bank lenders.
These loan providers do however still have to follow responsible lending laws.
THE DIFFERENCE BETWEEN FIRST & SECOND TIER LENDERS?
When it comes to using the big banks or non-bank lenders, there are pros and cons to both. The most obvious is that while second-tier lenders are generally a lot more flexible when it comes to getting an approval for a loan, typically they’ve always been a little more expensive.
For example, if you were going to pay 5 percent with a main bank, you’re normally going to pay 1.5 to 2 percent more with the second-tier lender.
Traditionally people would only use second-tier lenders if they couldn’t get a loan from a bigger bank as a short-term option because it’s a lot easier to obtain finance and get a foot in the door.
WHY WOULD I USE A SECOND TIER LENDER?
Compared to the screens of information the main banks are looking at, a non-bank lender requires very little personal information. Generally speaking, they won’t comb through three months’ worth of bank statements and check every single transaction record.
On top of this, many are now bringing out some competitive products that could change the game for investors!
For example, one of the second-tier lenders is now doing a 20-year interest-only offer which is pretty much unheard of.
What would the advantage of this be for an investor you might be thinking?
Well look at it like this – let’s just say you had a $600,000 mortgage with one of the main banks. They may have granted you a small interest-only payment period but now you have to pay principal and interest on your loan. In some cases it could be cheaper to go to the second-tier lender at a higher interest rate and go interest-only.
WHEN INTEREST-ONLY LOANS ARE BETTER
As an investor, there’s a time and a place for interest-only and for principal and interest loan repayments.
During the acquisition phase of your property investor journey, your primary aim is to purchase the right properties, not to pay down your debt. Embracing debt can take a while to get used to, but you need to think about the long game and what you’re trying to achieve, i.e. many properties, all creating wealth.
If you can get an interest-only loan in your acquisition phase, this is 100 percent what you should do.
Why?
Because interest-only loans give you flexibility with cash and that flexibility allows you to move on to the next property faster. Having access to spare cash is vital in your acquisition phase, which can last for years. If you’re paying every last cent you have to get down your principal, where is the next deposit amount going to come from when you want to buy a second, third or fourth investment property?
Picking the right home loan is important and you can read more about your options here.
SUMMARY – THE BENEFITS OF SECOND-TIER LENDING FOR INVESTORS
There was a lot of good that came out of 2020 and 2021 for property investors. The most obvious was major capital growth. In fact, almost every man and his dog in New Zealand who owns property now, has gained a lot of wealth on paper through equity because of how quickly values have risen.
But being rich on paper doesn’t count for much if you can’t use that equity because no bank wants to touch you.
However, the emergence of non-bank lenders means a ‘no’ from the bank last week, could be a ‘yes’ from a second-tier lender this week, meaning investors can grab their equity and run with it in order to continue to build out their portfolios.
Oftentimes when market conditions are less than ideal, people sit on their hands and ultimately get left behind. In real estate, action equals money so looking for alternative ways to keep moving forward is a smart decision.
EITHER WAY, SPREAD YOUR RISK!
Regardless of whether you go with a main bank or a second-tier lender, you want to make sure that you spread your risk and don’t put all of your eggs in one basket.
Most banks or financial institutions have clauses in their loan documents that entitle them to review any one of the property loans you hold with them at any time.
Some property owners can be caught napping, as the banks can ask for additional funds if they believe the property value has decreased.
This clause means the bank is entitled to use equity in any of your other properties, held with the same bank, to ensure they are protected from changes in property values, even if it is not specifically related or attached to the original loan.
In other words, all properties are security for all loans with the same lender, which can severely limit your investing future. The clause is known as the “all monies clause.”
The alternative is to use securitised lenders (again, non-bank lenders) or to be diverse by using more than one bank.
Therefore, the result is that any funder you have borrowed money from to invest can only use an individual property as security within your property portfolio.
Understand that the best way to control the bank loan terms and conditions is to use a new funder every time you invest. It is very important to be in control of your financial future.
Sophisticated borrowers, who want to grow their portfolio without the risk of the lender reviewing their complete financial position every time they apply for funds to buy another property, do not cross securitise their properties unless it is necessary. This is the best way to move forward easily.
SECOND-TIER LENDING IS A MAJOR OPPORTUNITY!
For property investors who thought they’d have to watch their equity slowly go to waste, there’s now another option with second-tier lending.
With the right product and terms and conditions, second-tier lending could give you a massive advantage when it comes to creating wealth over the long-term.
However, when it comes to smart investing, lending in itself requires a solid strategy.
The basics listed in this article are a great start but there are many more ways you can improve your finance structure for better returns and a stronger portfolio. To learn more, join our free property investing seminar.
Our expert property coaches are exceptional at helping investors build a wealth creation plan that optimises every available opportunity for new and existing investors.
Limited spaces available.
Register now for the free property investor webinar.
By Sue Irons
How To Use Equity To Purchase An Investment Property
by Sue Irons | General, Property Investment Education
Without a doubt, an investor’s secret weapon to building a profitable property portfolio is their ability to use equity.
This is because the one thing we need as property investors, particularly in the acquisition phase of our journey, is access to our money.
The more cash we can lay our hands on, the more properties we can buy and start to get an income from.
The good news is, during 2020 and 2021 bucket-loads of equity was generated for New Zealand homeowners as real estate across the country rose at a rapid speed. In fact, almost every man and his dog in NZ who owns property now, has gained a lot of wealth on paper through equity because of how quickly values have risen.
So, if this is you the best thing you can be doing to capitalise on this position is to now use equity to create future wealth through real estate.
But first, let’s cover the basics…
WHAT IS EQUITY?
Equity happens when your property is worth more than you paid for it. Maybe the average area price has gone up thanks to an improvement in local infrastructure, or there’s a lack of stock so people suddenly need to pay more to live in your location.
Or it could be from a major growth period like what we’ve experienced over the last couple of years.
Whatever the reason, your property is now worth more than you spent buying it.
Capital growth on a property can quite easily give us the warm and fuzzies. It’s great to swan around feeling smug that your $450,000 apartment would now sell for $500,000. But unless you do something about it, how does it really serve you?
To use equity, is the one financial tactic that a property investor needs to know how to use to grow their portfolio faster.
HOW TO USE EQUITY TO PURCHASE PROPERTY?
Once your property has equity, the smart thing to do (making sure you can still service the loan) is to revalue the property and draw out the increased amount. Property investors then use that cash as a deposit on the next one or two properties, which also yield rent income and capital growth.
Most property investors don’t start out their journey with a big bucket of cash that never empties. The majority of property investors need to borrow money from banks and lenders to get enough cash to buy that first investment.
And the quickest way to buy the next property is to have our first investment pay us back what we borrowed to buy it. In short, we want our properties to pay us back the deposit amount so we can use that money as the next deposit.
The equity equation can begin very early on. In fact, in a perfect world, you’ll buy a property with equity already in it.
Most people who have purchased or held property over the last few years now have a healthy stash of equity and now is the time to put it to work!
CAN YOU LOSE EQUITY?
Ever heard the saying, ‘If you don’t use it, you’ll lose it?’ – this could not be truer when it comes to equity. Just because you have it today, doesn’t mean that it will be there tomorrow.
Markets are constantly changing. Over the 20 years that you own a property you can expect the value to go up, go down and plateau. That’s how real estate works.
Property investors don’t live on capital growth. The income from rent and regular increases in that rent is what allows people to work a three day week. The more properties you own, the greater the passive income.
To use equity instead of just letting it sit there and do nothing, means you can buy a second, third or fourth property that much faster, which equates to more passive income.
MARKET CONSIDERATIONS WHEN USING EQUITY
If you’ve owned real estate before, you’ll probably understand that the property market changes all of the time.
Over the last 12 to 24 months the New Zealand property market has seen a range of unique conditions unfold. Everything from exuberant growth right across the country, to stricter lending laws taking place and now the rising of interest rates.
Rising interest rates are not uncommon, and in fact are a normal part of property market cycles. The issue right now, is that many people who currently hold property (or plan to), are not familiar with increases because we haven’t seen them in New Zealand for the last seven years.
And it isn’t just interest rates that are sending people into a stir, with the crackdown of banks now demanding higher deposits. Very few will entertain lending to someone who doesn’t have a minimum 20 percent deposit. Now that’s a pretty hefty blow for buyers hoping to get a foot in the door with a flexible 10 or 15 percent.
The problem now is that while many homeowners are sitting on a massive pile of equity, going down the traditional route of using it is becoming harder due to the current market landscape.
WHEN IS THE BEST TIME TO USE EQUITY?
But does that mean you have no options? Absolutely not! The best thing to do is pursue other ways to use that equity to continue to invest in property, and there’s a very important reason why.
You won’t make money on a property that you didn’t buy.
There’s never a right time to purchase real estate – you’ll always find a reason to sit on the side-line if you choose to.
The problem with this is, while you’re sitting there hoping for a halt in property prices, interest rates to go down or the bank to get more flexible with borrowing conditions – the exact opposite is happening.
Now not only are you losing potential capital growth and the ability to use equity by not buying today and gaining more value on your property tomorrow, the longer you wait, the more you’ll pay to enter into the market.
Last year alone we saw around 20 percent growth (some areas more than others).
Not acting in the hopes that the market will change to suit your circumstances is wishful thinking that will cause you to lose out on huge gains. The best time to buy (with the right investment strategy) is today.
I HAVE EQUITY BUT MY BANK HAS DECLINED FINANCE – WHAT NEXT?
We’ve established that there’s probably more equity in the NZ market right now than ever before. We’ve also established that the best thing that property investors can do to create future wealth is use it!
But what if you’re trying to use equity and have been declined by one of the big banks due to the current tight lending restrictions?
The number one issue we’re seeing property investors run into right now, is not that they don’t have the capital to reinvest – it’s strict lending laws and rising interest rates that are limiting people’s ability to tap into their capital.
Accessing money from a traditional bank is becoming harder, and it’s becoming more expensive too. But there’s one major opportunity available to property investors at the moment that could change the game completely – it’s called second-tier lending.
For a full breakdown of what second-tier lending is and how you can take advantage of it, read this article.
In summary, first-tier lending comes from the major main banks in New Zealand – think ANZ, ASB, Bank of New Zealand, Kiwi Bank and Westpac.
Under the Reserve Bank all of the main banks are governed by specific regulations and have rules that they must adhere to. Also, because they are influenced by the Reserve Bank, they all follow the leader when it comes to the rise and fall of interest rates.
However, second-tier lenders are different. They are not controlled by these same regulations and therefore have a lot more flexibility in who they can lend to. Building societies and credit unions are classified as second-tier lenders – they are basically non-bank lenders.
These loan providers do however still have to follow responsible lending laws.
Compared to the screens of information the main banks are looking at, a non-bank lender requires very little personal information. Generally speaking, they won’t comb through three months’ worth of bank statements and check every single transaction record.
On top of this, many are now bringing out some competitive products that could change the game for investors!
For example, one of the second-tier lenders is now doing a 20-year interest-only offer which is pretty much unheard of.
If you’ve got equity and have been declined finance from one of the bigger banks, then looking into second-tier lending could be just the ticket to growing your property portfolio.
HOW TO PUT TOGETHER AN EQUITY PLAN
Let the experts at Positive Real Estate teach you about how you can use equity to grow your property portfolio at one of our free property investing seminars.
Sign up for one of our information and education events, where you’ll be equipped with the tools, resources and support to thrive, and not fall behind on your path to financial freedom – whatever that may look like for you.
Book your spot now and find out what you need to know about the current market landscape and how you can make it work for the ultimate wealth creation opportunities.
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