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Ryan Smuts: 4 things to watch out for when working with 2nd-tier lenders

Wednesday, July 22, 2020


Second-tier/non-bank lending is not for the faint-hearted. Rules differ widely from traditional property financing. Still, with the banks taking a tough stance on property lending these days, it pays to open up your mind to second-tier lenders to get yourself moving forward. 

I have been asked to share some not-so-obvious tips with first-time borrowers in the second-tier market: 

Comparing to bank pricing is a fool's errand 

We are talking about 🍎and 🍊.

Second-tier lenders exist because they offer products a traditional bank can't. They are not regulated like a bank (e.g. before the LVR restrictions were lifted, the 2T lenders were lending up to 80% on IPs) and they lend on different criteria from a bank. So if you find yourself at the low equity end or simply do not meet banks' criteria, you could possibly get your dead funded by a 2T lender. In that case, it makes no sense to compare the 2T's rates with that of the banks seeing that you are dealing with an entirely different product. 

A more helpful comparison is to look at the opportunity cost: are you better off going ahead with the deal using the higher 2T rates or are you better off missing the entire deal altogether. 

Don't, for the love of God, go direct 

This is where serious investors separate from the pack. 

Navigating all the different lending criteria across the bank and 2T space is near impossible unless you are prepared to live and breathe lending criteria all day long. Every lender is vying for a competitive edge in these strange times by offering something different. At the time of writing, 2T pricing range from the mid-3% right up to the high teens. You could also be up for additional fees (fixed or %). 

Simply put, there is no market rate and no industry norm. At least not for now. The offerings are drastically different from lender to lender. Just because a 2T approves you doesn't mean it is your best funder. Choose to work with an experienced and qualified advisor who can guide you through this choppy market. 

Beware of hidden fees 

They really add up! 

Let's look at construction lending as an example. Some lenders charge what is known as a line fee. It is an interest on the amount of money that is not yet drawn. So say you are approved for $1M but have so far only drawn down $100K, you could still be charged line fee on the $900K. 

Your lender and advisor should explain this to you but I encourage any investor to get into the habit of asking ample questions about a loan product before making your decision. As you can see here, interest rates almost never give you the full picture in the 2T market. 

Other common hidden costs to expect are things like valuations, QS reports etc. 

Understand how GST works in the 2T space

If you buy and sell properties as a business (colloquially referred to as trading or flipping) then your activities would attract GST. Because the IRD is paid before the mortgagee, banks will exclude the GST from the value they put onto the property and lend on that figure. The most you can currently get as a first mortgage for a standard trade lending through a non-bank is 80% LVR. On an ex-GST basis, it is closer to being 70% of the GST incl. price. 

For example: 

Purchase price is $500K (GST incl) or $434,782.61 (GST excl). 

70% of GST incl is $350K. 80% of GST excl is $347,826.09. 

These are some key things to be aware of when looking at the 2T market. Products vary considerably and are very much based on your overall intentions/goals and financial position.

More and more of our investor clients are achieving good success in the 2T market. If you have any questions or require further assistance in this area feel free to reach out at any time. We would love to help. 


Ryan Smuts 

Ryan is a Key Accounts Manager at Kris Pedersen Mortgages and Insurance as well as a property investor. 





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