In many respects, it’s a great time to be in the business of mortgages and finance. The country’s buoyant property market, coupled with historically-low interest rates, is propelling borrowers to review, and often expand, their property portfolios.
But with LVR restrictions from the Reserve Bank along with major banks shying away from bridging finance, mortgage advisors must think outside the box to meet their client’s financial needs.
One option worth considering is a second mortgage from a reputable non-bank lender. These alternative lenders can help meet your client’s short-term financial goals or needs. As with any lending option there are always pros and cons to consider.
Why use a second mortgage
Using a second mortgage unlocks the equity in your client’s home, freeing up capital to meet your client’s investment needs. However, they’re not designed to be long-term solutions, as they have higher interest rates and fees attached to them.
With this in mind, a second mortgage should only be taken out for a short time, ideally around six to twelve months, and your client needs to clearly show how it will be paid off in that time-frame. Otherwise, the benefits of this access to capital are wiped out by heavy interest payments.
When to consider a second mortgage from a non-bank lender
- Short-term bridging finance to get them from A to B. Second mortgages should be used as a short-term measure. For example, when clients need to borrow against their house to get through a period of uncertainty, like losing their job, setting up a new business or for help with purchasing an expensive item, knowing they can pay it back quickly. Alternative lenders are able to help meet these short-term needs.
- As an alternative funding option when a client’s bank says ‘NO’. With the LVR restrictions in place, there are times when banks say ‘no’ and you hit a brick wall. This is where a reputable non-bank lender can step in and offer another option that meets your client’s financial needs.
- Working capital for a client’s existing or start-up business. People setting up a new business or expanding an existing one may need a short-term stopgap between starting out and being able to apply for a bank loan. A second mortgage can help achieve this.
- Debt consolidation loan. Unfortunately, there are always unforeseen circumstances which may cause a client to need some breathing-space. For instance, if they get sick, the loss of a partner or redundancy. A second mortgage can help tidy up any outstanding personal loans and arrears on the first mortgage. Plus, with loans being consolidated they’ll pay less interest in the long term.
Private lenders – the pros and cons
Recently, I’ve heard a few advisors say they’ve moved a client’s lending to non-bank lenders (or private lenders) entirely. These alternative lenders are not governed by the new LVR restrictions, so can help meet your client’s financial needs when a mainstream bank is unable to.
While on the surface this may seem to be a quick fix to solving your client’s borrowing needs, it’s important to consider the long-term impact of moving your client’s lending away from a mainstream bank.
There’s also the reduced product offering to take into account – mainstream banks offer customers tools to help meet their financial needs, like credit or debit cards, savings options, digital assistance and personal help.
And you don’t want to shut the door on your client returning to a bank for lending in the future.
On the flip side, because private lenders don’t have the same constraints placed on them, their guidelines for documentation and qualification for lending can be less stringent than banks. This is why they are potentially a better option for your clients when they want to access capital for a short time.
Mixing it up
An alternative to the all-or-nothing scenario is to mix up your client’s loan portfolio: keep the majority of lending with your client’s main bank and use a second mortgage from a private lender for any additional capital.
This is a cost-effective, short-term solution that helps you meet your client’s borrowing needs and while letting them continue to access the benefits of dealing with a bank for their first mortgage – lower interest rates and fees, more service offerings and a relationship for future borrowing needs.