More complex borrower circumstances and demand for flexible lending structures are giving non-banks a role that extends beyond changes in bank appetite. But are borrower perceptions changing to meet the opportunities that non-banks can provide?
Non-banks are an increasingly important piece of the lending puzzle, yet their value is often overshadowed by a focus on cost – a comparison Claire Seymour, Commercial Finance Adviser at The Good Broker, believes needs more context.
“People will say ‘non-banks are expensive’. But compared to what?”, asks Seymour. “Losing a deposit where the bank won’t support a settlement? Missing out on an investment opportunity? Or being the difference between a project failing or succeeding?”
For Seymour, her role goes beyond filling temporary gaps in bank lending and while she can’t speak to an increase in market share, what she does comment on is that the reason her clients end up with a non-bank is structural rather than cyclical, and structural things don't reverse when conditions loosen.
Baden Martin (pictured), General Manager of Lending at Liberty Financial, also describes a sector with an enduring role, although growth varies across lending segments. However, he does say specialist solutions are increasingly entering advice discussions earlier.
“Five years ago, many conversations started after a bank decided it was unable to assist. Today, it's more often an adviser saying, ‘This borrower has a few moving parts and I want someone who'll look at the whole picture.’”
When timing and structure matter
As with most things, timing is everything in non-bank lending.
“For example, a borrower may have sufficient security and a clear commercial opportunity, but their timetable doesn’t accommodate a bank’s document requirements,” explains Seymour.
“My client had an unexpected opportunity to buy stock at roughly a third off, with a shipping date attached, but his bank wanted financials and his accountant couldn't produce them for several weeks.
“We had a very short timeframe to get the funds together so we went non-bank. The discount was worth several times the difference in interest.
“So in a situation like that, it’s about how the value of a lending solution can extend beyond just an interest rate.”
Seymour says her recurring borrower groups include recently self-employed clients, businesses undergoing transitions, developers seeking equity releases and investors whose proposed income depends on work being completed. And these circumstances require advisers to explain what is changing, how lending supports that change and where repayment will come from.
It also helps that pricing is part of the story, as the gap between some specialist and traditional lending options has narrowed, explains Martin. That means a specialist solution is no longer viewed as something borrowers turn to only when they have no other options.
He also says complexity is increasingly familiar within household finances.
“More broadly, household finances have become more complex. It’s increasingly common to see two incomes, a side business, a trust, and a partner who contracts. This is becoming a normal part of modern New Zealand households.
“So regulation is another part. Debt-to-income limits apply differently to banks and non-banks. Some borrowers who would have been comfortably ‘bankable’ in 2021 now hit a cap that says nothing about their creditworthiness and are exploring alternative lending options.”
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A broader product spectrum
Product development is another reason non-bank lending may retain relevance beyond a particular market cycle. Seymour has observed more lenders offering longer-term regulated lending, extending their role beyond bridging.
Martin, meanwhile, describes a more nuanced approach to matching borrowers with products.
“The tiering is much more granular now. When I started, you were roughly viewed as bankable or not, and pricing reflected that pretty bluntly. Today there's a much broader spectrum.
“At Liberty, for example, we offer options including prime, custom, low-doc solutions for self-employed borrowers, a higher-LVR product and short-term private lending. Importantly, a borrower can move between these as things change.”
A wider range creates opportunities, but also makes a clear explanation of suitability essential. Advisers need to distinguish between the flexibility a client requires and the additional cost they will incur.
“Pricing has also become more competitive, particularly at the prime end of the market. That's almost entirely a funding story. New Zealand securitisation has real depth now, offshore institutional money has come in, and for licensed deposit takers like us, the Depositor Compensation Scheme changed what retail funding costs,” adds Martin.
“But there will always be scenarios where specialist lending carries a pricing premium, and that's appropriate. Those loans often require more detailed assessment and involve different risk considerations than a standard lending application.”
A bridge or a longer-term fit?
Neither contributor sees one universal pathway for non-bank borrowers. Some need a temporary facility while trading history develops, accounts become available or a property sells. Others have circumstances that are unlikely to become simpler.
Seymour distinguishes between planned returns to bank funding, deliberate longer-term arrangements and bridges to a sale. Her approach depends on the client and the purpose of the borrowing.
“From my perspective, for regulated residential lending I'll go to the bank first, and where I can't, the plan to get the client back to a bank is part of the recommendation from the outset.
“For experienced wholesale clients, where the bank is not an option, or where we consciously choose to not go to the bank, then I will choose the non-bank I know will best fit the strategy.”
The adviser’s work therefore continues after settlement. Where an exit underpins the recommendation, progress towards it needs attention throughout the loan.
“You’ll need to make sure you keep your client on track with the exit plan, and you’ll need to update the lender regularly,” Seymour says.
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Adviser understanding will shape growth
For Seymour, further growth depends partly on advisers recognising the problems non-banks can solve and understanding that submissions may require a different approach.
“Not all advisers know how to work with non-banks, so they won’t know how to identify the problem that a non-bank can solve.
“Also, they think that they need to present a loan in the same way as they would to a bank, but it can be vastly different. You need to understand risk through the non-bank lenders perspective, as well as understand and articulate your clients background, goals, security type and exit plan.
“You'll need to be able to spot and mitigate risks to a lender and where lenders are busy, and you haven’t covered all angles, you risk getting a decline for your client, where the loan goes into the too hard basket.”
Martin similarly places responsibility on lenders to develop useful propositions.
“New Zealand benefits from a competitive lending market. While we continue to work with industry stakeholders to improve the competitive landscape, the onus is on us as a sector to continue innovating and providing options that customers and advisers genuinely value.
“The prescriptive affordability regulations are gone, and lenders are deciding for themselves again how to work out whether someone can repay. That's a big shift, and it's had surprisingly little discussion. It also arrived in the same few weeks as the OCR increased for the first time in over three years and business failures ran at their highest in more than a decade.
“In that setting, the most valuable thing a lender has is a credit team that's seen a cycle. Good lending has never been about ticking boxes. It's about applying sound judgement, understanding a customer's circumstances and making decisions that remain sustainable over the long term.”
Therefore, the structural case is clear: borrower complexity, timing pressures and demand for different lending structures will persist. Whether that translates into lasting market share will depend on lenders delivering – and advisers understanding – solutions that meet those needs.
