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Non-bank lending has grown - fast
In New Zealand, the vast majority of lending is provided by the major banks, such as ANZ, ASB, Westpac or BNZ. They’re the first port of call for most borrowers and brokers – but they aren’t the only choice nor are they always the most suitable.
For those borrowers where main bank lending isn’t possible or appropriate, non-banks fill the gap, providing home loans, personal loans, auto loans and business loans to borrowers in unique circumstances.
Non-bank lending is small – very small. Non-banks only made up about 1.5% of all home loan borrowing in New Zealand, according to Reserve Bank figures. But that number is growing, and rapidly.
According to those same Reserve Bank figures, main bank mortgage lending values grew 8.2% from March 2021 to March 2022. Non-bank mortgage lending, on the other hand, grew almost 4 times faster, increasing by over 30% over the same period.
Clearly, something is working for non-bank lenders and their customers.
Why has non-bank lending become so popular lately?
If you surveyed borrowers about the most important thing they looked for in a loan, chances are you’d turn up one common thread: low interest rates. But compared to main banks, non-banks do typically have higher interest rates – though not always.
How do we reconcile this with the growing popularity of non-bank lending?
The key is the criteria of a non-bank compared to main bank lenders. Where main banks require borrowers to tick a wide variety of boxes to be approved for lending, a non-bank lender can often provide credit where the main banks can’t, using their more flexible criteria or product options.
This might be due to some adverse credit history on the part of the borrower, they may have some missed payments on their file over which the main banks would reject their application, or they might be self-employed or have overseas income that the main banks don’t recognise. They may even be in a unique or complex borrowing situation that the main banks can’t help with, but for which a non-bank has a dedicated, specialised product.
Is this popularity likely to last?
To predict the future, you must look to the past.
Legal changes like the CCCFA have challenged the main banks, leaving non-banks in an excellent position to be more nimble and flexible. Many of the changes prescribed by the CCCFA were, in fact, already being performed by non-banks, allowing them to work almost business-as-usual.
Growing diversity in income sources also plays a significant factor. Many people are choosing to enter self-employment, and many people in New Zealand receive overseas income – either of which can have negative ramifications for a main bank application.
Then there’s the age-old factor of turnaround times. Sometimes, time is of the essence for a deal, and slow approvals can create a hurdle for a person’s home purchase. Non-banks, being smaller, are often more agile than their larger cousins, allowing for faster turnaround times and technology adoption to reduce wait times for brokers and customers.
Add in the variety of unique borrowing situations that more and more Kiwis find themselves in, and you quickly uncover the reasons why non-bank lending has become so popular. As long as these factors are factors – and many of them are fundamental parts of the credit landscape – there will be a place and a growth trajectory for non-bank lenders in the toolbox of a New Zealand mortgage adviser seeking to help a customer navigate all available options for their next source of credit.
Mark Mountcastle
Mark Mountcastle has over 30 years’ experience in financial services and leadership, managing numerous projects, risks, and cultural changes.
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