Your guide to non-conforming mortgages

There are options even if you don’t fit the bank’s criteria

If you’re a borrower with a full-time job, a substantial deposit, NZ residency, and a good credit rating, finding a home loan is pretty straightforward. You might need to talk to a mortgage broker or shop around to get the best interest rate, but most banks will be happy to lend to you.

For borrowers who don’t meet standard home loan criteria, getting approved for a mortgage can be a bit more complicated. If you have a low deposit, you’re self-employed or a contractor, you’re new to the country or your credit isn’t great, it can be a struggle to find a lender to finance your first home loan.

But it’s not impossible. Even if your financial situation doesn’t fit the mortgage mould, there are home loan options. You may have to find a non-bank lender and structure your loan differently, but you don’t need to give up on buying a home altogether.

Risk and reward – standard home loans

Most banks have a set of fairly strict mortgage criteria. To apply, you need documentation of steady income over time, a substantial deposit – usually 20% – proof of residency or citizenship, and a good credit record. In a market saturated with would-be borrowers, it’s easy for banks to turn down applicants who don’t meet those standards.

It’s also about risk. Borrowers who don’t meet the criteria represent increased risk to the lender. If you don’t have a good deposit or a reliable income, or your credit rating is negative, you’re more likely to miss payments or default on the loan. You may have faith in your ability to keep up with your payments, but it’s difficult to prove without documentation and a positive credit history.

Here’s our guide to non-conforming home loans:

Are you a non-conforming borrower?

Non-conforming borrowers fit into a few categories:

• Low deposit borrowers may have saved just 5 or 10% of the loan amount they need, making it difficult to qualify for a standard loan.
• Borrowers with bad credit could have significant debt or a history of overdrafts or unpaid credit card debt with their bank, which could mean they struggle to be approved for a mortgage.
• The self-employed, casual workers and people who work on commission may find it difficult to prove their income over time.
• Older borrowers may have problems buying their first home – because the standard mortgage term is 25 or 30 years, banks may balk at lending to people closer to retirement age.
• New residents or people buying from overseas can find it difficult to get a home loan as well.

Some non-traditional borrowers may fit into more than one of these categories, making it even more difficult to get a mortgage.

Non-conforming borrower, non-conforming lender

If you’re a non-conforming borrower, it makes sense to seek out non-conforming lenders. Often, when the bank says no to your application, you can still get a mortgage approved through a non-bank lender.
Banks are restricted by Reserve Bank rules and their own corporate policies. This can make them pretty inflexible – they can’t bend the rules or make exceptions for borrowers who don’t fit the criteria. Non-bank lenders provide finance but don’t usually provide other bank services such as savings accounts or credit cards. Because non-bank lenders don’t have to comply with Reserve Bank rules around loan-to-value ratios (LVR) they can be more flexible about who they lend to. Many borrowers find that they can get a mortgage through a non-bank lender after being turned down by the banks.

Fees, rates, and other differences

If you’re a non-conforming borrower and you qualify for a mortgage through a non-bank lender, your loan won’t be exactly like a standard home loan. Because non-conforming borrowers represent increased risk for the lender, loans are often more expensive and less flexible. You may need to pay a one-off fee when you take out the loan, and your interest rate is likely to be higher than those offered by the big banks. You may not be able to access the mortgage features offered with traditional mortgages either – revolving credit facilities or a mix of fixed and floating rates.

However, this doesn’t have to last forever. Most lenders will let you switch your mortgage over to a traditional lender or structure after a few years, provided you keep up with payments and chip away at the principal. For example, if you have a deposit of 5% to start with, you’ll generally be able to switch over to a standard mortgage with lower rates once you’ve paid off another 15% and effectively have an 80% LVR. If you had poor credit initially, making regular repayments on your mortgage can shore up your credit rating and improve your chances for future mortgages. Once you’ve had a home loan for a while, you’re in a far better position to negotiate with your bank or another lender.

A mortgage broker can help

If the bank turns you down and you’re struggling to meet mortgage criteria, don’t despair. Non-conforming mortgages are approved all the time – you just need to know where to go. And the best way to find the right lender is through a professional broker. A mortgage broker will be able to talk to non-bank lenders on your behalf, negotiate the best possible rates, and help you get into your first home at last.

Ready to take out a home loan? Make an appointment with a Global Finance broker today.

**These are general guidelines and are by no means a reflection of bank or lending policies