Bank vs Non-Bank Lending: Which Is Right for NZ Property Investors?

When most New Zealanders think about property finance, they automatically think of the major banks – ANZ, ASB, BNZ, Westpac, and Kiwibank. These institutions dominate the mortgage market and represent the traditional path to property financing. However, a growing alternative lending sector offers property investors additional options through non-bank lenders, also known as specialist lenders or second-tier lenders.

At Luminate Financial Group, we regularly help investors evaluate whether traditional bank lending or non-bank alternatives better serve their specific situations. The right choice isn't universal – it depends on your circumstances, property characteristics, investment strategy, and timing. Some investors benefit from exclusively using mainstream banks, others find non-bank lenders essential for specific deals, and many use a combination of both strategically throughout their investment journeys.

Understanding the differences between bank and non-bank lending, when each option makes sense, and how to access both types of finance effectively can significantly impact your ability to build a property portfolio in New Zealand's current lending environment.

Let's explore both lending types comprehensively so you can make informed decisions about financing your property investments.

Understanding Traditional Bank Lending

Traditional banks are registered financial institutions regulated by the Reserve Bank of New Zealand, offering a full range of banking services including mortgage lending for property investment.

The Major Players

New Zealand's main banks include ANZ, ASB, BNZ, Westpac, and Kiwibank. These institutions dominate mortgage lending, collectively holding the vast majority of residential property loans. Some smaller banks like TSB, SBS Bank, and Co-operative Bank also offer mortgage lending, though with smaller market share.

These banks are heavily regulated, well-capitalized, and generally very stable institutions. They offer the lowest interest rates available in the market and the most comprehensive product ranges.

Bank Lending Characteristics

Lower Interest Rates: Banks offer the most competitive interest rates available, typically 1-2% lower than non-bank lenders. For investment properties, bank rates might range from 6% to 7.5% depending on market conditions, compared to 8-10%+ for non-bank lenders.

This interest rate difference is substantial. On a $400,000 loan, the difference between 6.5% and 9% interest rates equals approximately $10,000 annually in additional interest cost.

Stricter Lending Criteria: Banks maintain conservative lending standards including comprehensive income verification and documentation, strict debt servicing calculations using test rates well above actual rates, adherence to LVR restrictions with limited flexibility, conservative property valuation approaches, and detailed assessment of existing property portfolios.

These strict criteria mean banks decline applications that don't meet their standards, even when borrowers could genuinely service the debt.

Longer Application Processes: Bank applications typically take 2-4 weeks from application to approval, sometimes longer for complex situations. The process involves extensive documentation requirements, multiple assessment stages, and thorough verification processes.

Comprehensive Product Ranges: Banks offer numerous mortgage products including fixed rate periods from six months to five years, floating rate options, offset mortgages, revolving credit facilities, construction lending, and various features like redraw facilities or splits between multiple loan types.

Relationship Banking: Banks value ongoing customer relationships and may offer preferential terms to customers who maintain broader banking relationships including transaction accounts, credit cards, insurance products, and KiwiSaver accounts.

When Bank Lending Works Best

Bank lending suits the majority of property investment situations where you have stable, verifiable income, strong credit history without defaults or judgments, properties meeting standard bank criteria, sufficient deposits meeting LVR requirements, time to complete thorough application processes, and straightforward investment structures.

For investors meeting bank criteria, banks represent the optimal financing source due to significantly lower interest rates and costs.

Understanding Non-Bank Lending

Non-bank lenders are financial institutions providing mortgage lending but not operating as full-service banks. They're sometimes called specialist lenders or second-tier lenders.

The Non-Bank Landscape

New Zealand's non-bank lending sector includes institutions like Liberty Financial, Avanti Finance, Bluestone, and Resimac, among others. These lenders focus specifically on mortgage lending rather than offering comprehensive banking services.

Non-bank lenders are still regulated financial institutions subject to Credit Contracts and Consumer Finance Act requirements and other consumer protection legislation. They're not unregulated fringe lenders, though they operate with more flexibility than mainstream banks.

Non-Bank Lending Characteristics

Higher Interest Rates: Non-bank lenders charge significantly higher interest rates than mainstream banks, typically 2-4% above bank rates. Where banks might offer 6.5% rates, non-bank lenders might charge 8.5-10.5% for the same borrower and property.

This higher cost reflects the increased risk non-bank lenders accept by approving applications banks decline, as well as their higher cost of capital since they don't have deposit-taking ability like banks.

More Flexible Criteria: Non-bank lenders assess applications more flexibly including accepting non-traditional income sources, considering unique property types banks decline, working with credit-impaired borrowers, exceeding standard LVR restrictions, and assessing complex situations on their merits rather than rigid criteria.

This flexibility enables approving worthwhile applications that don't fit bank templates.

Faster Processing: Many non-bank lenders pride themselves on quick turnarounds, often approving applications within days rather than weeks. Some specialize in fast processing for time-sensitive opportunities.

This speed can be crucial when purchasing properties requiring quick settlements or competing in fast-moving markets.

Fewer Product Options: Non-bank lenders typically offer simpler product ranges, often focusing on specific loan types like bridging finance, short-term loans, or specialty residential lending. Product features and flexibility may be limited compared to comprehensive bank offerings.

Higher Fees: Non-bank lenders often charge higher establishment fees, ongoing fees, and potential exit fees compared to banks. These fees add to the overall cost of borrowing.

When Non-Bank Lending Makes Sense

Non-bank lending serves specific situations where bank lending is unavailable or impractical including self-employment with irregular income or complex income structures, credit history issues preventing bank approval, properties banks won't lend against (unusual types, locations, or conditions), exceeding bank LVR limits but with strong servicing capacity, time-critical situations requiring fast approvals, bridging finance between property sales and purchases, and complex investment structures banks find difficult to assess.

Non-bank lending should be viewed as strategic tool for specific situations rather than default choice for all lending.

Detailed Comparison: Key Factors

Let's examine the critical differences between bank and non-bank lending across multiple factors affecting property investors.

Interest Rates and Costs

Banks: Highly competitive interest rates, typically lowest available in market. Rates currently ranging approximately 6-7.5% for investment properties. Modest establishment fees (often $500-$1,000) and minimal ongoing fees. Potential for rate negotiations, particularly for strong customers or large loans.

Non-Bank Lenders: Significantly higher interest rates, typically 8-11% or more. Substantially higher establishment fees (often $2,000-$5,000+) and potential ongoing fees. Rate negotiations less common, with pricing more standardized based on risk assessment.

Cost Impact Example: On a $500,000 loan held for three years:

• Bank at 6.5%: approximately $97,500 interest
• Non-bank at 9.5%: approximately $142,500 interest
• Additional cost: $45,000 over three years

This substantial cost difference makes non-bank lending expensive if used unnecessarily or retained longer than required.

Approval Criteria and Flexibility

Banks: Rigid criteria based on income verification (payslips, tax returns, financial statements), credit score thresholds, debt servicing calculations using test rates, LVR restrictions with minimal flexibility, and property type and location standards.

Applications not meeting these criteria are typically declined regardless of overall merit or borrower quality.

Non-Bank Lenders: Flexible assessment considering overall situation rather than rigid checklists. Will consider alternative income verification, worse credit histories if explainable, higher LVRs with strong justification, and properties outside standard parameters.

This flexibility is non-bank lending's primary value proposition – solving problems banks won't accommodate.

Application Speed and Process

Banks: Formal processes requiring comprehensive documentation, multiple verification stages, credit committee approvals, and property valuations. Timeline typically 2-4 weeks from complete application to approval, sometimes longer.

Rushing bank applications risks errors or incomplete submissions leading to declines.

Non-Bank Lenders: Streamlined processes with quicker decision-making. Many non-bank lenders approve applications within 3-7 business days. Some specialize in 24-48 hour approvals for urgent situations.

Speed comes from more efficient processes, experienced credit assessors making quicker decisions, and less bureaucratic approval structures.

Loan Features and Flexibility

Banks: Comprehensive product ranges with numerous features including multiple fixed rate terms, offset accounts, revolving credit options, ability to split loans across multiple products, redraw facilities, and construction lending with progressive drawdowns.

Banks also typically allow restructuring, refinancing, and product changes throughout loan term without penalty.

Non-Bank Lenders: Simpler product structures, often limited to basic loan types. Fewer features and less flexibility during loan term. Some non-bank loans have restrictions on early repayment or refinancing, potentially including break fees or exit costs.

Carefully review loan terms before committing, particularly regarding any restrictions on refinancing back to banks when your situation improves.

Maximum Lending Amounts

Banks: Will lend large amounts subject to serviceability and security. Investment property loans commonly range from $200,000 to $2 million+. No arbitrary caps if you can service debt and provide adequate security.

Non-Bank Lenders: May have lower maximum lending amounts, though this varies by lender. Some focus on smaller loans ($100,000-$500,000), others compete for larger transactions. Maximum amounts often depend on specific situations rather than fixed caps.

Geographic and Property Type Flexibility

Banks: Generally lend nationwide but prefer mainstream locations and standard property types. May decline properties in very remote locations, unusual property types (like properties on Māori land, cross-lease with complications), or properties with identified issues (weathertightness concerns, significant deferred maintenance).

Non-Bank Lenders: Often more flexible with property types and locations that banks avoid. May lend against properties banks decline due to location remoteness, unusual titles or structures, properties requiring work, or cross-lease situations banks find complicated.

This flexibility enables purchasing properties at better prices due to limited buyer competition from bank-financed purchasers.

Strategic Uses of Non-Bank Lending

While non-bank lending costs more, several strategic applications justify the additional expense.

Bridging Finance

When selling one property and purchasing another, timing gaps often occur. Non-bank bridging finance covers the period between purchase settlement and sale completion, enabling you to secure new property before selling existing one.

Example: You've found an excellent investment property requiring quick settlement but your current property hasn't sold. Non-bank bridging finance (perhaps at 9% for 3 months) enables securing the opportunity rather than missing it. Once your sale completes, you refinance to bank lending at standard rates.

The additional interest cost (perhaps $3,000-$5,000) is worthwhile for securing a property that appreciates or generates income.

Credit Repair Period

Borrowers with recent credit defaults or adverse events often can't access bank lending for 2-3 years after events are resolved. Non-bank lending provides access to finance during this period.

Example: You had a credit default 18 months ago (now resolved). Banks won't lend until the default is 36+ months old. Non-bank lending enables purchasing property now rather than waiting another 18 months. After establishing 12-24 months of perfect repayment history with the non-bank lender, you refinance to bank lending at better rates.

The higher interest cost during the interim period is offset by earlier market entry and equity growth from property appreciation.

Complex Income Situations

Self-employed borrowers, commission-based earners, or those with multiple income streams sometimes struggle with bank income verification requirements despite genuinely strong financial positions.

Example: You're self-employed with substantial income but aggressive tax planning that minimizes taxable income on paper. Banks can't lend based on income not shown in tax returns. Non-bank lenders assess your complete financial picture including business assets, cash flow, and overall financial strength rather than just tax returns.

This enables accessing finance despite not fitting bank templates.

Properties Banks Won't Finance

Some perfectly sound properties don't meet bank lending criteria due to location, type, title issues, or condition.

Example: You've identified an excellent property on cross-lease title that banks decline due to complications in the lease document. Non-bank lenders assess the property on merits, recognizing it's perfectly inhabitable and rentable. You purchase with non-bank finance, potentially at a discount due to limited buyer competition, then either hold long-term or refinance to bank once you've established tenancy and demonstrated rental income.

Exceeding Bank LVR Limits

When you have strong servicing capacity but insufficient deposit to meet bank LVR requirements, non-bank lenders sometimes lend at higher LVRs.

Example: You want to purchase a $600,000 property but only have $150,000 deposit (25%). Banks require 35-40% deposits for investment properties. Some non-bank lenders might lend at 75% LVR based on your strong income and servicing capacity, enabling you to proceed now rather than saving for another 1-2 years.

The higher interest cost might be justified by earlier market entry and starting the investment clock sooner.

Time-Critical Opportunities

Sometimes excellent opportunities emerge requiring quick decisions and settlements. Banks can rarely accommodate very fast timelines.

Example: A motivated seller offers a property $50,000 below market value for quick sale settling in 10 days. Banks can't approve and settle that quickly. Non-bank lender approves within 48 hours and settles in time. You secure the bargain property, then refinance to bank lending within months after establishing tenancy.

The non-bank fees and higher interest for a short period are insignificant compared to the $50,000 saving from quick settlement.

The Hybrid Approach: Using Both Strategically

Many sophisticated investors use both bank and non-bank lending strategically throughout their portfolios.

Core-Satellite Strategy

Maintain core properties with low-cost bank lending representing the foundation of your portfolio. Use non-bank lending for satellite opportunities that don't fit bank criteria or require speed, flexibility, or higher leverage.

This approach minimizes overall financing costs while maintaining flexibility for opportunities.

Bridge and Refinance Strategy

Use non-bank lending as short-term bridging finance to secure opportunities or solve temporary problems, then refinance to bank lending once situations stabilize and meet bank criteria.

Plan non-bank lending as temporary from the outset, with clear strategies for transitioning back to bank lending within 6-24 months.

Portfolio Optimization Strategy

Use non-bank lending to acquire properties that banks decline but that offer excellent investment fundamentals. After establishing track records of successful tenancies, stable income, and potentially some appreciation, refinance to bank lending at better rates.

This enables building portfolios with properties others can't access due to financing limitations, potentially acquiring properties at better prices.

Choosing the Right Option for Your Situation

When evaluating specific property opportunities or financing needs, consider these factors in deciding between bank and non-bank lending.

Start With Banks

Always explore bank lending first due to substantially lower costs. Only consider non-bank lending if banks decline your application, you can't meet bank LVR requirements, your timeline can't accommodate bank processing times, or the property doesn't meet bank criteria.

Non-bank lending should be your solution when banks won't or can't help, not your default choice.

Calculate Total Cost Difference

When non-bank lending is necessary, calculate the true cost difference including interest rate differentials over expected holding period, establishment fees and ongoing fees, and any exit costs or break fees.

Compare this total cost to the benefit of proceeding with the opportunity now versus waiting until bank lending becomes available.

Plan Exit Strategy

If using non-bank lending, plan how and when you'll refinance to bank lending. Consider what must change for banks to approve your application (time passing since credit event, property establishing tenancy history, your financial position strengthening), when refinancing might be feasible, and whether the non-bank loan has any restrictions on early exit.

Non-bank lending works best as temporary solution with clear path back to bank lending.

Consider Alternative Solutions

Before committing to expensive non-bank lending, explore alternatives including waiting and saving larger deposit to meet bank requirements, partnering with others to pool deposits, selling other assets to raise capital, or reconsidering whether the specific opportunity justifies the cost.

Sometimes the right answer is waiting rather than proceeding with expensive finance.

Working With Mortgage Brokers

Specialized mortgage brokers provide invaluable assistance navigating both bank and non-bank lending options.

Broker Value Proposition

Experienced brokers understand which banks suit different situations, have relationships with multiple non-bank lenders, can present applications optimally for approval likelihood, and help you access both mainstream and specialist options.

Brokers earn commissions from lenders, so their services are typically free to borrowers. They're incentivized to secure approvals, which aligns with your interests.

Choosing the Right Broker

Select brokers with demonstrated experience in property investment financing, access to both bank and non-bank lenders, clear understanding of when each lending type makes sense, and transparent communication about costs and options.

Interview multiple brokers before selecting one. Ask about their experience with both bank and non-bank lending, how many non-bank lenders they work with, and examples of situations where they've successfully used specialist lending.

Broker Limitations

Remember that brokers aren't always neutral advisors. They earn higher commissions from some lenders than others, which can influence recommendations. Always understand the costs involved and whether alternatives exist before committing.

Good brokers disclose commission structures and provide genuine advice even when it doesn't maximize their commissions. Choose brokers with strong reputations for client-focused service.

The Luminate Financial Group Perspective

At Luminate Financial Group, we view bank lending as optimal for most property investment situations due to substantially lower costs and comprehensive product features. However, we recognize non-bank lending serves important strategic purposes for specific situations where bank lending isn't available or practical.

The key is using each lending type appropriately rather than defaulting to either exclusively. Start with mainstream bank lending for properties and situations fitting standard criteria. Consider non-bank lending as a strategic tool for opportunities that banks won't accommodate but that offer strong investment fundamentals justifying higher financing costs.

Many investors successfully build substantial portfolios using exclusively bank lending, never needing non-bank alternatives. Others find non-bank lending essential for specific deals that prove highly profitable despite higher financing costs. Most successful investors maintain awareness of both options and use whichever makes sense for specific situations.

Never use non-bank lending simply because you haven't optimized your financial position for bank lending. If banks decline your applications, first explore whether improving your financial position, credit history, or application presentation would enable bank approval before resorting to expensive alternatives.

However, when non-bank lending genuinely solves problems that would otherwise prevent worthwhile investments, don't hesitate to use it strategically. A property purchased with non-bank finance at 9% that appreciates 15% over two years before refinancing to bank rates proves excellent despite higher initial financing costs.

The right lending choice isn't universal – it's situation-specific. Understand both options thoroughly, maintain access to both through good broker relationships, use bank lending as your default for cost optimization, and deploy non-bank lending strategically when circumstances justify higher costs.

Both bank and non-bank lending have legitimate places in sophisticated property investment strategies. Success comes from understanding when each option makes sense and using them appropriately rather than limiting yourself to either exclusively or using expensive alternatives unnecessarily.

Evaluate each financing decision on its own merits, considering total costs, strategic benefits, and whether alternatives exist. This thoughtful approach to financing enables building property portfolios effectively regardless of whether specific situations require mainstream bank lending or specialist alternatives.