Private credit rewriting mortgage and business borrowing

Private credit is reshaping lending in New Zealand as more people turn away from banks who can’t and, in many cases, won’t offer mortgage flexibility.

Monday, November 18th 2024, 9:10AM

As a result a “no” from the bank no longer means “game over”.

For many borrowers trying to get money from a bank is difficult. “If you don't fit perfectly into the bank’s boxes they don't want to deal with you or they dial back the lending quite significantly, Paul Bendall, First Mortgage Trust (FMT) chief executive says.

Non-bank lenders such as First Mortgage Trust, Basecorp, Avanti, Squirrel and Pepper are filling the hole by offering a more individual focused service than traditional sources of finance.

In the past, some people have had the perception non-banks are “dodgy” or “second-rate.” But they are legal, regulated and run by finance experts.

KPMG, in its annual Financial Institutions Performance Survey says the non-bank sector participants believe they play an important role in the market and there is a need for their services. However they also noted there are misconceptions about their role, especially with regulators and some potential customers.

“The non-bank sector has 1.7 million customers and is providing critical financing for valid credit needs. They provide important lending to a range of people, businesses and industries through a range of products that banks simply do not, and likely will not provide for various reasons,” John Kensington, KPMG head of banking and finance says.

Non-banks’ interest rates and charges may higher than the main banks, but sometimes getting a more expensive loan is better than not getting a loan at all. What borrowers pay is based on the strength of their application and the risk it poses to the non-bank.

There are genuine options available and Bendall says while the private credit industry is becoming an increasingly important alternative to traditional banking that can offer significant benefits, it’s often not well understood by the public.

According to the IMF, half the global financial system is now embedded in the private credit sector or outside the traditional banking industry.

“In America it makes up 50% of the country’s lending. That’s not just property, it's personal finance, motor vehicle finance and credit cards. Australia's probably averaging 25%,” Bendall says. We’re not quite there yet: “In the space that we play in, stripping out the personal finance lending, New Zealand is at about 8%.”

He says Kiwis often don’t realise New Zealand has a thriving private credit sector that’s been steadily growing for many years. “Some people have outdated perceptions of risk in non-bank lending, but the reality is that private credit has evolved significantly and offers a more tailored and flexible option.

“We had a highly experienced property investor borrow some money from us a few months ago – he just got sick of the banks and wanted to have a tailored approach. “His lawyer said to him, ‘What have you done wrong that you can't get your money from a bank?’ He said, ‘No, it's actually the opposite. FMT are better to deal with’.”

Bendall says the banking landscape is changing rapidly and it's important Kiwis understand these shifts.” While overseas markets are more advanced, New Zealand is catching up.”

As banks face increasing regulatory restrictions, private credit providers like FMT are stepping in to provide essential funding to individuals and businesses, aligning with the Commerce Commission’s recent study highlighting the need for more competition and innovation in the lending industry.

For borrowers, lenders, such as FMT offer tailored, flexible financing, providing greater access to funding for businesses and individuals with specific needs.

On the other side of the coin – literally – people with a nest-egg that can be as small as $500 are choosing to place their savings, and trust, in private credit fund managers, who on-lend it. For investors, it can provide higher yields than traditional savings or bank term deposits, with many funds outperforming standard bank returns.

FMT’s business has been built off the back of mum and dad-type investors, and Bendall says as it gets bigger, it wants to diversify its funding sources so the business will appeal to a wider investment audience as well.

At any given time, FMT has about 630 loans and around 1700 mortgages securing that.

FMT doesn’t offer personal finance. For investors it does only first mortgage lending right across the spectrum from small-scale loans to people buying investment property through to habitual commercial property investors and an element of development.

The point of difference, Bendall says, is that it provides tailored solutions. “We'll look at the transaction in its entirety. While, it's really important that applicants have got the ability to service a loan, but that's not the be-all and end-all. We'll look at the whole transaction – the security, the person’s experience – and come up with a solution for them that provides a bit more flexibility.”

That applies to investors, too. “FMT has a Group Investment Fund and PIE Fund (portfolio investment entity, which may provide tax advantages) and it has just launched a wholesale fund enabling wholesale investors to invest into its Group Investment Fund and receive a bonus return for a fixed term investment,

Bendall, who has more than 20 years’ experience in the financial, property and banking sectors, says FMT is well on its way to $1.8 billion of funds under management.

FMT was launched in 1996 by three Bay of Plenty law firms – later joined by two South Waikato firms – managing an initial $30 million of funds.

Bendall says the business has really been built off an investor-first mentality and quite a conservative approach to lending.

“In our nearly 30 years of business we’ve never lost a cent of investor capital or missed a quarterly return to our investors and that’s something we’re committed to maintaining.”

The business has a national perspective, focusing on the five main centres: Auckland, Hamilton, Bay of Plenty, Wellington and Christchurch. “Ninety seven percent of its loan book is based in these areas. That's where the population is, where the jobs are and the markets that have proved stable over a long period of time, Bendall says.

Tags: FMT