Bank funding gap leaves first home buyers out in the cold
Young Kiwi families with high hopes of taking advantage of the loan-to-value ratios with low deposit for new builds – many with pre-approvals from their bank – are having their hopes dashed when they realise the bank will only finance the completed home, and most builders won’t build without finance.
“It’s a rock and hard place,” says Southern Cross Partners CEO Luke Jackson. “The banks want a finished house, but the builder needs money to actually build the project.
“If the building company goes out and buys the land and builds the house, they become a developer and it’s even harder for them to get finance – very few, bar the big turnkey builders like Universal Homes, can do something like that.
“Bear in mind that 80% of New Zealand’s home builders are small businesses. They can’t often afford to buy the land and finance the build themselves, and to do so ties up too much capital.”
Mr Jackson said banks might approve mortgages on a fixed price construction basis but will typically require far more equity than your average first home buyer has.
“What we’re seeing is the banks will give first home buyers pre-approval to buy a new build home, provided it was completed and built within the last six months.
“The buyer then goes to a turnkey building company in the hope they have some speculative stock on hand – in a location that is convenient, in a style they like and that meets their needs. They are often disappointed.”
As a result, second tier funders like Southern Cross Partners are seeing strong growth in their ‘bridging finance’ product, but some first home buyers and builders may be losing out because they’re unaware of how to plug the mortgage gap.
“We’re not saying first home buyers with pre-approvals from their banks should choose the bridging option – it makes better sense for the building company to do it.
“Builders can approach mortgage brokers, and we are currently doing a lot work with the likes of NewBuild, for example, and ask them to find construction finance that allows them to buy the land and build the house.
“When it comes time for the new owner to take ownership, their bank’s pre-approval kicks in and Southern Cross Partners is repaid.”
Mr Jackson said he was speaking out because he was concerned that many first-time home buyers – and builders – were losing out because they don’t know the alternatives.
“They get pre-approval from the bank, which is very exciting to begin with. It quickly turns to disappointment when they realise their pre-approval can’t buy them the land or allow them to make progressive payments during construction.
“Don’t just stop with the bank. Go to a mortgage broker and consider all your options. Too many first-time homeowners aren’t doing their research or asking the right questions,” Mr Jackson said.
Southern Cross Partners is an FMA (Financial Markets Authority) licensed peer-to-peer lender which matches borrowers and investors together and then facilitates residential property loans supported by a registered mortgage over the borrower’s property.
The company utilises a network of mortgage advisers who help people that don’t fit typical bank lending criteria, even when they have good equity to back their loans (for example, self-employed people).
Under the Southern Cross Partners model, investors invest funds in a loan which the investor owns (together with other investors who contribute to that loan), while Southern Cross Partners manages the loans. If no investors put their hands up to invest in a loan, Southern Cross Partners will fund and retain that loan itself.
The process is completely transparent, and all the details are available.
For more information about P2P investing (including the risks) visit http://southerncrosspartners.co.nz or contact your investment advisor