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Mortgage broker Squirrel unveils home loans requiring a deposit as low as 5% targeted at first home buyers in cities who are on good incomes but can't rely on parental support

Mortgage broker Squirrel unveils home loans requiring a deposit as low as 5% targeted at first home buyers in cities who are on good incomes but can't rely on parental support

Mortgage broker Squirrel is launching a first and second mortgage product requiring just a 5% deposit that's aimed at first home buyers in cities on good incomes who can't rely on parental support.

"Launchpad" features two loans.

The first loan, provided by non-bank lender Resimac, will make up 80% of the value of the property at fixed or floating interest rates ranging from 2.99% to 3.39% per annum. It'll be a 30-year loan and interest-only for the first five years. This, Squirrel says, will allow borrowers to focus on paying off the smaller and more expensive loan first. 

This second loan will comprise up to 15% of the value of a property, and be funded from investors through Squirrel Money, Squirrel Mortgages' sister company and peer-to-peer lender. This loan will have a fixed interest rate of 9.95% per annum, with principal and interest to be paid off over five years. In terms of peer-to-peer retail investors, Squirrel says they're getting the opportunity to invest into residential mortgages and personal loans and get returns between 4.00% and 7.50% per annum, whilst "helping build New Zealand."

Squirrel says the combined borrowing rate at a 95% loan-to-value ratio (LVR) could be as low as 4.09% per annum, albeit the loan also requires a $1,000 establishment fee.

Squirrel chief executive John Bolton says Launchpad targets first home buyers with good incomes who can't rely on parental support.

"They're the ones who have been missing out," Bolton says. It [Launchpad] is not going to set the world on fire. But there's absolutely a market for it. And I would be pretty happy if over a year we wrote $100 million [of Launchpad loans]. That would be a good outcome."

“Till now, there have not been any options for people with a household income over $150,000 or wanting to buy over $700,000 unless they had help from parents or at least a 10% deposit, often more. This is an option that fills that gap."

Bolton says Squirrel has seen a lot of would-be buyers with good double incomes missing out because they didn't meet the requirements of the Government’s Kainga Ora scheme, which caters for the lower end of the market.

Even though Squirrel's requiring a deposit of just 5%, Bolton says the Launchpad offer is responsible lending. Not being banks, neither Resimac nor Squirrel are subject to the Reserve Bank LVR restrictions.

"The reality is when you're buying a home as opposed to an investment property, it's a long-term investment and you've got to look through the short-term noise. We've launched this product after the market's started to enter a bit more of a consolidation period, so some of that frothiness is disappearing from the market. So people are buying into a market where they've got better information. We're talking entry level housing, this isn't the expensive end of town where you've probably had the biggest price movements. This is first home buyers, entry level housing. A lot of it's underpinned by new builds," Bolton says.

"From a responsible lending perspective, the servicing calculations that we run are more aggressive than the banks' own servicing calculations. So I feel very comfortable that affordability is being appropriately tested."

Loan applicants must be New Zealand residents and first home buyers planning to live in a metropolitan area property. To qualify, they must be employed and paying pay-as-you-earn (PAYE) income tax, and will be subject to a credit check and calculations to ensure they have enough income to service the mortgage. Deposits must be genuinely saved, can include KiwiSaver, and can't be gifted, Squirrel says. 

Launchpad will be available to borrowers buying apartments that are a minimum of 50 square metres, and require a 10%, rather than 5%, deposit.

In most cases property valuations won't be required. Squirrel says valuations generally don’t materially alter the underlying risk for Squirrel, so it doesn't want to cost first home buyers money for the sake of ticking a box.

'Homeowners are relatively low risk'

In terms of peer-to-peer home loans, Bolton points out Squirrel Money has been doing these for four to five years.

"Homeowners are relatively low risk. We're only doing PAYE, we're not doing self employed people, not at these LVRs. That would be too risky. This is PAYE income, proper servicing calculations, but it's the second mortgage component paid off over five years so it's quite an aggressive repayment profile. It forces them [borrowers] to get equity into the property quickly. But what it also means is it really only is available to people who can afford it," says Bolton.

Borrowers will need to have been in their jobs for more than 12 months or have a history in their occupation demonstrating good job stability.

Bolton describes Launchpad as somewhere between an old fashioned first and second mortgage, and securitisation.

"If you think about a securitisation programme, you basically have a waterfall of exposures, all [at] different risk grades...In a way what we've done here at a very simplistic level is really picking up that idea of tranching your risk and pricing it accordingly. It's somewhere between securitisation and an old fashioned first and second mortgage."

Bolton suggests focusing on the "all up" interest rate rather than the 9.95% interest rate on the peer-to-peer loan. Squirrel says once the LVR is below 90% the interest rate could drop to 3.76%, and when the LVR's below 85% the rate could fall to 3.40%, assuming the house price remains stable.

"Bear in mind that you're paying down the five year consumer loan first so your rate actually starts to drop quite quickly. And as an all-up rate that [4.09%] is actually really market competitive. If they were doing 95% lending the banks would be loading 1.5% low equity margins to their rates, which would actually get them to rates around 4.2%, 4.3%," says Bolton.

"This is a part of the market that banks should be writing, this is the lower risk, it's PAYE, it has got good servicing because we're forcing a more aggressive amortisation than banks, and we're forcing people to get equity in their properties faster. When you're talking about responsible lending, I think we're doing all the right things." 

Squirrel says it can lend up to $120,000 towards a first home buyer’s deposit.

"We do have deposit minimums that mean the maximum loan we can do at 95% LVR is $800,000 and at 90% LVR it is $1,200,000. That compares to Kainga Ora First Home price caps in Auckland of $700,000 for new properties and $625,000 for existing properties, in Wellington $650,000 and $550,000, and in Christchurch of $550,000 and $500,000."

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55 Comments

Got a second mortgage in the 1980s to finance an extension and improvements to my home. Recall the interest rate was quite a bit higher than the existing first mortgage, both the same bank. In those days mortgage rates would rise and fall according to the banks. Both mortgage rates were below rates for business/commercial lending. A question then for today is if a property investor is buying and then selling property as a business, and requiring finance to do so, why then is that mortgage finance at the same rate being charged for a household.

Because property investment today is a special business where the rules are different. Up until recently they could claim all the cost deductibles that every other business enjoys, but without all the real world stuff other businesses endure such as:

* Taking out business loans at 8%
* Paying Commercial Rent
* Paying Electrical Bills for the premises
* Paying Staff including leave entitlements and PAYE tax
* Collecting and paying GST
* Having to entice customers on a daily basis for an income rather than 1 customer on a 12 month fixed term for 2/3rds of the average weekly wage.

Be interested to know how long any other business can take out an Interest Only loan for.

Except it is not a business, it is an investment.

Nobody in their right minds would claim investing in Bitcoin is a business even when you can let others borrow it by an extra interest which is basically what happens when you invest in a rental property. Yet here we are with the landlord's club complaining about their investments being hard to maintain, well there is an easy solution to that, invest in other sectors of the economy.

While also getting to pretend one is not investing for capital gains so as to conveniently evade tax.

This has got disaster written all over it. Why do lenders consider a PAYE job more secure than an established self employed/limited company?

exactly....and what happens if house prices fall?

its just more petrol on the fire allowing young people to over extend themselves

Because the stats would show they are more secure...

Dont some of those PAYE workers work for small businesses ? I have 5 employees, but because im self employed Im not worthy.... Oh the Humanity.

Which stats are those?

The internet I just made that up keyboard warrior stats, thats what.

I had a friend who was earning $200k+ in Christchurch who was able to get a 100% mortgage from ANZ back before the GFC.

How on earth did they have no pennies to rub together on a $200k income?

Beats me. I think he had something in the low 5 figures saved but didn't want to spend that. The impetus was kiwisaver being introduced with the mortgage diversion option; he hadn't really been planning to buy a house.

I was earning a lot less than that then and got a 110% mortgage from ASB. For a rental. Good times then!

Looks like loan sharks made it to the real estate sector. Many young couples will get into this based on ill advice, hopefully this won't end up in tears.

As a former broker we did split loans like this all the time and almost always to owner occupiers. Never had any repayment issues. The borrowers were so happy to have an option, they worked really hard to make the payments and we never had any bounce. This is a really good lending option which I fully support. If I was in these borrowers shoes I'd take it.

When people are desperate they would take any options, even those that are not really that great for them, I am all in for giving people options, the problem is those taking advantage of these situations to make a profit is not the most ethical choice especially when there are high risks involved like in this case.

Sub prime Squirrel.

New Zealand needs this like a hole in the head.

Don't even qualify for SquirrelI? I won't be surprise to hear you regurgitate the same narrative 10 years from now.

You seem to write off every single opportunity to be a home owner because it didn't suit your ideas.

It's interesting, there are a group of commenters who always see the negative side of everything, it doesn't matter the topic, if it's about housing, the government, policies, the RBNZ, money. The likes of Brock, Albert, gnx, b21 always, without fail think everything is a bad a idea and too dangerous. (edited)

It is the group of commenters that have common sense and understand the basics of the economy and care of what might happen apart from their own interests.

EDIT: please stop editing your own comments after someone has already replied to them.

Doing pretty well thanks with my young beautiful family and $250k plus income. How about using some rational thinking rather than the ad hominem attacks.

That's awesome Albert!

Disagree.

This is exactly what NZ needs. If you saw how many good quality borrowers are declined based on low deposits you'd appreciate this will help thousands of people get into their own homes. Good on squirrel.

It's dodgy they arent covered by the RBNZ lending restrictions, which are there for a purpose.

This was expected as entry prices are high and the FHB have to keep being rolled in to fill gap investors left . Did not expect it so soon though

No reason for FHBs to complain there isn't a level playing field.

To be fair.. people are quick to knock this but an old school friend bought her first house decades ago with this type of scheme where the initial few years were expensive. Her house is now fully paid off

That was a completely different scenario, when 2nd mortgages were around both interest rates and inflation were high, prices were 3-4x income. All you needed to do was service the mortgage for a few years and inflation had put a big dent in the principal. Prices are now so high that debt serving as a percent of income is near record highs (despite low rates) and will remain far higher for the life of the mortgage unless rates fall or inflation/income goes much higher, both highly unlikely.

2nd mortgages are a laugh, the old "we had to take out a second mortgage" chestnut that comes out from time to time. Term deposit rates were double digits and a 20% down payment was 7 - 12 months worth of wages, yet people were taking out 2nd mortgages? Sure goes to show how frivolous people were back then.

Imagine if today's FHB who are having to save 3 - 4 x their wages for a deposit, could instead just buy the house???

Buyers know that but they have no choice on price.

This gives the hopeless a chance and is great news.

If this was your only option of course you'd do it and move heaven and earth to make the payments.

These loans won't be approved if servicing fails.

As an existing peer lending investor I think this is a good addition to Squirrel's existing loans and less risk than unsecured lending. Sure, peer to peer is risky and should only be a small part of portfolio but having some high risk high return investments is part of investment diversification. Most people taking out this sort of loan will pay it back quickly so even the employment risk is relatively low. This product may be a little late to market if house prices stabilise and FOMO is now gone.

The sub-prime alarm bells certainly ring with this one but on the other hand if they are actually doing proper income and saving checks it's not quite US GFC levels of risk. I'm sort of partial to the idea in the absence of any serious government action to control the housing market, as the alternative is that people on above average incomes but without family support continue to sit on the sidelines.

Nearly 10% interest on 15% of the median priced house (let's say $820k?) works out to about $600 per week by the looks of it. The remainder on interest only at 3.39% would be around $300pw? Seems like a fair chunk, but kind of manageable for a couple on $150k combined.

That being said, I'd much rather the focus was on increasing supply and addressing speculative demand, as measures to control risk in the housing market have disproportionately harmed FHBs without family support. 90-100% mortgages going away post GFC and LVRs coming in in 2013 slammed the door shut on these people while prices continued to run away.

What’s the definition of metro area?

Anywhere the haircuts are hip.

I presume all squirrels borrowers have been bounced by the banks. I am just going to say the old "if its too good to be true (4 to 6% investor return) it usually is"

"Squirrel says it can lend up to $120,000 towards a first home buyer’s deposit."

Gareth, I think there's a "0" missing

Nope.

OK so are you saying that Squirrel will lend $120k deposit on top of the 95% loan ? That would most likely make it a 100% loan then ?

Squirrel are confident that property prices cannot come down, therefore are happy to lend 100% of the purchase price. A bit like what the banks do with property investors.

Surely the high interest premium does not mean Squirrel considers these are higher risk than usual loans right?

That is the max for the 15% Squirrel will be loaning, the other 80% is resimac.

Interesting product, JB, wish you all the best to allow some more FHB's into homes and make some $ in the process.

If it wasn't for the fact that I'd already seen this offered by another brokerage/lender weeks ago, I would've found this rather intriguing.

Personally, we probably fit into the category of people this type of loan is aimed it but having actually dealt with Resimac before, they're not as straight forward to deal with as they're making it sound.

Makes me wonder what arrangement Squirrel has with Resimac as Resimac is strict with valuations and loans that extend beyond retirement age.

I suspect if you had issues with loans extending beyond retirement age this isn't targeted at you. I suspect this is more targeted at young professionals late 20s early 30s

That's only 100 mortgages a year at current prices.

Here's another possibility. Why not revert to what used to ACTUALLY happen. Young FHBs in the 1960s, 1970s, 1980s, and 1990s often used the following methods until the banks started offering just the one mortgage to make more money: they would obtain a smaller second mortgage by the vendors 'leaving money in', or the family supplying the funds , or their solicitors lending the second mortgage from their trust fund (although the latter method did drop off as more and more solicitors were caught dipping into these funds themselves and clients (usually elderly) who entrusted their funds with solicitors eventually decided that their money would be safer in the bank. The FHBs, both husband and wife working before having children, used to save the deposit whilst renting. The vendor leaving money in as a second mortgage was the most common method, as this was often the making of the sale; and of course vendors weren't so greedy as they have become in recent times.

Banks don't like vendor finance as it usually indicates a massive red flag that there's issues with the house.

H'hold income of $150k. OK. Above average. But 5% of $700k is only $35k. Is that all that this target borrower can rustle up for a deposit? Is this the reality for many people? If a deposit of that size is all they can afford, what are the chances they have a 'non-housing related' emergency fund?

Two things: Currently they would have to be rustling up $70k, so this gives them more of a chance; and I suspect they aren't looking at $700k houses, with DTIs of 6+ pretty commonplace

Among the causes of the GFC -

'Lax underwriting standards and high mortgage approval rates led to an increase in the number of homebuyers, which drove up housing prices. This appreciation in value led many homeowners to borrow against the equity in their homes as an apparent windfall, leading to over-leveraging.'

In Australia - low deposit home loans are mortgage insured so the risk is quantifiable and publicly reported. Standard and Poors' report the average default/claim rate is less than 0.50% so on average less than half a percent of low deposit homeowners default. The worst ever claim rate was after the 1987 share market crash (1991) recession where unemployment went up to around 10%. At that point the mortgage insurance claim rate peaked at 3.00%. It went a little over 1% during the GFC.

That is Probability of Default. Then there is Loss Given Default. Obviously these second mortgages will lose most of their value if house prices dropped AND the borrower defaults. 3% x 100% = 3%. Still only 3%.

The P2P loans are paying investors 7.50% and provisioning 1.00%pa into a reserve fund that currently has over 4.00% reserves. The reserve fund can haircut borrower interest to replenish the reserve fund and the loss is socialised across the asset class giving maximum diversification. That equals a lot of capital protection.

Loans are tested for affordability using standard bank processes, require PAYE income (not commission),and the 15% second is amortised over 5 years pushing equity into the property quicker than banks. The underwriting standard is clearly way higher than the US during a sub-prime crisis with NIJA loans (no jobs and no income). To draw comparisons is plain dumb and shows a lack of understanding residential mortgages.

In a residential mortgage bond S&P typically rate 90% of the notes at AAA which is a better credit rating than the NZ government. There is always risk there but owner-occupied residential mortgage portfolios (no development/business loans) offer a strong form of security. This particular portfolio is low-deposit so the risks are higher.

The risks on owner-occupied seconds will be significantly lower than on a consumer finance book. Squirrel reports its underlying default rate on its consumer book of 1.30% and that is during and after COVID.

John, that you?

Yup :) Couldn't find my old Squirrel log-in.

House investors probably dont want FHB buying and occupying homes, they want them as renters! Any products that convert renters into home owners is exactly whats needed. With rents where they are FHB can likely use this product for a small increase over their current rents and become secure!