Published 4 November 2005
The Reserve Bank governor’s petulant rant this week â€“ that a high proportion of New Zealanders are ignoring his previous ineffectual policy statements by continuing to invest in property well into a boom â€“ was followed on Friday by financier Cairns Lockie Ltd saying it had increased its “no financials” loan limit to $5 million.
Cairns Lockie said when it launched its “no financials” mortgage category these loans were aimed at the self-employed who are unable to verify their income based on past accounting information, though their current cashflows are satisfactory.
It’s a category of people that’s always been on the outer in a country where loans are almost universally tied to real estate â€“ the underlying fact of life militating against any change in thinking by borrowers.
Cairns Lockie said today it would lend up to $1 million/dwelling and up to $5 million/individual borrower: “Traditionally the self-employed have found it much harder to borrow than those on wages & salaries. Our â€˜no financials’ home loan makes it easy for the self-employed merely to declare their income on a one-page form, without going through the lengthy process of obtaining accounts & cashflow forecasts for their company.”
The company said the larger individual exposures would also be available for investment rental properties.
As the finance sector comes under the spotlight amid warnings that loan defaults are on their way, Cairns Lockie also issued advice on what investors should look for in a finance company when they’re considering investing in it:
1) background, training, skills & the qualifications of the directors
2) quality & the type of the loan portfolio and whether there are any impaired loans
3) related-party transactions
4) percentage owed by the 6 largest debtors
5) amount of equity.
Cairns Lockie has a prospectus-issuing finance subsidiary, General Finance Ltd, and directors Williams Cairns & James Lockie said they were well qualified, with a number of years’ experience in the industry.
“Our loan portfolio is confined to purely the residential home market – we do not lend on cars, computers or chattels. We do not have any impaired loans. We do not lend to ourselves, companies related to us or our staff members. Our 6 largest loans make up only 32% of our portfolio. Our equity ratio, at 40.34%, is one of the highest in the industry, but this will decrease over time as we grow. It is a huge plus to be well capitalised right from the beginning – this should give our investors a high degree of comfort. Importantly, the directors & their families are investors themselves.”
One of Reserve Bank governor Alan Bollard’s complaints seems to be that he realised too late the extent to which New Zealanders had borrowed at fixed loan rates, and that because of that type of borrowing his attempts to regulate the market through official cash rate rises were having les & less effect.
What should the borrowers do? Switch to floating rates so they can be gouged again, as happened after the mad Muldoon freeze was lifted by the incoming Labour government of 1984? In that era, first mortgages got as high as 30% and homeowners had no control.
Until 1984, residential borrowers were confined to first, 2nd & 3rd mortgages. Over the next 20 years the finance sector has become far more sophisticated & flexible, as Cairns Lockie again mentioned in discussion of revolving lines of credit for property investors: “One of the great flexibilities of the modern mortgage which we offer is that they provide true â€˜come & go’ facilities. This means a floating type of mortgage you can repay at any time and redraw when you want to. Basically, a modern mortgage operates like a giant overdraft facility but at much lower rates. These types of mortgage facilities are ideal for property investors. For instance, if a property investor or anyone else has headroom available in their mortgage and wants to put a deposit down on a potentially good buy or wants to carry out some improvements on a property, funds are readily available. The great feature of today’s mortgages is that most of them have a high degree of flexibility built into them.”