Buying property is a great way to begin to build wealth for you and your family, but depending on your financial situation, equity position, and the banks tightening their debt-to-income ratios, it may be a “no” from the banks when it comes to lending.  

 If you’ve been turned down by a bank, you may start exploring second-tier lenders like Resimac, Bluestone, Liberty, Avanti Finance etc.  

 These companies can be a real lifesaver when the banks say no, but before you dive in to signing a contract, it’s important to know the risks of second-tier lending and ensure you don’t end up with debt up to your eyeballs.  

 In this article, we’ll talk about 07 risks when it comes to second tier lending so that you can make an educated decision on whether second tier lending is the right option for you. 

Preliminary Question: Why have the banks said no? 

Before heading down the second-tier lending route, it’s important to ask yourself: why did the banks say no in the first place? It could be due to a lower credit score, insufficient deposit, a high debt-to-income ratio, or an unstable income source.  

 Understanding the reason can help you assess if you’re truly ready to take on a loan at all, or if waiting, saving a bit more, or improving your credit might put you in a better position to approach traditional lenders again. Jumping straight to a second-tier lender without addressing these issues could just be postponing bigger problems down the line. 

 01. Higher Interest Rates and Fees

Let’s get straight to it—the interest rates with second-tier lenders are typically higher than those at your regular bank. Why? Because they’re taking on borrowers the banks won’t, which means more risk for them. And with more risk comes more cost… for you.  

 Aside from the higher rates, you’ll likely be hit with extra fees too—application fees, administration fees, you name it. It’s all part of the package, and these costs can add up quickly, so make sure you’re doing the math as to how much this lending will cost you. 

02. Stricter Loan Conditions

Sure, second-tier lenders might be more flexible when it comes to approving your loan, but they can also come with stricter conditions. You might face shorter loan terms, balloon payments at the end of the loan period (a big chunk of money due all at once), or specific property types they’re willing to lend on. You may also have to refinance after a couple of years, and if interest rates have risen even further, this could be a pretty stressful situation.  

03. The Debt Cycle Danger

The flexibility of second-tier lenders can sometimes lead you into what feels like a never-ending debt cycle. If you’re already stretching your budget to buy a property, those higher interest rates and fees could make it tough to keep up with payments.  

 Fall behind, and suddenly you’re facing late fees and penalty charges—ouch. In the worst cases, if you keep defaulting on your mortgage payments, you could be looking at a mortgagee sale, which is every homeowner’s nightmare. 

04. Impacting Your Future Borrowing Power

Taking out a loan from a second-tier lender can be a red flag for traditional banks if you want to borrow more in the future. It might lower your credit score or make you look like a higher risk. And we all know banks are picky about their borrowers.  

 So, before you opt for second-tier lending, think about how it could affect your future financial moves—especially if you’re planning on refinancing down the line.