How private credit returns are generated in New Zealand: where the interest starts and where it ends up

How private credit returns are generated is straightforward. A business borrows against property and pays interest, and that interest, less whatever anyone in between keeps, becomes the investor’s return. In New Zealand, short term secured business loans pay 12% to 18% p.a. because borrowers are buying speed and a term of months, not because their credit is weak.

HomeSec Business Finance, a private business lender lending since 2004, with its New Zealand office in Auckland, lends its own money this way and invites wholesale investors to co-fund some of its loans. Below, we follow a dollar of interest from the business that pays it to the investor who receives it, and look at what it pays for and where it can leak.

What is a private credit return made of?

It helps to split the rate a borrower pays into layers.

A bank’s rate on a long loan is built mainly from the first two layers, spread thinly over many years. A short term lender charges for all four, and the last is the one borrowers value most. Whatever intermediaries take comes off the total before the investor is paid, which is why the structure matters as much as the headline rate.

Why do New Zealand businesses pay 12% or more?

Because the alternative is often waiting, and waiting can cost more than interest.

Picture an established Christchurch business that has agreed to buy the building it leases, with settlement due in a fortnight. Its bank is interested but needs longer than that. Borrowing NZ$300,000 for three months at 14% p.a. costs NZ$10,500 in interest. Losing the building, or the deposit already paid, would cost far more. That is the trade the borrower is making, and it is why most of HomeSec’s borrowers are established businesses drawing on equity in property they already own.

HomeSec can decide within hours and settle within days, and its loans run from one to 12 months. A double-digit annual rate charged for three or four months is paid for those months only.

Why don’t the banks fill the gap?

Business lending takes up a smaller share of bank balance sheets here than across the Tasman. University of Auckland research by Professor Rod McNaughton found business lending was 18% of total New Zealand bank lending in 2024, against 30% in Australia, and that banks still wanted personal guarantees and property security even under a government-backed lending scheme.

The Reserve Bank’s own work points the same way:

• Over the past three years, small firms paid spreads of about 390 basis points over the 90-day rate, against 280 for medium firms.
• Outright rejections averaged under 5%, but smaller firms more often met higher costs or terms they would not accept.
• In November 2025 it reported soft credit growth for smaller businesses, with annual lending to small and medium firms going backwards.

None of that makes the banks wrong. Their model suits long, standard loans. It does leave sound businesses with property equity that need an answer faster than a bank can give one, and that is the market short term secured lending serves.

What is the investor being paid to accept?

The borrower’s premium becomes the investor’s compensation for four real exposures:

1. Default. A borrower may not repay on time, or at all.
2. Recovery time. Under the Property Law Act 2007, a default notice must allow not less than 20 working days to remedy the default before the property can be sold, and a mortgagee sale then involves marketing, typically about four weeks.
3. Commitment. Your money is lent for the term, not held at call.
4. Concentration. One loan is one borrower and one property.

HomeSec narrows those exposures rather than removing them. It caps residential LVRs at 80% and lends at lower LVRs against commercial property, does no construction or development lending, keeps terms to a year or less, and puts its own money into every loan. Risks and protections goes through each safeguard.

Why does one loan pay 12% and another 18%?

Rates generally follow risk. Compare two hypothetical loans:

Location adds another layer. REINZ figures for August 2026 showed every South Island price index rising while seven of the eight North Island series fell. Neither loan is automatically the better one. A higher rate is only worth having if the extra risk is one you have read about and accepted.

Where can interest leak on its way to you?

In a pooled mortgage or private credit fund, borrowers pay the fund and the fund pays investors a distribution. In between can sit management fees, performance fees, the drag of cash held back for redemptions and, in some funds, a margin the manager keeps between the borrower’s rate and yours.

Wholesale investors see less of this than retail ones. The FMA points out that wholesale investors do not receive a product disclosure statement, or information about the investment’s ongoing performance. Marketing can mislead as well. In October 2021 the FMA ordered Du Val to remove advertising for its mortgage fund that it considered likely to mislead or deceive investors over the level of risk and fees. By September 2025, RNZ reported, Du Val’s Mortgage Fund investors were unlikely to benefit from the statutory management.

None of this means every fund keeps a hidden margin. The practical point is that in a pool you usually cannot compare the borrower’s rate with your own, so ask the manager to show you both.

How does direct co-funding keep the rate in view?

In direct co-funding there is no pool for the interest to pass through. You read the loan’s pack, including its rate, before you decide. If you go ahead, the loan agreement is drawn up in your name (or your company’s or trust’s), you are named on the mortgage registered with LINZ for your exact contribution, and principal and interest are paid straight into your own bank account.

HomeSec has its own money in the same loan and earns mostly when loans are repaid, so its outcome moves with yours. The wider contrast between the two structures is in direct mortgage investment vs pooled funds.

How does 12% to 18% stack up against deposits in 2026?

One useful lens is the margin each option pays over the OCR of 2.75%.

The deposit margins are thin because the bank carries the lending risk. The loan margin is wide because you carry it. Our returns guide turns these rates into New Zealand dollar examples. Interest from co-funding is not subject to GST, since lending is an exempt supply, but it is taxable income with resident withholding tax at your RWT rate. Your accountant will confirm your position.

Is 12% to 18% too good to be true?

New Zealanders have good reason to ask. Between 2006 and 2012, 51 finance companies went into receivership or liquidation or froze payments, and RNZ reported in 2016 that about 200,000 investors were still owed around $3 billion. At Strategic Finance, 58% of 87 loans were second mortgages sitting behind $544.4 million of senior debt.

Most of those investors held debentures. They lent to the finance company, and the company chose the loans; no mortgage carried the investor’s name. The test for any double-digit return is whether you can trace it to its source.

If every answer is yes, the return has a visible source. Our account of New Zealand’s finance company collapses shows what happened when the answers were no.

Want to trace the return on a real loan?

Each HomeSec pack sets out the property, the borrower, the exit, the rate and the risks. To see one, register your interest, and the Funding Manager will be in contact.