Australia’s mortgage industry is getting more competitive with the resurgence of non-bank lenders and the emergence of neo-bank lenders.
Borrowers have more options to choose from when getting their home loan – so why should you choose a non-bank lender for your next home loan?
What is a non-bank?
A non-bank lender is a financial institution that does not have an authorized deposit-taking institution (ADI) licence.
They perform most of the functions like a traditional bank would, but are not able to take deposits from their customers.
However, even if they cannot take on deposits, they offer products like home loans, car loans and even credit cards at competitive interest rates compared to the bigger banks.
What are the advantages of using a non-bank lender?
There are several advantages of using a non-bank lender compared to a traditional bank:
- They are specialist lenders who can help higher-risk borrowers who were rejected by major banks due to a variety of reasons like their credit history or their employment status.
- Since Australian Prudential Regulatory Agency (APRA) does not regulate them, they assess repayments differently. They have different and lenient methods for assessing existing and new debt.
- As they borrow funds at wholesale prices, they can offer competitive and sometimes even cheaper interest rates than traditional banks.
- They offer lower setup fees and ongoing fees than traditional banks.
- Due to their small size, they don’t have a large hierarchical structure like traditional banks and have shorter turnaround times.
- They offer a much more personalized service than a traditional bank.
- They cannot provide the full range of banking products like having a savings account, checking accounts, etc so they cannot fulfil all your banking needs.
- They have a limited physical presence and have fewer branches. Most of their services are offered online.
- They have fewer loan product options compared to traditional banks.
- They’re not as good the big banks at unusual securities.
- They’re not as good for temporary employees and casual employment home loans.
- They are not listed publicly.
- They are small in scale.
- They are only a few years old.
- The $250,000 government guarantee is not available for them as they are not ADIs.
- They have access to low cost funding.
- They do not have their own dedicated association.
- Their product offerings are limited, but they cater to specific niches like low docs, bad credit, etc.
- They are not as regulated as banks. However, regulation might get tighter as non-banks are gaining traction.
- They are not constrained by the legacy technology and systems used by traditional banks.
- Basic home loan with either a fixed or variable rate with limited features. There are some that offer split rate home loans as well.
- Some even offer a full-featured standard home loan with the added benefits of offset account, redraw facilities, ability to make extra repayments, etc.
- Low doc loans
- Bad credit home loans
- Investment loans
- Construction loans
- Athena Home Loans
- Australian First Mortgage Bank
- Bank of Sydney
- Better Mortgage Management
- Beyond Bank
- Bluestone Mortgages
- Click Loans
- Fox Symes
- Freedom Lend
- Hodgestone Finance
- Homeloans Ltd
- Homestar Finance
- Iden Group
- Kogan Money
- La Trobe
- Liberty Financial
- MKM Capital
- Mortgage Ezy
- Mortgage House
- National Mortgage Company (NMC)
- Newcastle Permanent
- Pepper Money
- Reduce Home Loans
- State Custodians
- Suncorp Bank
- Victorian Mortgage Group
- Virgin Money
- Well Home Loans
- Fees and rates like establishment fees, application fees, monthly and annual fees, offset and redraw fees.
- If there are any hidden costs like break costs.
- Provision of a free redraw
- The length of their application process
- The customer service they offer
- Criteria for application
- Online banking facility
- Low credit score or bad credit
- A high Debt-To-Income ratio
- Been declined by bigger banks
What are the drawbacks of using a non-bank lender?
While non-bank lenders offer competitive interest rates, there are some drawbacks of choosing it over a traditional bank:
Are non-bank lenders safe?
Due to the absence of a banking licence, many make the misconception that non-banks are not safe.
Many people think that non-banks are last resort to getting their home loans approved.
However, non-banks are just as safe as traditional banks.
Since they cannot take on any deposits, you are not actually depositing any of your money with them.
You are just repaying them for the loans and mortgages you are approved for.
Since ASIC regulates them, they still have to follow the directives put out by the National Consumer Credit Protection Act (NCCP).
The NCCP protects consumers and ensures that ethical and professional standards in maintained and upheld in the finance industry.
Furthermore, non-banks are also bound by Australian Consumer Law, Privacy Law and ePayments code.
How do non-banks differ from traditional banks?
Non-bank lenders differ from traditional banks in two significant areas: where their funding comes from and who regulates them.
Firstly, non-banks seek 100% of their funds from the wholesale money market.
Since non-banks are not Authorised Deposit-taking Institutions (ADIs) like traditional banks, they cannot offer deposit products like saving accounts, term deposits, etc.
A portion of funding for traditional banks come from the deposits of their customers, whereas the funding more non-banks come from private investors or large organizations.
Secondly, since non-banks are not ADIs, they do not hold a banking licence and are not regulated by the Australian Prudential Regulatory Agency (APRA).
Instead, non-banks hold a credit licence and are regulated by the Australian Securities and Investments Commission (ASIC).
Non-banks follow the Consumer Credit Code, which governs all Australian credit transactions.
APRA takes on an advisory role for non-bank lenders.
Besides the two major areas, non-bank lenders differ from traditional banks in the following:
What are the types of home loans offered by non-bank lenders?
Most non-banks are specialist lenders who have been known to lend to riskier borrowers.
Some of the types of home loans offered by non-banks are:
Who are non-bank lenders in Australia?
Here is a list of non-bank lenders in Australia, some of which are also on our panel of lenders.
Should I use a non-bank lender?
Due to the aggressive interest rates offered by non-banks, it may seem like a no brainer to choose a non-bank lender for your home loans.
They offer flexible interest rates and lower fees on their home loan products.
Furthermore, traditional banks have been forced to respond to their fierce competition by lowering their interest rates as well.
However, interest rates are one of the many facets you should look into when choosing a lender.
You also have to take into consideration the following points before choosing a non-bank lender:
Do I get a better interest rate with a non-bank?
Essentially, yes, you might get better interest rates with a non bank lender.
Since non-banks are competing with bigger banks, they tend to offer competitive interest rates to lure in customers.
They undercut the cost of their products and lower their interest rates to stay alive in the fierce competition.
What happens if a non-bank goes bust?
You should not worry, as non-banks are governed by most regulations like traditional banks.
Furthermore, as they are not ADIs, you’re technically not depositing any funds with them.
However, just because a non-bank goes bust, does not mean you can escape repaying your mortgage.
Where do non-banks get their money if they can’t take deposits?
As non-banks cannot accept deposits, they rely on wholesale funds from Australian banks or other overseas institutions.
Another way they get their funds is through “securitisation” where they bundle together a group of mortgages and sell this as an asset to investors.
When should I choose a non-bank lender?
Since non-bank lenders are not as regulated as traditional banks, they have the flexibility to lend to borrowers that big banks do not accept.
Non-bank lenders are able to help borrowers who have:
The fast processing speed of non-bank lenders means they can close the transaction a week faster than traditional banks.
Need help choosing a lender?
If you’re still not sure about whether to go with a traditional bank or a non-bank for your home loan, the best option is to choose a mortgage broker.
A mortgage broker will assess your situation and consider your needs and give recommendations on the best lenders based on your situation.
Our specialist brokers will come up with tailor-made solutions to your unique circumstances.
To get in contact with them, call us at 1300 889 743 or complete our free assessment form online.