No matter which financial product you are looking for in Australia, your options will be similar: the traditional banks holding the majority of the Australian market share, and other financial institutions or non-bank lenders looking to challenge the major banks.
Speaking practically what exactly is the difference between non-bank lending and opting for one of the big four banks? Let’s take a look.
What is a non-bank lender?
A non-bank lender refers to any financial institution in Australia that isn’t a bank or, in the strictest sense, a credit union. Non-bank lenders exclude what is commonly referred to as Australia’s big four banks: Commonwealth Bank, NAB, Westpac, and ANZ. Non-bank lenders also exclude challenger banks like Bendigo Bank, Macquarie Bank, Bank of Queensland, and smaller lenders.
A non-bank lender might be a specialist mortgage lender, an online lender or a lender funded by investors rather than deposits.
Banks are referred to as authorised deposit-taking institutions (ADIs), and though non-bank lenders are not ADIs, they are still heavily regulated in Australia as they deal in financial products. Non-bank lenders will still hold an Australian Credit Licence (ACL) and are regulated by ASIC, the Australian Securities and Investments Commission, and have to follow the directives of the National Consumer Credit Protection Act (NCCP). APRA, the Australian Prudential Regulation Authority, collects data from larger non-bank lenders and can make rules for them if needed for financial stability.
Why would I choose a non-bank lender for my home loan?
There are some drawcards that lead some Australians to choose non-bank lenders. That said, a non-bank lender is not necessarily the option for every borrower, and some features offered by an ADI might work better for you. Here are some pros and cons of non-bank lenders:
Pros of non-bank lenders
- Lower fees
Big banks have large overheads to cover, with huge numbers of staff and branches. This is less so the case with non-bank lenders, who are generally able to keep fees lower. If you are using a non-bank lender for your home loan, this may help to avoid a ballooning comparison rate next to your headline interest rate. - Lower interest rates
Likewise, lower overheads (particularly for online lenders) mean non-bank lenders are often looking to shake up the loan market with competitive interest rates. Remember that this is not automatically true, and you will want to do your own comparison and seek professional advice or consult a mortgage broker if you are looking for more information. - Personalised service
One of the reasons many people dislike the big four banks is the feeling of being anonymous and disposable in a sea of customers. With much smaller customer pools, you are more likely to get a higher level of customer attention and personalised service with a non-bank lender. - Faster processing
The major banks are notorious for bureaucracy and taking time to get things done, but some non-bank and online lenders can process loan applications faster. - More flexibility
Non-bank lenders will still check your credit history before approving your loan application, but there may be greater flexibility than the rigidity of a traditional bank. This can be a blessing for borrowers with a lower credit score or for those with less documentation, like if you are self-employed.
Cons of non-bank lenders
- Lack of offset accounts
The big banks are often able to offer generous offset accounts on their home loan products as they are authorised deposit-taking institutions, which non-bank lenders are ineligible to do to the same extent. - Lack of branches
This may not be a deterrent for younger first-home buyers, but many homeowners like to have access to a physical branch location to be able to talk face-to-face with an employee in the event of a concern or a change in financial situation. With a smaller non-bank lender, especially an online lender, there may be limited locations in metropolitan Sydney or Melbourne or no physical locations whatsoever. - Less longevity
Since many non-bank lenders lack the long-established reputations of the major banks in Australia, it’s easy to find yourself sceptical of them. It’s worth remembering the extensive ASIC regulation, Australian credit licence requirements in place, and APRA advisory position. On top of this, if your non-bank lender runs into trouble, your loan contract usually continues and you still need to keep making repayments, or you can refinance.
Is a non-bank lender right for me?
Choosing whether to opt for a major bank, a smaller challenger, or a non-bank lender is a major decision and one worth seeking professional advice on. While a non-bank lender may or may not be right for you, it’s important not to assume that a Big Four bank will offer you a better home loan option or that a non-bank lender will automatically be cheaper.
Instead, focus on which features you need, and which loan options are on offer, and don’t rule out any home loan products before you’ve started your search.
