Non-bank Lenders Australia | How Do Their Home Loans Compare?
With the emergence of non-bank lenders, Australia’s mortgage industry has seen a significant increase in competition. Non-bank lenders are gaining popularity among borrowers because of the benefits they can offer when securing a home loan.
This surge in competition provides borrowers with more options to choose from. Because of that, most borrowers may struggle to decide on the lender they want to go with for their next home loan. Traditional banks have several benefits, but non-bank lenders offer unique features such as faster approval times, greater flexibility, and more tailored service.
So should you just ditch traditional banks and start your home loan process with a non-bank lender?
Well, there’s more to this equation. This article will explore what non-banks are, how they compare to traditional banks, their pros and cons, and whether you should use them.
What is a non-bank lender in Australia?
A non-bank lender is a lender without an authorised deposit-taking institution (ADI) license. As the name suggests, an ADI allows financial institutions to receive customer deposits. In contrast, banks are lenders registered as an ADI with the Australian Prudential Regulation Authority (APRA).
Although non-bank lenders perform the most basic functionalities like a bank, they cannot receive customer deposits (term deposits and savings accounts) and use the funds to provide home loans. So, generally, non-banks self-raise the funds to provide home loans by issuing bonds to institutions and investors.
But that doesn’t mean that they aren’t trustworthy or non-reliable as they have their own legal codes and conditions to comply with, some of which are:
- ASIC laws
- Privacy Law
- The National Consumer Credit Protection Laws
- Australian Consumer Law
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What is the difference between traditional bank and non-bank lenders?
The core difference between traditional banks and non-bank lenders is that traditional banks operate with an ADI, while non-bank lenders operate without one. Although there are other differences between the two types of lenders, this is the fundamental distinction.
The other core distinction between traditional banks and non-bank lenders is how they regulate, generate and use their funds:
Their regulatory oversight:
- Traditional banks: Traditional banks in Australia are regulated by the Australian Prudential Regulation Authority (APRA).
- Non-bank lenders: Non-bank lenders in Australia are regulated by various regulatory bodies, depending on the type of financial service they provide.
For example, the Australian Securities and Investments Commission (ASIC) regulates non-bank lenders, financial advisers, and investment managers. At the same time, the Australian Prudential Regulation Authority (APRA) oversees the regulation of non-bank deposit takers, such as building societies and credit unions. Other regulatory bodies that may oversee non-banks in Australia include the Australian Competition and Consumer Commission (ACCC) and the Australian Transaction Reports and Analysis Centre (AUSTRAC). The Consumer Credit Code, which regulates all credit transactions in Australia, is also followed by non-bank lenders.
Their origin of funds:
- Traditional banks: Traditional banks in Australia receive most of their funding from their customers’ deposits.
- Non-bank lenders: Non-bank lenders in Australia typically rely on self-raised funds, which refers to obtaining 100% of their funding from the wholesale money market. Typically, non-bank lenders source funding from private investors or major organisations such as RAMS (real asset management) group, Perpetual Ltd, MKM, etc.
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Different ways how non-bank lenders differ from traditional banks in Australia:
In Australia, Non-bank lenders differ from traditional banks in several ways, including:
- Less established reputation: Non-bank lenders are privately listed, have only been around for a few years and are also smaller in scale than traditional banks. Because of that, non-bank lenders may not have the same established reputation as traditional banks, making some borrowers hesitant to work with them.
- Regulations: Non-bank lenders are not subject to the same regulations as traditional banks, which allows them to be more flexible in their lending practices.
- Focus on niche markets: Non-bank lenders tend to concentrate on niche markets and have a limited range of product offerings, such as small business loans, personal loans, or property loans, which are customised to suit the needs of those markets.
- Speed of loan approval: Due to their lack of reliance on legacy technology and systems used by traditional banks, non-bank lenders can approve loans much faster than traditional banks, often within hours. In contrast, traditional banks may take several days or even weeks to process loan applications.
- Less paperwork: Non-bank lenders typically require less paperwork and documentation than traditional banks.
- Different lending criteria: Non-bank lenders may have different lending criteria than traditional banks, such as accepting borrowers with lower credit scores or requiring different levels of collateral.
- Higher interest rates: Because non-bank lenders may provide loans to borrowers who do not meet the criteria for loans from traditional banks, they usually take on more risk and charge higher interest rates than traditional banks.
Non-bank lenders offer borrowers an alternative to traditional banks, with more flexible lending practices, faster loan approval times, and tailored lending products. However, borrowers should be aware of both the pros and cons of lending from a non-bank lender, like potentially higher interest rates.
What home loans do non-bank lenders offer?
Non-bank lenders provide various home loan options that cater to different borrowing circumstances and are often willing to lend to borrowers who may be considered riskier by traditional banks. Some non-bank home loan options include:
- Bad credit home loans
- Investment loans
- Owner-occupier home loans
- Low-doc home loans
- Construction loans
- Refinance home loans
- Guarantor home loans
- Bridging loans
- Basic loans (fixed or variable)
- Split-rate loans
- Full-featured standard loans (with offset accounts, redraw facilities, ability to make extra repayments, etc.)
Who are the non-bank lenders in Australia?
There is an abundance of non-bank lenders in Australia. Here are some non-bank lenders from Australia:
- AAA finance
- LaTrobe Financial
- MEZY
- MA Money
- Brighten
- BC Invest
- Macquarie
- Liberty Financial
- Pepper Money
- Resimac
- RedZed Lending Solutions
- Australian Finance Group (AFG)
- Bluestone Mortgages
- Latitude Financial Services
- SocietyOne
Our own panel of non-bank lenders in Australia include:
- AAA finance
- LaTrobe Financial
- MEZY
- MA Money
- Brighten
- BC Invest
How do home loans offered by non-bank lenders compare with other lenders?
Naturally, the home loan offered by non-bank lenders may differ in terms of interest rates, fees, and loan features compared to traditional banks and other lenders.
And there’s no definitive answer to which is the best. That answer would be particularly tailored to what you are looking for in a home loan.
However, to help you compare, here are some pros and cons of getting your home loan from a non-bank lender:
Pros and cons of non-bank home loans
Pros:
- Quicker loan approval: Non-bank lenders can expedite loan approvals, making it ideal for borrowers who need funding urgently.
- Flexible lending criteria: Non-bank lenders may have less stringent requirements than traditional banks, making it easier for borrowers who need to meet traditional lenders’ strict standards to obtain a loan.
- Unique loan features: Non-bank lenders offer loan features that traditional banks may not have, such as redraw facilities or offset accounts.
- Potentially lower interest rates: Non-bank lenders’ lower overhead costs can lead to lower interest rates than traditional banks.
- Non-bank lenders are more lenient towards borrowers with imperfect credit or financial issues.
Cons:
- Less regulation: Non-bank lenders may not be subject to the same level of regulatory oversight as traditional banks, leading to predatory lending practices.
- Higher risk: Non-bank lenders are considered riskier than traditional banks due to their lower financial stability and history.
- Higher fees: To compensate for their lower interest rates, non-bank lenders may charge higher fees than traditional banks.
- Limited product offerings: Non-bank lenders specialise in niche markets, such as small business loans, personal loans, or property loans, and offer a limited range of products.
Is it safe to borrow from non-bank lenders?
Borrowing from non-bank lenders in Australia is often seen as a last resort due to the misconception that they are less safe than traditional banks. However, this is not necessarily true, as non-bank lenders are regulated by the Australian Securities and Investments Commission (ASIC) and must comply with the National Consumer Credit Protection Act (NCCP) and other consumer and privacy laws.
On top of that, non-bank lenders do not have a banking license and cannot take deposits, so you are not keeping any of your money with them. Instead, you are repaying them for the loans they provide.
In addition to complying with responsible lending laws that require lenders to assess a borrower’s ability to repay a loan before approving it, non-bank lenders in Australia are also bound by ethical and professional standards outlined in the NCCP Act. This helps to ensure that borrowers take on only a little debt and can afford to repay the loan.
Non-bank lenders can be very much relied upon. However, it’s essential to check if the lender is
licensed with ASIC. Licensed lenders must follow specific standards and regulations to treat their customers fairly. To ensure you are dealing with a reputable and licensed non-bank lender, it’s essential to research their terms and conditions, fees, and interest rates.
Therefore, borrowing from a non-bank lender can be safe if you choose a licensed and reputable lender and take the time to understand the loan agreement before agreeing to it.
Should you choose non-bank lenders for your next home loan?
We’ve already discussed most of the pros and cons of non-bank lenders in Australia by now.
Non-bank lending can provide speedier loan approvals, more flexible lending criteria, and unique loan features but carries the potential risks of less regulation, higher fees, and specialised product offerings.
Whether you choose a traditional bank or a non-bank lenders for your next home loan, consider your financial goals and conduct thorough research on the terms and conditions you seek. Ultimately, that will be the deciding factor.
For more expert advice, speak to our expert mortgage broker today. At Odin Mortgage, we can offer you a tailored deal with one of the non-bank lenders from our panel.
Frequently asked questions
If a non-bank lender you borrowed from goes bankrupt, their belongings will be sold to pay off what they owe, and the money obtained will be used to repay their debts. In this scenario, your loan may be transferred to another lender who will become responsible for servicing it.
However, it is essential to remember that your loan agreement terms will remain the same, and you will continue to repay your loan under the same conditions as before.
If you have any questions or concerns, it’s best to contact the new lender or consult a financial expert.
Non-bank lenders may offer lower interest rates than traditional banks due to their lower overhead costs, which can result in savings for borrowers. But interest rates vary widely depending on the lender, loan type, and other factors.
Plus, non-bank lenders may charge higher fees to make up for their lower interest rates, so it’s essential to consider the overall cost of the loan before choosing a lender.
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