Find out how you could benefit from a non-bank lender
Before the Australian banking industry was deregulated in the first half of the 1980s, homebuyers had only banks, credit unions and building societies to turn to when in need of a home loan. These resulted in many Australians with a low income or less than stellar credit history being denied the opportunity to own a home.
With deregulation came a number of non-bank lending institutions that were offering home loans at interest rates below what the banks were offering. This forced banks to also lower their rates, creating a competitive market for home buyers to shop for loans.
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What is a non-bank lender?
A non-bank lender is an institution other than a bank, credit union or building society that is offering loan products to consumers, including investment banks, mortgage originators, insurance companies, mortgage brokers and more. These lending institutions do not hold a banking licence, but they are also tightly regulated, as defined by the Consumer Credit Code, which governs all credit transactions in Australia, and by the Australian Securities and Investments Commission (ASIC).
The Australian Securities and Investments Commission sets regulations requiring all lenders to openly disclose any fees or rates associated with their products and that this information is readily available to consumers. The difference in regulation is with the Australian Prudential Regulatory Authority (APRA) which oversees banks only to ensure that they hold to financial promises made to you. However, the Federal Government has laid out plans in its 2017 Budget to extend APRA's oversight to non-bank lenders as well.
Non-bank lenders are privately owned and not mutual, typically relying on wholesale sources to get their funding. Their services are limited when compared to those that banks offer, but do include basic and fully featured home loans, line of credit loans, low doc loans, reverse mortgages and bad credit loans. Some of the features offered by banks could be missed since there are no other types of services like credit cards or transaction accounts available with a non-bank lender.
What is the main difference between a non-bank lender and a regular bank and how will it affect me?
As a privately owned financial institution, a non-bank lender has more flexibility in the rates and fees that are offered for their home loans. This allows them to compete with the banks by undercutting the cost of their products. In doing so, the banks have to respond to the competitive market and lower theirs as well.
This ability to set their own rates has helped the Australian home loan market respond to the needs of homebuyers by generating competition. You and other consumers benefit by being able to find home loans from any type of financial institution with reduced fees and lowered interest rates.
What happens if a non-bank lender goes bust?
The dependence that non-bank lenders have on a steady economy make them more vulnerable during times of financial turmoil. This was seen during the global financial crisis, when some Australian non-bank lenders were forced to close their doors. If this were to occur with your non-bank lender they can’t force you to pay your loan balance in full. Also, you wouldn’t get a free pass on the balance of your loan. Your obligation would be to continue making repayments as normal. If ownership does change, the terms of your original contract will remain in effect.
- Glenn is the Chief Strategy Office of 1st Choice Financial, Concord, NSW.
- Glenn specialises in mortgages, financial planning, self-managed super funds advice, and mortgages and insurance for medical professionals.
How do non-bank lenders work and how are they different to a regular bank?
The differences are slightly exaggerated - a lot of it is media hype. Most non-bank lenders get their money from banks themselves. They try to minimise costs and lower their overheads - then they’re in a position where they can try to beat the banks. The crazy part is that they beat the banks with their own money. They sell wholesale funds to these mortgage managers. The mortgage managers then package the funds and on-sell it to give you loans, and depending on the cost associated and the margin they can get, that’s how they make their money.
Why do you think non-bank lenders are popular?
The advantage is flexibility in rates, because they have a margin to work with, and they can go absolutely rock-bottom.
People also love their service. I started out at a non-bank, and they have a huge amount of clients. Clients don’t want to move from them, they don’t want to go to the banks. A lot of people go there because of a bitter experience with banks, and from a service level there’s an advantage there because they get funds at wholesale and sell it at retail.
At the end of the day there’s a service proposition there that people are happy about. A non-bank lender will work on the assumption that a customer thinks a bank treats them like a number, so they’ll go to a smaller lender, and that lender gives them good customer service. It’s a win-win situation for a client, and is a customer service proposition that banks may or may not have.
Non-bank lenders keep the banks honest. They act as a bank’s conscience in a way. If the banks get back into the state where they’re the only ones in the market, especially after the GFC, then you lose that edge.
Are there any disadvantages that you can see with a non-bank lender?
There could be inconsistencies in passing on the rate cuts and things like that, so it’s not always the case, because they get money from another source where they’re getting it at the same rate, and that stems from where they’re getting their money from. If they’re mortgage managers they’ll be getting it most of the time from the banks, but they could also get private funding and that process will be a bit more difficult, and the rate could be quite different.
What types of loans do non-bank lenders have?
- Basic home loans. A basic home loan can be either at a fixed or variable rate but will not have any added features.
- Full feature home loans. Full feature usually refers to the loan having added benefits such as a redraw facility and offset account.
- Split rate home loan. This is a home loan where a portion of the terms are at a fixed interest rate and the balance at a variable rate.
- Reverse mortgages. A reverse mortgage is designed for seniors and allows them to use the equity built into their home.
- Bridging loans. A bridging loan allows a home buyer to continue paying a home loan on one property while waiting for a new construction to be completed, or to assist with moving into another property.
- Bad credit loans. A bad credit loan is a home loan that allows for individuals who have a previous bad credit history to qualify. In most cases the interest rate will be slightly raised to make up for the extra risk.
- Low doc home loan. Self employed individuals may have a difficult time obtaining a home loan due to a lack of paperwork supporting their income earned. A low doc loan measures their financial capability in a different way to determine eligibility.
How can you compare home loans from non-bank lenders?
You are going to be looking at the same features with a non-bank lender as you would with a bank when deciding between non-bank lenders. These include things such as:
- Interest rates. Non-bank lenders must disclose their interest rate and comparison rate. When looking over the comparison interest rates make sure that they are for the same terms and for the same borrowing amount.
- Fees. This includes application and settlement fees along with any monthly or annual fee. Also look at the fees for special features such as redraw facilities.
- Features. There could be some features that you won’t find with a non-bank lender due to their lack of other banking products, but you should still check for flexible repayments, extra repayments and penalties, interest-only repayments and charges for an early payout. Other features to consider are portability, offset accounts and loan purpose.
- Eligibility. Although non-bank lenders have more flexibility with qualifying individuals for a home loan, they are still bound to ensure that the terms will not put you under financial hardship. Check over your finances and expenses before hand and use a home loan calculator to make sure that your income will allow you to be eligible for a home loan.
List of non-bank lenders in Australia
- Better Mortgage Management
- Mortgage Ezy
- Plan Lending
Things to consider when getting a loan from a non-bank lender?
You should compare the home loans offered by non-bank lenders in the same way that you do with banks, looking at the interest rates, fees and features and finding the home loan that suits your needs. Take advantage of home loan calculators which can show you based on that criteria, and your desired home loan amount and terms, which home loan option gives you the most value.