Why you should consider a non-bank lender
With the cost of living continuing to climb, it is more important than ever for borrowers to dig a little deeper and find financial products that offer the best value.
The mortgage industry has become more competitive over the past few 12 months and as a result, Australians now have more options than ever when it comes to choosing a home loan.
In this article, we look at what a non-bank is, how it differs from a mainstream lender, how they’re funded, and their advantages over the big banks.
What is a non-bank and how do they differ from the big lenders?
When it comes to home loan lenders, borrowers have three main choices: banks, mutuals and non-bank lenders.
Both banks and mutuals offer deposit accounts and are classified as 'authorised deposit-taking institutions' (ADIs). They are both regulated by the Australian Prudential Regulation Authority (APRA).
Non-banks do not offer deposit accounts, so they are not classified as ADIs nor are they regulated by APRA. However, non-banks are required to follow the Consumer Credit Code, which governs all Australian credit transactions, and the Australian Securities and Investment Commission, which ensures all lenders are transparent with fees and rates.
Non-banks usually rely on wholesale funding to fund their home loans. As the mortgage market has become so competitive, most non-banks now offer the same features and products as the other lenders.
How are non-bank home loans funded?
As non-bank lenders are not ADIs, they are not able to rely on customer deposits to fund their home loans. Instead, they seek their funding on the wholesale money market, which is where large organisations invest in mortgages. Banks can only rely on deposits for a proportion of their loans, and therefore have to go to the market for the remainder, similar to the non-banks.
During the Global Financial Crisis (GFC) in 2007, non-bank lenders found it difficult to secure funding for their loans on the wholesale money market. As a result, the Federal Government stepped in to make funds available at an affordable rate. The Federal Government saw how important non-banks were in order to keep the mortgage market competitive and used the Australian Office of Financial Management (AOFM) to invest in residential mortgage-backed securities.
Mortgage-backed securities are where home loans are bundled into parcels of mortgages that investors can invests in. This process is called 'securitisation' and has a purpose of providing a steady stream of funding for home loan lenders.
Looking back, competition within the mortgage industry has come a long way since the height of the GFC. The GFC generated a lot of fear about what could potentially happen locally and consequently, this saw a shift away from smaller lenders and a migration towards the big banks, which were perceived as a safer option.
However, since the GFC, non-banks have continued to demonstrate their value, promoting positive competition within the Australian home loan market.
With the rising cost of living and other financial pressures, borrowers are looking for lending alternatives to help reduce their outgoings each month. Non-banks are clearly offering a genuine alternative to the big four, giving money and power back to borrowers. The more that borrowers support non-bank lenders, the more everyone can save, with healthy competition helping to drive interest rates down.
What are the advantages of choosing a non-bank lender?
They offer competitive options
Unlike the big banks, non-banks are not weighed down by the cost of having a large corporate structure and branch networks. As a result, non-bank lenders can pass on these savings to borrowers in the form of lower interest rates. Some of the most competitive interest rates on the market are offered by non-banks.
Savings for borrowers can also be in the form of lower setup and ongoing fees. When you are shopping for a home loan, speak with different lenders about the setup and ongoing fees they charge. Often, it’s ongoing fees that can make or break your budget.
They can offer niche lending solutions
Not every borrower is going to fit the mould for a prime home loan. Some borrowers require a specialised home loan to suit their circumstances or need to have their loan assessed on its merits rather than relying on automated assessment through score cards. Non-banks can often provide lending solutions that enable borrowers to get home loans when they’ve been declined by the major banks.
As non-banks are smaller, they can offer personalised service and make an effort to get to know their borrowers.
If you are eager to see how a non-bank lender can help you get a competitive home loan, then give our expert Lending Specialist team a call on 1800 111 001 or leave your details here and they will contact you.
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of homeloans.com.au. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from a finance professional before implementing changes relating to your finances.