Choosing the right mortgage can sometimes be an overwhelming experience. When there are so many lenders offering different product features, finding the best option for you can be a challenge. While there are different home loan products offered, the lending fundamentals are essentially the same for every financial institution. Whether a home loan is taken out through a bank or a non-bank lender, the same laws and regulations apply within Australia.
What is a Non-Bank Lender and how do they differ from Banks?
When clients decide to get a home loan, they usually have three choices – banks, mutual societies or non-bank lenders. Non-bank lenders are lenders who do not hold an Australian banking licence and who are not a mutual society. In other words, not a bank, building society or a credit union. Unlike non-bank lenders, mutual societies and banks offer deposit accounts and are classified as ‘authorised deposit-taking institutions’ (ADIs). They are heavily regulated by the Australian Prudential Regulation Authority (APRA). On the other hand, non-bank lenders do not offer deposit accounts, so they are not classified as an ADI. This means although regulated by the APRA, they are required to follow the National Credit Code which governs all Australian credit transactions. The Australian Securities and Investment Commission ensures all lenders are transparent with fees and rates.
In most cases, clients find it comforting to borrow money from banks, as a result they hold a larger share of the mortgage market. However, the criteria is usually stricter for banks. The fees are higher and tend to offer less personalised home loan products and services.
Non-bank lenders offer highly competitive interest rates which are attractive for borrowers with good financials. Non-bank lenders are more flexible and can provide more options for borrowers, including those with poor credit ratings, are self-employed or have previously been knocked back by the banks.
How are non-bank home loans funded?
Non-bank lenders usually rely on wholesale funding to fund their home loans, where large organisations invest. Because they can access low cost wholesale funds, they have a greater margin to work with. This means that they can offer increasingly competitive interest rates.
During the Global Financial Crisis in 2007, non-bank lenders found it difficult to secure funding for their loans on the wholesale money market. The Federal Government stepped in to make funds available at an affordable rate, after seeing how important non-bank lenders were in order to keep the mortgage market competitive.
Pros and Cons of Banks
• Easy to access if you already hold an account with a bank lender. Banks have branches throughout Australia
• Banks are generally more established and clients can feel more comfortable approaching them
• Banks have strict lending criteria and may not have as many tailored loan options for clients
• Some banks have high fees
• Customer service can be slower or less personalised at banks
Pros and Cons of Non-Bank Lenders
• Non-bank lenders can offer lower interest rates than banks
• They provide loan options for clients who do not meet bank lending criteria (self-employed, low credit rating or clients that have been declined a loan in the past)
• Non-bank lenders rely on referrals, hence providing a great experience and personalised customer service is essential for most non-bank lenders.
• Some non-bank lenders may not be who they say they are. If there is any doubt, make sure to check that they have the appropriate licencing at the ASIC page.
• Some brokers offering products from non-bank lenders may not always have your best interest at heart. A small number of these brokers have chosen to put their commission ahead of their customers.
We offer a range of services designed to help you secure the right home loan for you. Positive Solutions Finance prides itself with having an experienced team on hand to answer any questions you may have regarding Home Loans. Call us today on 1300 40 3328.