Pros and Cons of Borrowing from Non-Bank Lenders Compared to Big Banks

Whether or not we realize it, Australians often remain loyal to big banks. In fact, over 80% of Australian home loans are held by the Big Four banks or their subsidiaries. However, non-bank lenders in Australia are providing more mortgage options than ever. Let’s take a look at what non-bank lenders offer and how they compare to big banks.

Understanding the Benefits and Drawbacks of Non-Bank Lenders in Australia

What Is a Non-Bank Lender?

A non-bank lender differs from traditional banks, credit unions, or building societies because they only deal with loans. Unlike banks, non-bank lenders do not hold customer deposits. They rely on wholesale funding markets exclusively, which gives them distinct advantages and challenges in the lending industry.

How Non-Bank Lenders Work

Because non-bank lenders don’t use customer deposits to fund loans, they solely rely on wholesale markets. While all financial institutions access the wholesale market to fund lending, banks can supplement this with their customers’ deposits. This reliance on wholesale funding alone means non-bank lenders in Australia may be more vulnerable to market fluctuations, as seen during the Global Financial Crisis (GFC), when their market share dropped significantly. Today, however, non-bank lenders have regained their footing thanks in part to post-GFC government support for increased competition in the home loan market.

Are Non-Bank Lenders Safe?

The Australian Securities and Investments Commission (ASIC) regulates non-bank lenders, while banks are overseen by the Australian Prudential Regulation Authority (APRA). All Australian lenders, including non-bank lenders, must comply with the Uniform Consumer Credit Code, which protects borrower rights and requires checks to ensure borrowers can repay their loans.

Advantages of Non-Bank Lenders

• Better Rates: Non-bank lenders typically offer more competitive rates due to lower overheads and the absence of investor pressures associated with public companies.

• More Flexibility: Non-bank lenders often provide flexible options for customers with prior credit issues or self-employed borrowers, who might struggle to get approval from traditional banks.

Disadvantages of Non-Bank Lenders

• Limited Products: Non-bank lenders primarily offer mortgage products. Customers who prefer a single financial institution for all services might find non-banks limiting.

• Inconsistent Offerings: Because non-banks rely solely on wholesale funding, their rates and terms can be more susceptible to market changes, resulting in potentially inconsistent offerings.

Choosing the Right Lender

The simplest way to work out if a non-bank lender is right for you and your circumstances is to talk to your Mortgage Broker. Brokers act as a one-stop shop, with access to a wide range of lenders, including banks and non-banks, and hundreds of home loan products.