To bank or not to bank? That is the question.
With many Australians seeking alternatives to the big four banks, it's essential to understand the advantages and disadvantages of non-bank lenders for your home loan needs.
What are Non-banks?
A non-bank lender is a financial institution that operates similarly to a traditional bank but does not hold an authorised deposit-taking institution (ADI) licence.
In Australia, to be classified as a “bank,” a provider of financial products such as bank accounts, credit cards, and home loans must meet specific criteria and hold an ADI licence granted by the Australian Prudential Regulation Authority. ADIs include banks, neo-banks, credit unions and building societies.
Non-banks, on the other hand, include registered financial corporations and some managed investment funds, such as hedge funds. While this type of lender provides many of the same financial services, such as loans and investments, they cannot accept customer deposits as a bank would.
Australian Non-banking Space
According to data from the Reserve Bank of Australia, non-bank lenders constitute approximately 5% of total financial system assets in the country.
You might think that number is bite-sized, but RBA data shows the market share of non-bank lenders is grown rapidly since 2015. As of April 2022, the non-bank lending market share has reached a ten-year high, accounting for approximately 20% annually for the six months.
Advantages of Non-banks
Competitive Interest Rates
Non-bank lenders are able to offer highly competitive interest rates because they have significantly lower overhead costs compared to traditional banks.
Flexible Lending Criteria
Non-bank lenders may be more flexible in their lending criteria, making them a good option for borrowers with a bad credit history.
Faster Application Processes
Many non-bank lenders accept online applications and offer quick turnaround times for approvals, making the application process faster and more convenient.
Personalised Customer Service
Non-bank lenders tend to provide more personalised customer service than traditional banks, giving you a more personalised experience and helping you to feel more valued as a customer.
Good Performance Track Record
Non-bank mortgages have performed well over recent years, with loss rates at low levels, as per Moody’s. This gives you confidence that your loan is in good hands and that you are making a sound financial decision.
Disadvantages of Non-banks
Limited Features
Non-bank lenders are not authorized deposit-taking institutions, and therefore may have limitations on the features they offer with their home loans. This may include restrictions on the types of loans, interest rates, and payment options available.
Less Product Variety
Compared to traditional banks, non-bank lenders may not have as many home loan products available. This is because they cannot offer deposits, which are a significant source of funding for banks.
No Physical Branches
Non-bank lenders often do not have physical branches, which may not suit customers who prefer in-person banking. This could be an issue for those who prefer to speak with someone face-to-face or need assistance with their loan application.
Limited Brand Recognition
Non-bank lenders are not as well-known as traditional banks, which can make some customers hesitant to trust them with their home loan needs. This lack of brand recognition can also make it harder for non-bank lenders to attract new customers.
Higher Interest Rates
Non-bank lenders may offer higher interest rates than traditional banks due to the higher risk involved in lending without ADI status. This can make it harder for borrowers to afford their loan repayments, and could result in financial stress or default.
Worried about the safety of transacting with non-bank lenders because they don’t have an ADI license? The Australian Securities and Investments Commission is here to safeguard you.
Non-bank lenders operating in Australia are required to obtain an Australian Credit Licence and adhere to a range of industry and legal regulations that are similar to those imposed on banks. These regulations include compliance with the National Consumer Credit Protection Act, the Australian Consumer Law, and the Privacy Act.
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