With the cost of living creeping up and the property market ready to burst, it is more important than ever to spend the time to find the best home loan for your situation.
Many people assume their lender for something as big as a home loan needs to be a bank, but this isn’t the case. The mortgage industry is more competitive than ever right now, and since the deregulation of the Australian banking industry in 1980 we have seen the rise of a number of non-bank lenders.
What is a non-bank lender?
A non-bank lender is a financial institution that offers credit and loan products but is not a bank, building society, or credit union. Non-bank institutions now make up almost 10% of the home loan market in Australia.
Non-bank lenders are regulated by ASIC (the Australian Securities and Investments Commission) and the Consumer Credit Code. This means they must abide by the same rules and regulations of the Consumer Credit Code when providing loans and other credit products.
For example, ASIC requires non-bank lenders to be transparent with their fees, so the information you need will be just as readily available to you as if you’d chosen a bank lender.
The main difference between banks and non-bank financial institutions is that non-banks do not hold an Australian banking licence. This means they cannot offer deposit accounts (savings accounts, transaction accounts, and term deposits), and they are not regulated by the Australian Prudential Regulation Authority (APRA).
Because non-banks are regulated by fewer government bodies, many people incorrectly assume that non-bank lenders are less trustworthy, but this isn’t the case, as we’ve explained above.
Another difference between banks and non-bank financial institutions is that non-bank lenders are privately owned, so they get their funding for loans from wholesale sources.
What types of loans do non-bank lenders offer?
Non-bank financial institutions offer several main types of home loans, which we’ve outlined below. Other types of home loans may be available from niche providers.
1. Basic home loans
Basic home loans can be variable rate loans or fixed rate loans, and they are exactly what the name suggests – basic, with fewer bells and whistles in terms of features.
See our table below for a snapshot of the current non-bank lender variable home loan’s available for first home buyers borrowing $600,000 in NSW, repaying Principal and Interest with an 80% LVR. This table is sorted by comparison rate (lowest first), with links direct to the providers website.
2. Standard full feature home loans
Full feature home loans also come in either variable or fixed form, but they have added benefits in the form of features such as offset accounts, redraw facilities, and the ability to make additional repayments.
Check out our comparison table below which provides a snapshot of the current 3-year fixed rate home loans available that features redraw facilities and support additional repayments, formulated on the basis of a $600,000 loan in NSW repaying principal and interest. Please note that this table is sorted by comparison rate (lowest first).
3. Low doc home loans
A low doc home loan is a home loan that requires significantly less documentation and paperwork when applying.
4. Split rate home loans
A split rate home loan involves splitting your loan into two separate loans, one charged at a fixed interest rate and one charged at a variable interest rate. Split loans can give borrowers the best of both worlds for those who are not sure whether or not they want to fix their whole home loan.
5. Bad credit home loans
Bad credit home loans are exactly what the name suggests; they are home loans that enable someone with a poor credit history to qualify for a home loan. They usually charge a higher interest rate to compensate for the increased lending risk.
Banks vs non-banks: Why people choose non-bank lenders
The availability of non-bank lenders has driven healthy competition in the home loan market. There are a number of pros and cons of smaller lenders versus big banks, and several reasons why people might specifically choose a non-bank lender over the more traditional bank.
The first advantage of non-bank lenders is that banks can be weighed down by excessive regulation and corporate structure. Non-bank financial institutions are regulated by fewer bodies, and they may have a structure that allows them to offer more personalised customer service or a greater range of niche products to suit their customers’ individual needs.
Non-bank lenders may also be able to offer competitive interest rates, fees, and features. This is because a non-bank lender can be a customer-owned institution, which means they are owned by members. So rather than distributing their profits to shareholders via dividends, non-bank lenders pass their profits back to their customers in the form of lower interest rates, lower fees, and new and improved products and services.
Non-bank lenders may also be able to apply less stringent lending criteria in some cases, meaning some borrowers may not have to have a perfect credit history to secure a loan with a non-bank financial institution.
Many people find that they prefer the flexible, personalised approach of non-bank lenders. But there are of course disadvantages of non-bank lenders, which we’ll cover next.
Banks are still the most preferred option for Australians, as they easily hold the majority of the market. The Big 4 banks held 82% of the residential mortgage market as of June 2016. So why would borrowers choose banks?
The biggest reason would be recognition. Most people looking for a home loan would already know of the Big 4 banks in Australia, even if they didn’t know of any others. Signing up with a major bank can therefore be seen as being easier than finding a niche non-bank lender.
Another reason people choose banks is perceived safety or status. Banks have a more traditional structure, due to the intensive regulation and the expectations of shareholders, and people may therefore assume that banks are more trustworthy or more established.
Also, while it’s true that a smaller non-bank lender can offer more personalised services and products to their customers, they often do not have the same number or range of products that a bank can provide. Borrowers may assume that in most cases, an established bank will have the type of loan they’re after.
Home loans from non-bank lenders in Australia
If after reading all of that, you might be ready to commit to a non-bank lender in order to get a home loan, how do you find what’s out there? The best way to find a non-bank lender is to compare your options on the Canstar website.
When looking for a non-bank lender to give you a home loan, make sure you compare the different providers on their interest rates, fees, loan features, and eligibility requirements. Use the Canstar website to compare non-bank home loans based on these criteria and any other criteria relevant to you. Check out our comparison table below which provides a snapshot of the current 5-Star Rated home loans provided by non-bank lenders, sorted by comparison rate (lowest first) and featuring links direct to the providers’ website. Please note that this table has been formulated based on a $600,000 loan in NSW, repaying both Principal and Interest with 80%LVR.