What are non-bank home loan lenders?

Despite the breadth of choice of lenders, the big four banks – ANZ, CommBank, NAB and Westpac – dominate the mortgage market. They account for about three-quarters of the nation’s owner-occupier home loans, as listed by the Australian Prudential Regulation Authority (APRA).

For the non-bank lenders, despite them not being household names, you may find that they offer a mortgage with the rate, features and flexibility you’re looking for.

What is a non-bank lender?

Non-bank lenders are financial institutions that offer home loans and other credit products without being a bank. Non-bank lenders do not hold an Australian banking licence, meaning they cannot offer deposit accounts such as savings accounts, transaction accounts and term deposits.

Non-bank home loan lenders are also not classified by APRA as authorised deposit-taking institutions (ADIs), but rather as non-ADIs.

Just because a non-bank (or non-ADI) doesn’t offer cash accounts doesn’t mean it can’t provide a good value home loan, and more home buyers are beginning to recognise this.

The Reserve Bank of Australia (RBA) in their most recent Financial Stability Review (March 2024) found that non-bank lending has sharply declined over the last 12 months. In the review, the RBA notes that “this was largely due to competition from banks, which unlike non-bank lenders benefit from low-cost deposit funding, and so attracted mortgage customers away from non-bank lenders”

Do non-bank lenders have lower home loan interest rates?

Interest rates vary across all home loan lenders for both banks and non-banks, so it can make sense to shop around and compare home loan rates for a wide cross-section of lenders.

As a general guide, among the non-bank home loan lenders on the Canstar database, the standard average variable home loan rate was 6.36%, at the time of writing (see table below). That’s 0.62 percentage points more than the average variable rate among ADI lenders (remember, these are financial institutions that can accept cash deposits).

Average variable and fixed home loan rates ADIs vs non-ADIs

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Source: www.canstar.com.au – 20/05/2024. Based on owner occupier home loans on Canstar’s database, available for an 80%LVR, $600k, P&I loan; excluding introductory and other special condition loans.

A rate difference of 0.62 points may not sound like much, but on a typical home loan of, say, $500,000 repaid over 25 years, it can reduce monthly repayments by $196, according to Canstar’s Mortgage Calculator. That provides a long-term interest saving of around $53,000.

If we look at fixed rates. Among ADI’s the average 1-year fixed rate is 6.50%, which is 0.11 points above the average of 6.39% across non-bank home loan lenders.

This reinforces the value of casting your net wide and looking at what’s available from a variety of lenders. You can use Canstar’s Mortgage Calculator to see how your loan repayments could shape up across different interest rates and repayment periods.

How safe are non-bank home loan lenders?

In Australia, we are fortunate that both banks and non-bank home loan lenders are carefully regulated.

ADIs are regulated by APRA. Non-bank home loan lenders are regulated by the Australian Securities and Investments Commission (ASIC) and the National Credit Code.

This means that non-bank lenders need to have an Australian Credit Licence to provide home loans, and they must abide by the same rules and regulations as ADIs in terms of making responsible lending decisions.

What types of home loans do non-bank lenders offer?

Non-bank lenders typically offer home loans, which are:

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 loan features.

2. Standard full feature home loans

Full feature home loans also come in either variable or fixed rate form, but they can have added benefits that may include offset accounts, redraw facilities and the ability to make fee-free additional repayments.

If you’re wondering how non-bank home loan lenders can offer offset accounts when they are not licensed to take cash deposits, part of the answer is that many team up with an ADI to provide the linked offset account with a government guarantee. But it’s extremely important to understand how a non-bank lender’s offset facility works before committing to the loan and keeping cash stashed away in the offset account. For example, with a non-bank lender, money held in an offset facility may not be protected by the government’s Financial Claims Scheme.

4. Split rate home loans

A split rate home loan involves splitting your loan into two components, one with a fixed interest rate and the other with a variable rate. In this way, split loans can give you the best of both worlds – the certainty of a fixed rate and the flexibility and features of a variable rate loan.

Where do non-banks get their funding?

Both bank and non-bank lenders access wholesale money markets to raise the funds needed to provide home loans. This is essentially banks lending to one another. Banks can also access their own customers’ deposits to lend out as home loans, but strict rules apply around how much of these savings can be lent out.

Non-bank lenders may also use a process called securitisation to raise funds for home loan lending. In simple terms, this means investors provide the capital to lend out as a mortgage.

What happens if a non-bank home loan lender goes bust?

If a non-bank home loan lender went broke, your home loan wouldn’t suddenly disappear into the ether.

A possible chain of events would be that another bank or non-bank would purchase your lender’s portfolio of home loans. From your perspective, it would likely be business as usual in terms of making repayments. There is always the option also to refinance the home loan with a new loan and lender.

Home loans from non-bank lenders in Australia

If you’re interested in seeing what a non-bank home loan lender has to offer, how do you find what’s out there?

An easy way is to compare your options with Canstar. Be sure to compare the different providers on their interest rates, fees, loan features, eligibility requirements and any other criteria relevant to your needs. The Star Ratings shown can give you an indication of the overall value of the products, as determined by Canstar’s expert researchers.

You may wish to seek some independent financial advice before making any decision, and read the key facts sheet and Target Market Determination (TMD).

What are the pros and cons of non-bank lenders?

Pros

• Some non-bank lenders specialise in types of loans or industries that might be best suited to your specific needs.
• On the Canstar database non ADI’s are 0.62 percentage points more than the average variable rate amongst ADI lenders.
• Non bank lenders (ADI’s) often have more flexible lending criteria as well as more streamline processes.
• Both banks and non-bank home loan lenders are carefully regulated in Australia.

Cons

• Non-bank lenders do not hold an Australian banking licence, meaning they cannot offer deposit accounts such as savings accounts, transaction accounts and term deposits.
• As a general guide, among the non-bank home loan lenders on the Canstar database, the standard average variable home loan rate is higher than the bank lenders.
• Both banks and non-bank home loan lenders are carefully regulated in Australia.

Cover image source: Pincasso/Shutterstock.com.