What is a digital home loan?

Digital home loans are shaping up as the next big thing in the mortgage market, with even some of the major banks racing to launch products into the market. But is this type of mortgage right for you – and can it save you money? We take a look at what’s involved.

There was a time when applying for a home loan meant filling out a lengthy loan application and heading into your local bank branch. What followed was often a long and nail-biting wait to know if your loan was approved.

These days, technology is making it a lot easier to apply for a home loan, and digital home loans have fast-tracked the process even further.

So, what is a digital home loan, who offers them – and can a digital loan help you save with a low rate?

What is a digital home loan?

Digital home loans refer to mortgages available through fintech lenders, also known as digital banks or neobanks.

All lenders use technology to varying degrees in the home loan application process. What sets digital lenders apart is that their loans have an online-only application process often involving the use of an app. Plus, the digital home loan technology allows some lenders to cut loan approval time down to a matter of minutes.

Who offers digital home loans?

The following home loan providers on Canstar’s database provide a digital-only service to borrowers as they have no branches (per APRA Points of Presence Statistics) or face-to-face home loan centres:

• AMP Bank
• Athena
• Australian Unity
• Citi
• Easy Street
• Freedom Lend
• homeloans.com.au
• Homestar Finance
• ING
• Liberty Financial
• loans.com.au
• Macquarie Bank
• ME Bank
• Nano
• One Two
• Pacific Mortgage Group
• Pepper Money
• Reduce Home Loans
• Tiimely Home (formerly Tic:Toc)
• ubank
• Unloan
• Up
• Well Money
• WLTH
• Yard

Source: www.canstar.com.au – 14/11/2023

How do digital home loans work?

Once your home loan is up and running, digital home loans work in much the same way as a traditional mortgage. It is the application and loan assessment process that typically sets digital home loans apart from regular loans.

Each digital lender has its own systems and processes. However, Unloan claims it can take just 10 minutes for borrowers to make a loan application. The common thread that accelerates the loan assessment process is that much of the behind-the-scenes processing is conducted using clever technology.

To begin with, instead of handing over print-outs of your past bank statements, digital lenders usually harness the power of open banking. This gives the lender (with your permission) read-only access to your everyday account to review past transactions.

Using sophisticated algorithms, the digital lender analyses your account entries to determine your income and spending patterns, and get a feel for how well you will handle home loan repayments.

At the same time, the lender taps into the database of various property companies to value the home you plan to buy, while also checking your credit score to evaluate how well you’ve managed credit and debt in the past.

All this is much the same process that every lender follows. The difference with digital home loans is that each of these steps can be completed at the same time – and at turbo-charged speed. Nano for example, claims you can potentially have the green light for your loan in a matter of minutes rather than days or weeks.

Digital home loans vs big banks: who offers lower rates?

Digital banks have no branch network to maintain, and no massive teams of credit analysts to review loan applications. So in theory they should be able to offer cheaper home loan interest rates than the big banks. Indeed, a quick check of Canstar’s home loan database shows digital home loans can offer some of the lowest rates in the market.

But a digital home loan won’t always be cheaper than a traditional one. For example, digital home loan providers may prioritise speed, convenience and a slick customer experience when designing marketing their products, without necessarily looking to compete with other lenders on price.

The downside of digital home loans

The trifecta of a potentially low rate, an easy online application process, and a rapid loan approval time can make digital home loans sound like everyone’s ideal mortgage. However, digitising the home loan process can be complex, and for the time being at least, digital home loans tend to be best suited to borrowers with straightforward circumstances that fit each lender’s criteria.

In practical terms, this means digital home loans may not be suitable for all borrowers.

To be eligible for a Nano home loan, for instance, you’ll need household income of at least $100,000 plus a minimum 20% deposit or 20% home equity for refinancers.  Nano does not offer construction loans or loans to buy vacant land.

At present, Unloan is only available for refinancers, though its website notes that loans for home buyers are on the way.

Tiimely Home does not offer construction loans, split loans (divided between fixed and variable rates) or loans using a guarantor. Units and apartments within a high-density complex, which Tiimely Home defines as more than five storeys, require a 30% deposit.

The verdict on digital home loans

A digital home loan can come with a swift application process, a rapid approval time, and a low rate. But you need to be confident that you meet the lender’s criteria. If you don’t quite fit the bill, it’s good to know that in today’s competitive mortgage market there are plenty of low rate lenders vying for your business. It just may take a little longer to have your loan approved.

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