If you're in the market for a loan, whether it's a mortgage or a car loan, there's more competition than ever, which means you have a huge range of providers to choose from. These institutions can be anything from the big four banks to a tiny community bank with a single branch.
Generally, when it comes to home loans you have three different types of financial institutions to choose from:
- Retail banks
- Mutual banks
- Non-bank lenders
You might not be as familiar with the third option, but more and more Australians are: in October 2018, non-bank lenders (or just non-banks) reached a home loan market share of 7.7%. Year-on-year they grew by 13% compared to just 4.8% for the banks, according to APRA data.
But what are non-bank lenders, and how are they different from a bank? And more importantly, why should you choose one?
What is a non-bank exactly?
A non-bank is a financial institution that does not have an authorised deposit-taking institution license (ADI) and is therefore not eligible to offer deposit accounts, such as term deposits and savings accounts. This means they are still able to offer loan products like home loans and car loans, while some can still offer products like credit cards.
Due to the global financial crisis, there aren't as many non-banks around, as the crisis restricted many non-banks' access to funding. But there are still plenty of non-bank lenders out there to rival the major banks, including loans.com.au, who can offer competitive rates on lending products.
What products can you get with non-banks?
This obviously varies from lender to lender, but most non-bank lenders provide a host of products including:
- Basic and full-featured home loans (home loans with offset accounts and redraw facilities)
- Variable and fixed-rate home loans, as well as split home loan options
- Owner-occupier and investment home loans
- Construction loans and line of credit facilities
- New and used car loans
- Green car loans for environmentally-friendly vehicles
Although not all of them will do this, certain non-bank lenders may offer other financial products as distributors for other entities, such as credit cards, insurance, superannuation and more. Non-banks can also occasionally offer savings accounts and term deposits through another entity.
Are non-banks safe?
A common scare tactic employed by non-bank critics is that they aren't safe, since:
- They don't have the government guarantee for deposits of up to $250,000 (applies to ADIs)
- They aren't regulated by the Australian Prudential Regulation Authority (APRA) to keep them in line
While both of these points are true, that doesn't mean they aren't safe. Non-banks are regulated by the Australian Securities and Investment Commission (ASIC), and their home loan lending is also regulated by the Consumer Credit Code.
What are the advantages of choosing a non-bank?
With a broad range of products to choose from across a number of different institutions, here are the advantages of choosing a non-bank for your lending needs as opposed to a big bank or mutual bank:
They can offer competitive rates
Non-banks don't have the same corporate structure and number of branches that retail banks (and a number of mutual banks) do, which means they're often able to turn these savings into lower rates on their loan products. A number of the lower home loan rates on the market, for example, belong to non-bank lenders or their related companies. Non-bank products may also have lower fees on their products compared to retail banks.
This doesn't necessarily apply to every non-bank so just make sure you compare the rates and fees of non-banks to other products.
They can be more flexible with greater personal service
The big banks have millions of customers across the country - smaller institutions like non-banks don't, and therefore may be able to offer more personalised customer service. Lenders such as loans.com.au give you a good chance of speaking to an actual person either online or over the phone, which can make your application process much easier and faster.
Are there any reasons not to use a non-bank?
There are reasons to not use all sorts of institutions, and non-banks are no exception. While they can offer better rates, some non-banks can have more restrictive lending criteria: they might not lend to people with loan-to-value ratios of more than 80%, for example. Being smaller than larger banks means they might not have physical branches which some people prefer, and most of them don't offer products like savings accounts or term deposits. Lots of banks offer 'package' products where they offer discounts for customers who bundle products like home loans, credit cards and bank accounts together, which may not be possible with a non-bank.
Whether you choose to go with a non-bank, a mutual bank or a retail bank, it's crucial to compare a variety of products based on:
- Their fees and rates
- The criteria for application (will you get approved?)
- The customer service offered
- How good their online banking is or whether they have branches
- If they have the type of product and features you're looking for