Today, non-bank lenders offer a legitimate alternative to traditional banks and have created a competitive environment to the advantage of borrowers who have realised the benefits of shopping around for a cheaper home loan.
In the strictest sense of the term, a non-bank lender is a lender who is not a bank, building society or credit union, but one that has its own source of wholesale funds and lends those funds out with an added margin for profit.
Typically, a non-bank lender can also be someone such as a mortgage manager, who borrows money from a bank at wholesale rates and lends it out with a margin added.
There are several major benefits associated with using a non-bank lender. The fact that they borrow their funds at wholesale prices means they have a big margin to work with and can often provide lower interest rates than the banks.
Another advantage of non-banks over traditional banks is their size. Since they are smaller and subject to a different set of regulations, non-banks tend to be more flexible in their approach to lending. They are in a better position to be able to tailor their loan products to suit people’s individual circumstances.
Being smaller in size can also translate into a higher level of customer service. Personal service is a high priority for many borrowers - particularly those who have experienced bad service from a bank - and non-banks are in a good position to offer personalised service and faster turnaround times on loan applications.
The other main advantage that non-banks have is that, unlike the banks, they are often willing to lend to higher risk borrowers such as those who are self-employed. They can also be more accommodating of fluctuating credit history.
There is one main perceived benefit of borrowing through a bank - one that the banks have relied on for many years - and that is the air of security that surrounds them. The Big Four banks in Australia are long established institutions, and many people feel safer sticking with what they know and trust. They also do their normal daily banking with them, so for some it is about convenience as well as security.
And indeed, in times of financial crisis, such as the recent GFC, it was the banks who were guaranteed by the government, while the non-bank lenders were forced out of the market. However, these days non-bank lenders are subject to almost as much scrutiny and regulation as the banks. This means that security is less of an issue, particularly if it comes at the cost of low rates, flexibility and good service.
As with the main advantage of using a bank, the main disadvantage of using a non-bank lender is their perceived vulnerability because of their smaller size.
Some people believe that in unstable economic times a non-bank lender would be more vulnerable than a bank, and some also think interest rate rises would be more likely to be passed on by smaller lenders.
However, neither of these need necessarily be the case; borrowers should weigh the merits of individual non-bank lenders carefully rather than believing generalisations about the industry as a whole.
As with any large institution, a bank’s size and stability can also be its main drawback. Large organisations have a bigger hierarchy, more complex processes and more overheads, and this can translate into slower service and reduced ability to make lending decisions based on individual circumstances.
Back in the 1990s and early 2000s, there was a proliferation of non-bank lenders who sourced their wholesale funds through the securitisation markets (where bundles of assets such as mortgages are sold to investors).
After the GFC, these markets dried up and non-bank lenders were forced to look for other sources of funding, including from the banks themselves. Today, non-bank lenders account for less than 7% of the market, whereas during the days of securitisation, that percentage was as high as 50%.
Nevertheless, non-bank lending continues to grow as a sector that offers borrowers an attractive alternative to the banks and keep the lending market competitive.
While banks are perceived as being safer because of the high amount of government scrutiny and regulation they are subjected to, the reality is that non-bank lenders must also comply with intensive legal and industry codes. These include ASIC laws, National Consumer Credit Protection laws, Australian Consumer Law, Privacy Law and the ePayments Code.
The only difference with banks is that they are subject to yet another layer of regulation on top of this, which is administered by the Australian Prudential Regulatory Authority (APRA).
The non-bank lending sector also regulates itself to some extent, by rewarding those lenders who aspire to the highest levels of quality and service. For instance, the Non-Bank sector of the annual Australian Home Loan Awards is a fiercely contested event, which has seen loans.com.au take out the gold medal for Best Non-Bank.
The decision to go with a bank or non-bank lender should really come down to which type of lender has the best product for your circumstances. Like any other purchase, your choice should be based on availability, value for money and compatibility with your needs.
With the advantages that non-bank lenders often seem to have in all three of these areas, they should certainly be high on your list of contenders when shopping for a loan. Nevertheless, as with any major financial transaction, you should do your research first and seek professional advice before making a decision.
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