Non-bank home loans

When it comes to getting a home loan in Australia, you’re spoilt for choice. You could approach some of the big banks or the smaller, customer-owned banks or credit unions, and there is also a good selection available from non-bank home loan lenders.

Despite this breadth of choice, the big four banks – ANZ, the Commonwealth Bank, 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).

But that list doesn’t include all lenders including non-bank lenders. Yet, despite them not being household names, you may find a mortgage with the rate, features and flexibility you’re looking for among Australia’s non-bank home loan lenders.

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 license, meaning they cannot offer deposit accounts such as savings accounts, transaction accounts and term deposits.

It also explains why non-bank home loan lenders are not classified by APRA as authorized 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 recognize this.

The Reserve Bank of Australia (RBA) says non-bank lending has grown rapidly and in April 2022 non-bank home loan lenders collectively notched up growth close to a decade-long high of around 20% (on a six-month-ended annualized basis). That said, the RBA adds that non-banks still account for less than 5% of the overall home loan market.

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

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

As a general guide, among the non-bank home loan lenders on the Canstar database, the average variable home loan rate was 4.26%, at the time of writing (see table below). That’s 0.62 percentage points less 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

Source: www.canstar.com.au – 20/09/2022. Based on owner-occupier home loans on Canstar’s database available for a loan amount of $500,000, 80% LVR and principal and interest repayments, excludes introductory and first home buyer-only 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 $177, according to Canstar’s mortgage calculator. That provides a long-term interest saving of almost $53,000.

The picture changes, though, if we look at fixed rates. Among ADI’s the average 1-year fixed rate is 5.04%, which is 0.24 points below the average of 5.28% 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.

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, on the other hand, are regulated by the Australian Securities and Investments Commission (ASIC) and the National Credit Code.

It means 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 the main types of home loans, which we’ve outlined below. Other types of loans such as bad credit home loans for borrowers who may have a poor credit score or low doc home loans often pitched at self-employed people, 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 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 teams 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.

3. 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.

The upshot is that banks and non-bank home loan lenders can use a variety of funding sources for home loans.

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, or there is always the option to refinance the home loan with a new loan and lender.

As mentioned above, it’s important to understand how your non-bank lender’s offset facility works (e.g. is it backed by another bank covered by the Financial Claims Scheme) so you know what could happen to any funds held in an offset facility if the lender goes out of business.

Source: Canstar

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