What's the difference between banks and non-bank lenders?

When researching potential home loan providers, you may have come across the term ‘non-bank lender’ and been curious as to how this differentiates from traditional banks.

It’s no secret that banks, credit unions and building societies are all vying for your business, but which one is the best option for your home loan goals and financial needs? And are there any dangers in opting for a non-bank over an Australian bank?

With more and more Australians turning away from the big four banks and looking for competitor providers, it’s worthwhile understanding the differences, including the benefits and disadvantages, of non-bank lenders versus banks for your home loan needs.

Non-bank lenders explained

While you may assume every provider of bank accounts, credit cards or home loans can call themselves a ‘bank’, this is actually a common misconception. In Australia, you need to meet the specific criteria of being an ADI, or authorised deposit-taking institution, to be defined as a ‘bank’.

ADIs are authorised to not only lend money to customers through loans and credit, but accept deposits through providing bank accounts, savings accounts and/or term deposits. This authority is granted by the Australian Prudential Regulation Authority (APRA).

Non-bank lenders, or Non-ADIs, will not have an ADI licence. While they typically will be able to provide eligible customers with home loans, they are not approved to take deposits from their customers. However, a non-bank lender may still be able to provide accounts that are transactional, such as an offset account linked to a home loan.

Who are the non-bank lenders in Australia?

ADIs may include:

• Banks; including the Big Four Banks (B4Bs), their subsidiaries (e.g. Bankwest or Suncorp), neobanks and some online lenders
• Credit Unions and Building Societies

Non-ADIs may include:

• Money market corporations (brokers and dealers)
• Finance companies (some online lenders, some brick-and-mortar companies)

• For a list of all Australian-owner ADIs, please click here.

The advantages of a non-bank lender

As non-bank lenders do not have the same amount of financial products on offer they may also have fewer overheads to contend with, particularly for online lenders and neobanks. With fewer staff and branches, for example, a non-bank lender may have fewer expenses and therefore be able to pass these savings on to their customers in the form of lower rates and fees.

Non-bank lenders may also have fewer executives and shareholders to keep happy than the big banks. This allows non-bank lenders to focus on lending and providing the most competitive home loans. Non-bank lenders typically will provide more innovation in the fintech space for their customers because of this.

You may also find that a non-bank lender has fewer compliance hoops for customers to jump through by not being an ADI. So, home borrowers who don’t meet the standard eligibility criteria set by banks may be able to improve their chances of approval with a non-bank lender. This may be a competitive option to consider if you’re a borrower with bad credit history, for example.

Disadvantages of non-bank lenders

One of the most significant benefits of choosing a bank for your home loan is the simplicity and ease of having multiple products with the one provider. If you’re the type of person who likes to keep all their eggs in the one basket, such as having a bank account, savings account, credit card and home loan with the one bank, then a bank may be a better fit for your individual goals.

As a bank is classified as an ADI, they are also afforded greater protections than non-bank lenders. If a bank were to go under, any money you deposit with said bank up to $250,000 should be protected and returned to you by the government. This is because ADIs are protected by something called the Financial Claims Scheme (FCS).

There is also an increased level of convenience by opting for a bank for your home loan needs, particularly one that has branches for those who rely on face-to-face customer service. You may also find there is greater access to ATMs through a bank.

How do I choose between a bank and a non-bank lender?

The decision to opt for a bank or a non-bank lender for your home loan needs is highly personal and will depend on your mortgage goals and financial situation. Ultimately, one of the best things you can do to ensure you’re choosing correctly is do your research and compare your options.

RateCity provides several tools to help borrowers compare home loan options:

• Comparison tables

Comparison tables can help you narrow down your search and compare apples with apples by displaying home loan options side by side. Simply enter your loan details and then use the filters to compare by interest rate type, lender type, features, repayment options and more.

• Mortgage repayment calculator

To help you narrow down your shortlist of home loans, a Mortgage Repayment Calculator can help you discover your estimated loan repayments with each loan option. You can find out your estimated weekly, fortnightly, or monthly repayments, total interest payable, total amount payable, plus your repayment schedule.

• Real Time Ratings™

RateCity's Real Time Ratings™ is our world-first tool that helps you compare how much value a home loan product might offer you. The rating system gives each home loan a score out of five stars, based on loan costs and flexibility. It also factors in your loan size, deposit amount and borrowing type.

Compare home loans in Australia