What is a non-bank lender?

A non-bank lender is a financial institution that offers mortgages and other types of loans, but which doesn’t hold a banking licence.

Australia has many non-bank lenders, including Click Loans, Firstmac, Homestar Finance, iMortgage, Liberty, loans.com.au, Mortgage House, Pacific Mortgage Group, Pepper, Reduce Home Loans, Resi Mortgage Corporation, State Custodians and Virgin Money.

Non-bank lenders don’t feature on the list of Australia’s authorised deposit-taking institutions, because they can’t accept deposits (unlike banks, credit unions and building societies).

Authorised deposit-taking institutions, or ADIs, often use deposits as a source of funding. For example, a bank might pay a savings account customer 2 per cent interest, and then lend that money out to a home loan customer at 4.5 per cent.

Non-bank lenders, though, source their money from wholesale funders, which may be Australian banks or overseas institutions. They then on-sell this money to home loan customers (at a higher price). Non-bank lenders also sometimes source money through ‘securitisation’, which involves bundling together a group of mortgages and selling this asset to investors.

Governance is another thing that separates non-bank lenders from mainstream lenders.

ADIs are regulated by APRA (the Australian Prudential Regulatory Authority), while non-bank lenders are regulated by ASIC (the Australian Securities & Investments Commission).

What this means is that while both types of institution are monitored by the authorities, they follow slightly different rules.

The pros and cons of using non-bank lenders

Taking out a home loan with a non-bank lender is neither right nor wrong. You’re an individual, so you need to make your own decision based on your unique life circumstances and financial position.

That said, you should at least consider non-bank lenders when doing a home loan comparison. That way, you can decide if the best mortgage product for your situation is, indeed, a non-bank product.

As with all things in life, using a non-bank lender comes with both pros and cons.

Non-bank lenders are smaller than mainstream rivals, so they often have to charge lower interest rates (for comparable products) to win business.

Another consequence of being smaller is that non-bank lenders often provide more personalised service and more flexible lending terms. That’s why self-employed borrowers and people with bad credit histories often use non-bank lenders.

But non-bank lenders also come with disadvantages. They don’t have branch networks. They don’t offer savings accounts or credit cards. And some people feel it’s risky to borrow money from a small institution because it might collapse. (That said, it’s worth bearing in mind that the party that assumes the risk with a mortgage is the lender, not the borrower.)

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