Competitive home loan rates with non-bank lenders

If you’ve been with the same bank since you were a kid, you may not be aware that there are a range of providers out there outside of the big four banks. While there is a perceived stability in choosing a major bank in Australia, it could cost you time and money to count non-bank lenders out.

Non-bank lenders are competitor credit providers to the major banks that do not carry an authorised deposit-taking institution (ADI) licence.  

Non-banks can include insurance companies, investment banks, mortgage brokers and home loan lenders, among others. They typically provide the same products as traditional banks, credit unions and mutual funds, but are not authorised to provide deposit accounts, aka bank accounts, savings accounts, or term deposits.   

In the 1980s, the banking sector in Australia was deregulated. Prior to this you could only get home loans from banks, building societies and credit unions. As a result, it was difficult for Australians with alternative forms of income, such as small business owners, or those with a poor credit history, to buy a home.

After deregulation, several non-bank lenders were able to start offering home loans at very competitive interest rates and alternative or more niche lending criteria, often below those made available by the regular financial institutions. Home buyers began to benefit from this competitive market as the banks were forced to lower their rates.

Nowadays anyone can consider a home loan with a non-bank, as they can be a competitive option in the Australian home loan market.  

For a non-bank to not carry an ADI Licence, the deposit will not be guaranteed by the government under the Financial Claims Scheme (FDS). This scheme covers up to $250,000 per person, meaning if the non-bank were to go under, you may be at risk of not getting your money back.

That being said, nowadays if a lender was to go under, it is likely that another bank would simply accrue the mortgage debt, and you would become a customer of that bank instead. However, there is no guarantee of this, which is what gives the major banks that added sense of security for customers.

While a non-bank lender may not have an ADI licence, they are subject to the same banking regulations and laws as licensed financial institutions, according to the Consumer Credit Code and the Australian Securities and Investments Commission (ASIC).

Further, ASIC requires all lenders to disclose all rates and fees pertaining to their products, and to make this information easily available to consumers. The Australian Prudential Regulatory Authority (APRA) also oversees non-bank lenders for the sole purpose of ensuring that they keep to any financial promises they make.

Many non-bank lenders are also funded by the major banks as well, so you can take advantage of a more competitive or niche product, while also feeling a greater sense of security in the lender. If your non-bank lender was to go under, it’s likely the owner bank would simply take you and your debt on as a new customer.

• Lower interest rates

Non-bank lenders can often be more flexible in terms of the fees and the interest rates they charge, compared to the major banks. For example, RateCity research shows that when you compare the average big four bank home loan rate to the lowest non-bank interest rate over the last year, the non-banks come out on top:

Source: RateCity.com.au. Note: Based on the average big four bank variable owner-occupier rate paying principal and interest, compared to the lowest non-bank variable owner-occupier rate paying principal and interest, from 31/11/21, to 30/11/22. Data calculated based on specified dates each month. Data accurate as of 14/11/22.

Please note that these figures factor in several cash rate increases as led by the Reserve Bank of Australia. Even with fluctuating rates, the non-bank lenders generally offered more competitive interest rates historically.

• Lower fees

To be competitive in a crowded home loan market, non-bank lenders also tend to waive certain common fees, such as application fees, monthly fees, annual fees, and mortgage discharge fees. If you’re looking to ditch pesky fees, it may be worth considering a non-bank lender.

• More innovation

The major banks are often delayed in the innovative products and beneficial fintech they could offer, as they generally have more red tape to cut through and more executives that need to approve new products, tools or apps. This means that if you’re a fan of these kinds of perks, a non-bank may be able to offer more flexibility and freedom.

For example, big four bank, Westpac, gave customers access to ApplePay almost four years after ANZ, another big four bank, did so.

There are a few ways that non-banks will typically operate; it may be entirely privately owned and funded, a mix of privately owned and backed by a major institution.

Non-bank lenders may be privately owned and self-funded or, in some cases, backed by a major institution.

Privately owned non-bank lenders usually rely on selling on their products in large quantities to be retailed by others. They may offer highly competitive interest rates and fees, or innovative fintech and other perks, to entice customers to join with them.

Many non-banks are also funded by some of the bigger institutions in Australia. For example, Bank of Queensland owns Virgin Money Australia and ME Bank. Additionally, Bendigo and Adelaide Bank are a retail banking company that own Bendigo Bank and Adelaide Bank, as well as Community Bank, Rural Bank, Delphi Bank, UP, and more.

It should not make too much of a difference if your bank is owned by another bank in terms of day-to-day operations. However, there is a risk when it comes to the FCS, as this government guarantee protects deposits per account holder for each ADI – but some ADIs operate under multiple trading names.

Say you have $150,000 deposited in an offset account with your bank, and $200,000 in a savings account of a subsidiary non-bank, and they both operate under the same ADI. If the ADI were to go under, your funds would only be covered up to $250,00, regardless of how much is spread over the multiple providers.  

Another factor to be aware of if you are considering a home loan from a non-bank lender, is that there may be inconsistencies when it comes to passing on interest rate changes. As they often have a mix of private funding, and funding via banks, the rate changes could vary considerably based on how they manage mortgages.