What is a non-bank lender and how do they compare to the Big Four banks?

What exactly is the difference between non-bank lending and opting for one of the big four banks? Let’s take a look.
Ava Crawford
Written by
Ava Crawford
Imogen Baxter
Reviewed by
Imogen Baxter
Last updated
May 17, 2024
0 minute read
Table of contents
young family who purchased a home through a nonbank lender

No matter which financial product you are looking for in Australia, your options will be similar: the traditional banks holding the majority of the Australian market share, and other financial institutions or non-bank lenders looking to challenge to major banks.

Speaking practically what exactly is the difference between non-bank lending and opting for one of the big four banks? Let’s take a look.

What is a non-bank lender?

A non-bank lender refers to any financial institution in Australia that isn’t a bank or, in the strictest sense, a credit union. Non-bank lenders exclude what is commonly referred to as Australia’s big four banks: Commonwealth Bank, NAB, Westpac, and ANZ. Non-bank lenders also exclude challenger banks like Bendigo Bank, Macquarie Bank, Bank of Queensland, and smaller lenders.

A non-bank lender might be a building society or other society, superannuation funds, or online lenders. These are not just small-name companies but can be quite major presences in the Australian market, like AMP and Suncorp.

Banks are referred to as authorised deposit-taking institutions (ADIs), and though non-bank lenders are not ADIs, they are still heavily regulated in Australia as they deal in financial products. Non-bank lenders will still hold an Australian Credit Licence (ACL) and are regulated by ASIC, the Australian Securities and Investments Commission, and have to follow the directives of the National Consumer Credit Protection Act (NCCP). APRA, the Australian Prudential Regulation Authority, also holds an advisory role over non-bank lenders.

Why would I choose a non-bank lender for my home loan?

There are plenty of drawcards that have more and more Australians swinging away from traditional banks and towards non-bank lenders. That said, a non-bank lender is not necessarily the option for every borrower, and some features offered by an ADI might work better for you. Here are some pros and cons of non-bank lenders:

Pros of non-bank lenders

  • Lower fees
    Big banks have large overheads to cover, with huge numbers of staff and branches. This is less so the case with non-bank lenders, who are generally able to keep fees lower. If you are using a non-bank lender for your home loan, this may help to avoid a ballooning comparison rate next to your headline interest rate.
  • Lower interest rates
    Likewise, lower overheads (particularly for online lenders) mean non-bank lenders are often looking to shake up the loan market with competitive interest rates. Remember that this is not automatically true, and you will want to do your own comparison and seek professional advice or consult a mortgage broker if you are looking for more information. Non-bank lenders may also be slower to pass on rate rises from the Reserve Bank of Australia (RBA), although this is not always the case.
  • Personalised service
    One of the reasons many people dislike the big four banks is the feeling of being anonymous and disposable in a sea of customers. With much smaller customer pools, you are more likely to get a higher level of customer attention and personalised service with a non-bank lender.
  • Faster processing
    The major banks are notorious for bureaucracy and taking time to get things done, but many non-bank and online lenders are able to process loan applications and funding in a matter of hours.
  • More flexibility
    Non-bank lenders will still check your credit history before approving your loan application, but there may be greater flexibility than the rigidity of a traditional bank. This can be a blessing for borrowers with a lower credit score or for those with less documentation, like if you are self-employed.

Cons of non-bank lenders

  • Lack of offset accounts
    The big banks are often able to offer generous offset accounts on their home loan products as they are authorised deposit-taking institutions, which non-bank lenders are ineligible to do to the same extent.
  • Lack of branches
    This may not be a deterrent for younger first-home buyers, but many homeowners like to have access to a physical branch location to be able to talk face-to-face with an employee in the event of a concern or a change in financial situation. With a smaller non-bank lender, especially an online lender, there may be limited locations in metropolitan Sydney or Melbourne or no physical locations whatsoever.
  • Less longevity
    Since many non-bank lenders lack the long-established reputations of the major banks in Australia, it’s easy to find yourself sceptical of them. It’s worth remembering the extensive ASIC regulation, Australian credit licence requirements in place, and APRA advisory position. On top of this, in the event that your non-bank lender does go bust, very little is likely to change for you: another financial institution would most likely buy them out, leaving you free to continue making repayments or open for refinancing.

Is a non-bank lender right for me?

Choosing whether to opt for a major bank, a smaller challenger, or a non-bank lender is a major decision and one worth seeking professional advice on. While a non-bank lender may or may not be right for you, it’s important not to assume that a Big Four bank will offer you a better home loan option or that a non-bank lender will automatically be cheaper.

Instead, focus on which features you need, and which loan options are on offer, and don’t rule out any home loan products before you’ve started your search.

FAQs

What happens with my home loan deposit and repayments if my non-bank lender goes bust?

While non-bank lenders are heavily regulated, there is always the possibility that a company may be unable to stay afloat, and unlike with banks, your money is not protected by the Financial Claims Scheme. However, in the event that this happens, another lender or big bank is likely to take over the non-bank lender, and you would continue making repayments as normal or opt to refinance as normal.

Are non-bank lenders for borrowers with bad credit?

Non-bank lenders are not for everyone, but gone are the days of people assuming non-bank lenders are only for borrowers with bad credit. You will have to do a credit check with any lender, and while some non-bank lenders specialise in borrowers with sub-prime credit history, others target primarily those with excellent credit. It simply depends on the lender and on the financial product in question.

What financial products do non-bank lenders offer?

Non-bank lenders aren’t restricted to home loan products, with many offering options for other credit products like credit cards and personal loan options. The majority of discussion about non-bank lenders is surrounding home loans, with the loan amount being so much higher than other loan products, but you will find non-bank lenders offering home loans for a range of LVR tiers, for owner-occupiers and investors, and with fixed rates as well as variable rate home loans. You will not find a non-bank lender offering a savings account, as only ADIs can hold your deposits.

Can I get an SMSF home loan with a non-bank lender?

Options for SMSF home loans with non-bank lenders are growing and have been simplified, with most non-bank lenders happy to work with brokers to keep the process streamlined.

Can I redraw from a non-bank lender?

Non-bank lenders will generally offer almost all of the same options as a major bank, which means you can redraw from your repayments as you would with any other home loan. Like with any comparable home loan at a traditional bank, you will want to check for any fees or restrictions on redraws.

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Disclaimer
This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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