Banks Vs. Non-Banks
When you're buying a property and taking out a home loan for the very first time, choosing a mortgage product and a lender can be a very overwhelming prospect. There are many lenders out there and working out which one is right for you can be a challenging task. Not only does your lender have to be able to offer you a reasonable loan amount, but also agreeable interest rates, suitable loan terms, low fees and some flexibility, too. You need to be absolutely certain that they're trustworthy and offering you the very best deal possible.
Healthy competition between banks and non-bank lenders means they're all striving to offer the very best deals so that they can secure your business. This competition also helps drive loan innovation and opens up opportunities for lenders to specialise in niche products, which may come in handy if you're a unique customer (e.g. self-employed) or are taking out a loan for a unique property purchase (e.g. construction loan).
The banks and non-banks both have their pros and cons, which means the decision ultimately comes down to your personal circumstances. We've outlined some thinking points below, but we suggest you gain expert advice from a mortgage broker or finance professional before making your final choice.
- The major banks still hold a majority of market share in Australia, which reflects their continued popularity with borrowers. The Big Four banks are household names and many borrowers -- particularly first-time property buyers -- may feel safer taking out a loan with established institutions.
- Many carry out their day to day banking through the major banks, so for simplicity's sake they may choose to take out a home loan through the same institution. (However, it's advised that borrowers investigate all options, as other lenders may offer better deals.)
- While both banks and non-banks are regulated by the Australian Securities and Investments Commission (ASIC), banks also have an extra level of regulation under the Australian Prudential Regulatory Authority (APRA).
- While borrowers may feel safer taking out a home loan with a major bank as they may believe they're more capable of withstanding a hit, such large financial institutions can also have their drawbacks. For example, some customers argue that service can be slower and applications can take longer to be processed when dealing with a larger banking institution. Larger institutions may also mean that bank staff have less flexibility and authority to make decisions based on an individual borrower's circumstances.
- The major banks have tightened their lending criteria as a result of tougher economic times. Many loan products now require a larger deposit from borrowers to secure a loan, and it may also be tougher for some borrowers to gain loan approval. Many borrowers who may have successfully secured a loan in more optimistic times -- such as self-employed workers or those with a poor credit history -- may now find themselves being refused.
- The introduction of non-bank lenders into the home loan landscape has been a great boon for property buyers. Not only have they helped drive competition and innovation, but many also offer a great range of niche loan products, which may cater to your unique purchase or circumstance.
- Borrowers considered higher risk, such as the self-employed and those with a poor credit history, may be able to take advantage of non-bank lenders' perceived flexibility and willingness to cater to individual circumstances.
- Some supporters say that the smaller size of non-banks means they can give more personalised customer service and offer quicker turnarounds on loan applications.
- While being smaller can mean non-banks are often super efficient, it can also have its disadvantages. It may mean that they're more vulnerable to unstable economic conditions -- as evidenced during the GFC when a number of non-banks withdrew from the market.
- Some have suggested that non-bank lenders may be more likely to pass rate rises on to their borrowers, as a by-product of their smaller size and greater vulnerability.
Whether you choose a bank or a non-bank lender, there's no right or wrong answer -- take the time to chat with staff and thoroughly research the loan products on offer to ensure that you're making the best decision for you.