Non bank lenders
What exactly are non bank lenders?
Non bank lenders are lenders who do not hold an Australian banking Licence and who are not a mutual i.e. they are not a bank, a building society or a credit union. A true non bank lender is one who sources their own funding and then lends out their funds making a margin on the difference.
The key difference between banks and non-bank lenders is their ability to accept deposits and who their ultimate regulatory body is. Banks, building societies and credit unions are called ADI’s or Authorised Deposit Institutions. They are regulated by Australia’s Prudential Regulatory Authority or APRA for short and ASIC. Non-banks on the other hand are not legislated to accept deposits from consumers and are regulated solely by ASIC (the Australian Securities and Investments Commission).
Non bank lenders are less prevalent today than they were in 1990’s and early 2000’s. The onset of the GFC and resultant credit squeeze severely restricted access to cheap wholesale funding via the securitisation markets at that time and many non banks disappeared with loan books ultimately being wound down or bought out by bigger players. At this stage the market for mortgage backed securities has stabilised but there are less players in this space than in pre GFC times. Some non bank lenders have found other sources of funding (private equity) and they have focused on higher margin loans such as those in the non confirming space.
There has been some funding made available through the government backed (AOFM) mortgage securitisation scheme, however the main source of funding for many non bank lenders is now directly from their competitors the banks themselves! Rams is the classic example of a non bank lender that isn’t really a non bank lender being 100% owned and funded by Westpac.
Mortgage managers are another type of lender that are often called non bank lenders. Typically, mortgage mangers have agreements with lenders such as Macquarie Bank & Nab (through their subsidiary Advantedge) to access funds at wholesale prices and then lend the funds out under their own brand with a margin included in the end interest rate payable by the borrower. Each loan is funded at the individual loan level i.e. the bank funders do not provide a large chunk of funds to the managers to lend out, they provide individual loan funds at the settlement of each loan. The manager controls the process of approving loans (as long as they are within set guidelines) and manages the loan and customer through to the eventual loan discharge.
To confuse matters some mortgage mangers are also non bank lenders in true sense of the word. Typically, they are mangers for the more straight forward loans at competitive interest rates and true non bank lenders (i.e. they lend their own funds) for higher risk loans such as lo doc loans and credit impaired loans.
The availability of non-bank lenders has driven healthy competition in the home loan market. There are a number of pros and cons of smaller lenders versus big banks, and several reasons why people might specifically choose a non-bank lender over the more traditional bank.
Non banks and borrowing capacity
Its is an emerging point of difference for non banks that they are not regulated by APRA. For investors in particular the non banks offer the ability to source loans funds that would not be available from APRA regulated lenders. The key difference is around how existing debts are assessed.
For borrowers who receive very consistent commission income or regular overtime for example there can be some evades with non-banks as they may accept 100% of this income rather than the APRA lenders who will generally only accept 80%.
Pro and cons of choosing non bank lenders
Non bank lenders can have competitive interest rates and limited fee’s as they have less bells and whistles and overheads than traditional lenders.
Often non-bank lenders offer more personalised customer service and have the ability to assess deals case by case servicing complex lending situations that wouldn’t make it through the red tape with traditional lenders. This is especially beneficial for investors facing major roadblocks in growing their portfolio.
Smaller lenders may have less product features. Such as no offset account.
Though unlikely, extreme economic conditions (GFC mark 2) may mean the funding sources of non bank lenders may be cut off in the future. Interest rates may not end up as competitive as it was to start with and your loan may be “on sold” to another lender if they go out of business. In fairness this could happen with any lender, but it seems more unlikely to happen to a major bank.
Upfront and set up fees can be a bit higher than major banks.
So is it worth considering non bank lenders for your next loan?
Many people assume big banks are the most secure and best option for home loans. However, this is up for debate. The mortgage industry is evolving and non banks are becoming more competitive. By limiting yourself to major banks you’re cutting out a large portion of the competitive landscape and may miss out on the best fit for your personal circumstances.
For many investors who have been impacted by APRA’s tightening regulation non-bank investment loans may be the best option moving forward.
So in summary it is definitely worth considering alternatives to the major banks such as non bank lenders, second tier banks, mortgage managers and mutuals. Whether a non bank lender is right for you really depends on your own unique situation and plan.
Why not so we discuss the pros and cons in your unique situation