The lending landscape has changed dramatically since I started this business in 2002, and especially over the last decade.
The gap between bank lenders and non-bank lenders has never been wider.
For borrowers, understanding these differences can materially shape what you can do, how fast you can do it, and in some cases, it can make or break your wealth strategy.
What’s the difference between a bank and non-bank lender?
It is important to understand the difference in how banks and non-banks are regulated, because banks are more heavily supervised.
Traditionally, banks (also called authorised deposit-taking institutions, or ADIs) accept deposits from customers and then use a portion of those deposited funds to provide mortgages and other loans. Because they are holding depositors’ money, strong prudential regulation is essential. Without it, a bank could take excessive risks, suffer large loan losses/write-offs, and put depositors’ funds at risk. That is why ADIs are regulated by the Australian Prudential Regulation Authority (APRA).
Deposit customers also benefit from the Australian Government’s Financial Claims Scheme, which provides a deposit guarantee of up to $250,000 per account holder per ADI. In other words, if an ADI were to fail, eligible deposits up to that limit are protected. A safe, robust banking system is a cornerstone of a reliable economy.
Non-bank lenders can also provide mortgages to Australian borrowers, but many of them are not ADIs and do not take deposits. Instead, they typically fund their lending through securitisation: they bundle mortgages and raise money by issuing bonds to investors, then use those proceeds to write new loans. Because they are not deposit-takers, they are not regulated by APRA. Their regulation sits primarily with ASIC, mainly under the Corporations Act and the National Consumer Credit Protection Act (NCCP Act).
What rules do non-bank lenders have to comply with?
The NCCP Act governs what is called regulated lending. In simple terms, regulated lending is consumer lending for home and investment purposes. By contrast, commercial lending is generally not treated as regulated lending and does not fall within the NCCP framework.
Under the NCCP Act, lenders that provide regulated lending must:
- Hold an Australian Credit Licence (ACL)
- Provide clear pre-contract disclosures so borrowers understand key terms and risks
- Comply with responsible lending obligations, including assessing whether a loan is affordable and suitable for the borrower’s needs and objectives
- Deal with hardship requests fairly
- Belong to an external dispute resolution scheme such as AFCA
- Act honestly and efficiently, and avoid unconscionable conduct
Where the difference matters is on the prudential side. Non-bank lenders are not required to follow APRA’s macroprudential lending settings, because APRA only supervises ADIs.
For example, APRA requires banks to assess serviceability using a buffer of 3% above the actual interest rate. More recently, APRA has also placed caps on high debt-to-income lending. In earlier cycles, APRA also moved to limit the volume of interest-only lending.
Are non-bank lenders safe?
As with any industry, there will always be a few bad apples. That said, non-bank lenders are generally safe to use because they must comply with the NCCP Act. Many borrowers will still prefer lenders with a long track record and a strong reputation. Some of the larger non-bank lenders in Australia include Pepper, Liberty, Resimac, and Firstmac.
Caution with offset accounts
My main caution with non-bank lenders is to understand how their offset accounts may work.
Because non-bank lenders are not ADIs, they cannot offer traditional bank accounts that accept deposits. To work around this, many use a sub-account structure: one sub-account is your mortgage balance (in debit – meaning you owe them money), and the other is an “offset” sub-account (in credit).
When interest is calculated each day, the credit balance is netted off against the debit balance, so you pay interest on the difference (just like a standard offset account). In that sense, the “offset” is not really a bank account. It is more like quarantined, notional principal repayments – money you have effectively set aside to reduce interest, without formally paying down the loan.
The risk is what happens if the non-bank lender fails. In that scenario, the lender (or an administrator) could permanently combine the debit and credit balances, meaning your “offset” funds are used to repay the loan and you lose access to that cash.
That is potentially different to an ADI lender. If the offset is a genuine deposit account with an ADI, it may be covered by the government deposit guarantee (subject to eligibility and limits), so you are less likely to ever lose access to those funds in the event of a failure.
Therefore, the real question is not “does it work like an offset?” It is: do you want the offset to function as cash you can rely on having access to, or are you comfortable with the risk that you could one day be forced to permanently repay part of your loan using that offset balance?
What are the downsides?
There are a few potential downsides to using non-bank lenders compared with traditional banks.
First, most non-bank lenders do not have a branch network you can walk into. Some do have arrangements with other Australian banks that allow certain transactions to be done in person. If face-to-face access matters to you, you need to understand exactly what you can and cannot do under those arrangements.
Second, you are less likely to get a dedicated personal banker. Many banks offer relationship-style service where one person acts as your main point of contact and helps coordinate your broader banking needs. Non-bank lenders typically do not provide that model of service, so you will need to conduct your banking either online or over the phone.
Finally, non-bank lenders can change variable interest rates independently of the RBA. Because they fund mortgages through the bond market, their cost of capital is driven by bond market conditions, and lending margins can widen or contract as expectations shift.
As a result, a non-bank lender’s cost of capital can rise even if the RBA does not change the cash rate. If that increase is large enough, lenders may pass some (or all) of it on to borrowers through higher interest rates. This is exactly what happened during the GFC.
What are the advantages of using a non-bank lender?
The main advantage of using a non-bank lender is that they can offer significantly higher borrowing capacity. With banks facing tighter credit settings together with higher interest rates, the gap between what banks will lend and what non-banks will lend has widened materially.
For example, one recent client we have been working with was assessed by every bank as being able to borrow around $600,000. A non-bank lender, however, was willing to lend roughly double that amount – $1.2 million!
To be clear, I am not suggesting your borrowing decision should be driven by what a lender says you can borrow. It is still essential to borrow prudently and to think through the risks, including how your circumstances could change over time.
But in practice, we often see situations where a client can comfortably and sensibly service a larger loan than the banks’ assessment models will allow.
Building wealth through property is a game of finance
As I explain in this YouTube presentation, building wealth through property is usually more a game of finance than it is a game of property.
The key variable is your access to borrowing (when it is safe for you to borrow). Greater borrowing capacity can let you buy an additional property or level up in quality – buy a higher quality asset. Over the long run, that can make a meaningful difference to your future wealth.
That is why, I would rather borrow $1.2 million with a non-bank lender than be capped at $600,000 with a bank, even if the non-bank interest rate is slightly higher. Capacity often matters more than price, provided the strategy is still prudent and the risks are considered.
It is also worth remembering that choosing a non-bank lender today does not lock you in forever. Debt should be reviewed regularly. The goal is to optimise both (1) access to lending, if your financial plan requires it, and (2) minimise borrowing costs wherever possible.
A common approach is to use a non-bank lender to get into the market or buy at the right level, then refinance to a traditional bank later if that becomes the better fit.
Understand your options
More than ever, given the tightening of macroprudential lending rules that banks have faced over the last decade, it is important to understand your options and cast a wider net beyond the brand names you are most familiar with.
The easiest way to do this is to work with a great mortgage broker, because they can assess the market broadly and match you to the right lender, or combination of lenders, for your strategy and circumstances.
A great mortgage broker is someone with deep experience who can workshop solutions across a range of lenders, not just default to the obvious options. They will also be strategic about valuations to help maximise usable equity, and they will take the time to understand your longer-term goals, so the lending structure supports where you are trying to get to, not just what you are doing today.
