Jul 10, 2019
Welcome to Finance and Fury, the ‘Say What Wednesday’ edition.
Today I’m here with Jayden!
Today’s question comes from Gavin,
“Is there anything to be considered when looking at refinancing
mortgages with smaller lenders that run their business online like
reducehomeloans.com.au with rates of 3.19%, versus the larger
Types of Lenders
- Large lenders – ‘Big 4’ banks; ANZ, Commonwealth Bank, NAB, and
- Small lenders – almost any financial institution other than the
Big 4 banks
- Credit unions, building societies
- Non-bank lenders – what most online lenders fall under
What are non-bank mortgage lenders?
A non-bank mortgage lender is a financial institution that
offers home loans but is not a bank
Is a mortgage with a small lender better due to being
- It can be, depending on what you’re looking for in a home loan.
As with anything else, smaller lenders have their pros (possibly
lower interest rates, possibly better customer service, etc.) and
their cons (possibly fewer resources, possibly more limited loan
options, etc.). We’ve discussed some of these pros and cons in more
- Some smaller lenders are able to provide more competitive
interest rates or fees, while still offering all the same features
as loans from the big banks, such as an offset account or
redraw facility, the ability to make extra repayments, and
How it Works
- The company presented as the lender aren’t the ones who own the
mortgages, instead the provider of the deposit funds would have the
ownership of the mortgage.
- In the event the lender was in a defaulting position, the
recall of their assets (the mortgages people have borrowed) in a
liquidation process is unlikely as the ownership of the loan would
be transferred to another entity.
- Smaller lenders may be online only, so therefore they have
fewer overheads than the traditional “bricks and mortar” bank
Watch out for these red flags
- Non-bank lenders that are online only. If the website is all
you have to work with make sure all the information you need is
- The major things to watch out for with online lenders like
Reduce Home Loans is that they are not a Bank.
- Therefore, they don’t actually accept deposits for savings
accounts which is what a Bank would normally use as it’s source of
funding for their mortgage lending objectives.
- They do instead source funding from other means (sometimes from
the banks themselves) however, it does add an additional layer of
Can be confusing – so see what Laws apply to small
lenders to see where they fit
- ASIC – Australian Credit Licence -
National Consumer Protection Act 2009 (Cth) (NCCP) – This
is at least a minimum
- provide a certain standard of information to every potential
- assess whether a potential borrower can realistically service
- Same criteria as all other lenders – ASIC regulated
- APRA - an additional set of criteria for lending risk for the
banks – but non-bank lenders are not
deposit-taking institutions, so they are not regulated by APRA
- Some smaller lenders are regulated by APRA, but those who are
not carry additional risks
- Dispute resolution schemes - whether a big or small or non-bank
you have an ombudsman who can help resolve issues.
Are small lenders likely to fail or
- Government guarantee for deposits up to $250,000 doesn’t apply
if non-deposit taking lenders
- If your lender is failing, there are several likely scenarios
that protect you as a borrower:
- The smaller lender is bought (acquired) by a larger
- A larger institution buys your mortgage from the smaller
- The government provides assistance via the deposit
- Nothing really changes for you as a borrower, except that you
may get a new lender
- Always compare your options for switching your home loan
to another lender.
- Smaller lenders may in general be more vulnerable to economic
- Risk comes from their source of funding - larger lenders or
other large companies/investors
- But there are pros and cons to this as well, as this funding
means they are able to offer flexibility that the big banks may not
be able to offer.
Borrowers should look for a lender that is regulated by APRA as
well as the usual credit laws, is not connected with recent bank
failures, and doesn’t raise any red flags when you’re researching
their loan options.
Make sure they have an Australian Credit Licence, External
Dispute Resolution Scheme (AFCA) and are reputable.