Non-bank lenders haven’t always had the best reputation, but as mortgages continue to rise and banks place increasing restrictions on lending, people are looking for different loan options. This month’s guest blogger, Eddie Biesenbach of Best Mortgages, explains the major differences between banks and non-bank lenders.
Banks vs. non-bank lenders
As lending restrictions increase, we’re seeing more and more people bypassing traditional lenders and seeking mortgages or business loans from non-bank lenders. But some borrowers still make negative – and inaccurate – assumptions about non-bank lenders.
Good non-bank lenders are often unfairly lumped in with loan sharks, high-interest payday loans, and someone coming around to break your legs if you don’t pay up. Of course, most non-bank lenders aren’t dangerous or unscrupulous at all; they’re simply different to a traditional bank lender.
Here are three key differences between banks and other lenders:
Restrictions, regulations, and risk
In 2016, the Reserve Bank introduced LVR restrictions in an attempt to curb rising house prices. Since then, banks have tightened up their mortgage-lending criteria, making it much harder for people to get funding – particularly first home buyers.
Buying a property with a 10% deposit has become almost impossible, with some banks looking for at least 20%. For investment properties, you now need up to 40% – out of reach for most borrowers.
Because non-bank lenders are not affected by the LVR regulations, they’re able to offer flexible financial solutions for people rejected by the banks. This can be beneficial for people with a low deposit or bad credit, people who need bridging finance or help with a property development, or new businesses with little financial history.
A record number of borrowers are turning to non-bank lenders for these reasons.
Approvals made easy
Because banks are governed by such strict regulations, they often have time-consuming approval systems. They require very thorough documentation from prospective borrowers, including tax returns, bank statements, pay slips, and valuations before they preapprove a loan.
Non-bank lenders usually require similar documentation – after all, they don’t want to approve a loan that you won’t be able to service. The difference comes at the pre-approval stage. Once a non-bank lender has your documents, they’re usually able to approve your loan within hours or days. This is because they regulate and control their own funding, so don’t need to wait for outside approval.
General help or specialist service
Banks do everything – savings, insurance, checking accounts, credit cards, term deposits. Loans and mortgages are just one of their services. This means, if you’re looking for a specific type of loan or your financial situation is complicated, they may not have the specialist knowledge to help.
Non-bank lenders are different. They tend to specialise in one or two different areas, such as mortgages, small business loans, or bridging finance. This gives them in-depth knowledge of their specialist area, which means you can often get expert advice and support with your loan. Because they’re specialists, non-bank lenders also tend to deal with fewer clients at any one time. This means they have more time to respond to queries and applications.
The best option for you
Bank or non-bank isn’t the only choice you have to make when you’re getting a loan. There are also a number of ways to structure your mortgage, a range of interest rates and deals, and different repayment options.
Everyone is different, so everyone will have different needs, wants, and preferences when it comes to a loan. Talking to a mortgage advisor helps you make sure that you’re making the right choices for your financial situation.