The Differences Between Major and Alternative Lenders

Most Australians are familiar with the major Australian banks (ANZ, CBA, NAB, Westpac Group and Macquarie), their branch and ATM networks, and their service propositions. However, aside from these banks, there are several other non-major, non-bank or alternative lenders out there that many would not have heard about, but are more than capable of providing home loans, residential investment loans, commercial investment loans and even self-managed superannuation fund loans.. 

All these institutions have their pros & cons as well as their own niches. In this article, we hope to provide some insight as to some of the benefits of both the major and non-major lenders in Australia and why you would consider either type of lender.

Who are the Major Lenders and What are the Benefits of Using Them?

The major lenders operating in Australia are currently:

1.     Australia & New Zealand Banking Group (ANZ)

2.     Commonwealth Bank of Australia (CBA) who also own:

• Bankwest

3.     National Australia Bank (NAB) who also own:

• UBank

4.     Westpac Banking Corporation (WBC) who also own:

• Bank of Melbourne
• BankSA
• St George
• RAMS

5.     Macquarie Bank

The main benefits of the major lenders are:

1.     Substantial branch and ATM networks;

2.     They may have an international presence;

3.     They typically have a full suite of business banking solutions which may benefit self-employed customers. This is particularly helpful if you need to utilise the available equity within your home, as you may not need to refinance your home loan to secure a business loan;

4.     As these lenders are much larger institutions, they may be more resilient through tough economic times and therefore, less likely to fall over. Furthermore, their strength often sees them among the best rated institutions in the world which may have a positive impact on how much they borrow their funds for, and thereby affecting your loan rates. Furthermore, the fact that they can borrow funds at much cheaper rates than those enjoyed by smaller institutions, means that they can theoretically hold off passing on interest rate rises for longer than the smaller institutions who may have higher funding costs and therefore may increase their rates much more aggressively in an increasing interest rate environment;

5.     They may have more flexibility with regard to products, policies and loan structures.

Why would you use a Major Lender instead of an Alternative Lender?

There are a few reasons you as a borrower may apply for a loan with a major bank/lender, here are just a few:

1. You require easy branch and ATM access: 

• Many alternative lenders do not have a branch or ATM network and therefore you would be required to make any cash deposits via Australia Post outlets and other institutions' ATMs;

2. You own a business and need to use your home to secure a business loan also

• If your home loan is with a lender that does not offer business loans, then you would be required to refinance (generally speaking) to the lender offering business loans as generally they will not lend on a 2nd Mortgage;

3. You prefer a major institution as they may offer a one-stop-shop for things such as business lending, insurance solutions, wealth solutions; bank accounts etc;

4. Your borrowing structure may be quite complex and therefore not fit the policies of alternative lenders;

5. You may feel that major banks are safer when it comes to holding your deposit funds.

What are the Benefits of Using Alternative Lenders?

There are quite a number of non-major / alternative lenders in Australia. We currently have approximately over 30 on our lender panel and they all go through a very rigorous process to be included on the panel.

The reason there are so many of them on the panel is to give borrowers as much choice as possible as many of these lenders will have their own niches that may benefit borrowers with varying unique circumstances.

Some of the general benefits of using alternative lenders are:

1.     Generally, very quick application turnaround times, something that the majors have been struggling with for some time now;

2.     These lenders are generally smaller institutions and therefore may have lower overheads and thus why they are able to usually offer lower interest rates and fees to their customers;

3.     Whilst cheaper, a few of these lenders can still offer loan features that the majors offer such as redraw facilities, offset accounts and full internet banking capabilities;

4.     Flexible lending policies that may cater for specific cohorts such as newly self-employed customers, whereas the majors will want a borrower to have been self-employed for at least two years before they may be eligible for a loan;

5.     They tend to be early adopters of digitisation aimed at streamlining the lending process in order to make the process more convenient for borrowers, such as digital identification verification and/or digital loan documents that can be executed electronically. On the other hand, the major banks tend to be constrained by legacy systems and processes, and due to their sheer size, technological advancements may be much slower than these smaller, more nimble financial institutions.

Why would you use an Alternative Lender instead of a Major Lender?

There are a few reasons you as a borrower may apply for a loan with an alternative lender, here are just a few:

1. You have specific circumstances which mean that a major bank may not be the best fit for you;

• For example, you may be an emergency worker (paramedic, police, nurse etc) and rely heavily on recurring overtime, some of these lenders will allow 100% utilisation of overtime income for servicing purposes, whereas others (including some majors) will only utilise 80%.

2. You prefer the cheapest interest rate and fee arrangement rather than a branch network;

3. You prefer a smaller institution that you feel may provide a higher level of service as they do not have as many customers/applications to deal with; 

4. Your requirements may be quite simple and you do not need a major bank’s full suite of products and/or services;

5. You may be searching for an ‘ethical’ lender that does not invest in environmentally questionable businesses.

Are Alternative Lenders Safe?

A common question we are asked is “are small lenders safe?”. This is a fair question, given the events during the Global Financial Crisis (GFC) in 2008/2009 at which time the strength of some financial institutions was being questioned as some were starting to fail. During that time, some people lost their savings and it is understandable that this question remains an important consideration for borrowers.

The short answer to this question is yes, if you are only taking a loan from them. You are borrowing their money, you’re not necessarily leaving your savings with them (unless you’re using their offset account).

It is important to note that lenders that offer consumer mortgages (i.e. home loans and residential investment loans in personal names) in Australia are regulated and overseen by the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC) and must also adhere to responsible lending legislation, namely the National Consumer Protection Act 2009 (Cth). Therefore, borrowers should rest assured that having your mortgage with a smaller institution is as safe as a larger one and that they will have the same protections under the law as they would with a major lender. 

When it comes to deposits on the other hand, we recommend you do your due diligence as to whether the financial institution you are thinking of placing your savings with is covered under the Australian Government Deposit Guarantee Scheme. This is important because in the event that a financial institution fails, the government may cover the funds you lose up to certain amount limits per institution.

Like anything major decision though, it is best to get professional advice, so if you are unsure as to the legalities surrounding any of the above, you should consult your solicitor (or we can refer you to a good one if you do not have one). 

How to Approach Alternative Lenders

Most alternative lenders deal with brokers and are in fact quite reliant on brokers for the majority of their business. They understand that brokers work in the best interest of their clients and as such, are eager to provide as much support to brokers and their clients in order for them to stay competitive in a market full of other lenders.

If you have a particular alternative lender in mind, you may be able to look them up online and contact them via their contact page. However, if you do not necessarily have a lender in mind, or you have one in mind but would like to know how it stacks up against other lenders, get in touch with us and we can help you with this.

Final Thoughts

Borrowers should consider their whole situation when choosing a lender. You need to ensure the lender you apply to will meet all or at the very least, your most important priorities and objectives which you hope to fulfil by taking out a loan. Therefore, it is important that you fully understand the lenders’ niches and policy guidelines to ensure the highest possibility of application success.

However, don’t feel that you have to go it alone, with so many lenders all of whom have slightly differing policies, it is easy to feel overwhelmed as to which lender will be best for your circumstances. 

That’s where we come in, we have a vast lending panel comprising all the major lenders and several alternative lenders that cater for most requirements. Once we understand your specific circumstances and your priorities, goals and objectives, we then provide you with our recommendations as to which lender we feel will meet your needs.

We make it our business to ensure that all our clients are set up with loans that will complement their future strategy and goals.

Luay Khreish | +61 414 223 370 | [email protected] | www.aviatoradvisory.com.au

The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy. This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Credit Select Pty Ltd t/as AVIATOR Advisory and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.