What is the difference between banks and non-banks?
Welcome to the finance update for the week ending 12 August, 2023.
Australia’s big banks are easy targets for criticism given their reputation for poor service. In their defence, they are big, complex organisations with very large numbers of customers with diverse needs. But when reading this week that CBA posted a record result for the most $10.2 billion, and that their profit margin on home loans has significantly increased, in a time when many Australian’s are battling to make their home loan repayments, it does make for very frustrating reading.
A question that needs to be asked though is, why are banks hell bent on achieving ever increasing profits? Aside from it serving to increase executive bonuses, the underlying reason is to appease their shareholders.
Since we’re on the topic of banks, in this week’s newsletter, we take a look at the difference between bank and non-bank lenders.
What is a non-bank lender?
While a bank engages in both lending and accepting deposits, a non-bank lender concentrates solely on lending, yielding several advantageous outcomes, which we’ll delve into.
A bank generally generates profit by charging higher interest on loans compared to the interest it pays on deposits. This discrepancy is referred to as the ‘net interest margin’. To simplify, if a home loan carries an interest rate of 3.00% per annum, and a savings account earns 1.00% per annum, the net interest margin becomes 2.00%.
In contrast, non-bank lenders are unburdened by such concerns, enabling them to concentrate exclusively on lending.
But how does a non-bank acquire funds without deposits? The answer lies in a range of wholesale funding strategies, primarily revolving around ‘securitisation’.
In this process, mortgages are combined into pools, attracting investments from individuals seeking returns. Profit margins on securitised assets are generally narrower, and investors are often content with lower rates of return. The eventual outcome can translate to more affordable home loans for those in search of new homes or refinancing.
Distinctions between banks and non-bank lenders
Banks are designated as ADIs, or authorised deposit-taking institutions. This designation allows banks to provide both transactional and savings accounts. It’s customary for customers to turn to a single bank for various financial needs, encompassing bank accounts, home loans, credit cards, and more. Nonetheless, this setup serves the banks’ interests, making it less convenient for customers to switch brands, and thus offering less motivation for the bank to furnish competitive products.
Yet, being labeled a ‘non-bank’ does not preclude a non-bank lender from offering account options akin to transactional accounts. For instance, loans.com.au offers an offset sub-account, equipped with a Visa debit card for borrowers to access extra home loan repayments stored in their offset sub-account.
Advantages of opting for a non-bank lender
Relative to banks, non-bank lenders can present higher levels of service, coupled with competitive products featuring leading market rates and minimal initial and ongoing expenses.
Non-bank lenders are often more adaptable to your specific needs, striving to accommodate a wide array of scenarios and situations.
Who are examples of non-bank lenders?
It might seem like non-bank lenders lack prominence in the Australian lending landscape, but whilst the larger banks certainly claim the lions share of home loans in the Australian market, that does not mean that non-bank lenders are little known. Some examples of non-bank lenders include –
- Pepper Money
- Liberty Financial
- La Trobe
- Virgin Money
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.