Bank vs Non-Bank Lenders: What’s the Difference?

6 Oct

Choosing between a bank and a non-bank lender can feel confusing, so I’ll break it down in plain terms. Both types of lenders offer home loans, but they operate differently, which can affect interest rates, flexibility, features and how quickly your application gets approved.

What each lender is and how they work

Banks are the familiar big institutions that take deposits, offer everyday banking services and make loans from those deposits. They are subject to prudential oversight and regulation designed to protect depositors and the broader financial system. Non-bank lenders are businesses that specialise in lending but do not hold retail deposits. They fund loans from wholesale markets, investors or securitised products and often focus on particular loan types or customer segments. The Reserve Bank and other regulators have noted that non-bank lending is smaller than bank lending in Australia but has grown in recent years, especially in housing markets.

Regulation and safety differences

Banks are usually regulated by APRA for prudential standards and by ASIC for consumer protection. Non-bank lenders may be regulated by ASIC but not all are prudentially supervised in the same way as banks. That difference in oversight can affect the safety net for depositors and the perceived systemic risk, although regulators say current non-bank exposure to the system remains limited. It’s worth checking a lender’s licensing, error and omissions arrangements and how they handle complaints.

Pros of choosing a bank

Familiarity and convenience if you already have accounts with them.
Wider range of products and bundled services such as transaction accounts and insurance.
Strong prudential oversight and brand security.
Many borrowers value the predictability and brand trust that major banks deliver.

Pros of choosing a non-bank lender

More flexible lending criteria for unusual income, self-employment or complex situations.
Competitive interest rates and specialised products aimed at specific borrowers.
Faster or more tech-driven processes at some non-banks, which can speed approvals.
Non-banks have been winning market share by offering tailored solutions and nimble underwriting that some banks don’t provide.

Risks and trade-offs to consider

Non-bank rates and features can be competitive, but funding models mean they can be more sensitive to wholesale market changes.
Banks may be slower or stricter with lending rules, but they often provide more stability and broader support services.
Non-bank terms and exit costs vary, so read the product disclosure and compare features such as redraw, offset, fees and break costs.

What this means for you as a borrower

If you have a straightforward pay-as-you-earn job and long banking history, a major bank could be simple and reliable. If you’re self-employed, an expat, or have a non-traditional deposit or security situation, a non-bank may offer flexibility that helps you secure a loan. Non-banks are increasingly visible on the ASX and in property finance, so they are a legitimate part of the market to consider. The right choice depends on your circumstances, appetite for risk and the loan features you need.

Conclusion

Banks and non-bank lenders both have a place in Australia’s mortgage market: banks for broad services and brand security and non-banks for flexibility and niche solutions. The best option depends on your income type, loan purpose and tolerance for different product features. If you want a clear comparison for your situation, a broker can show you which lenders are likely to approve your loan and explain the fine print so you can choose with confidence.