Say What Wednesday: Considering refinancing your mortgage with a smaller online lender?

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 lenders?”

Great Question!

Types of Lenders  

1. Large lenders – ‘Big 4’ banks; ANZ, Commonwealth Bank, NAB, and Westpac
2. 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 cheaper?

1. 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 detail below.
2. 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 more.

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 branches. 

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 available
• 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 risk

It can be confusing, so see what Laws apply to small lenders to see where they fit

1. 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 borrower
   • assess whether a potential borrower can realistically service the loan
   • Same criteria as all other lenders – ASIC regulated
2. 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
3. Dispute resolution schemes – whether a big or small or non-bank you have an ombudsman who can help resolve issues.
   • AFCA

Are small lenders likely to fail or collapse?

1. Government guarantee for deposits up to $250,000 doesn’t apply if non-deposit taking lenders
2. 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 lender.
   • A larger institution buys your mortgage from the smaller lender.
   • The government provides assistance via the deposit guarantee.
3. 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.
4. Smaller lenders may in general be more vulnerable to economic conditions
   • 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.

Summary

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.