Big Banks vs Non-Bank Lenders: What's Different

Unlike traditional banks, a non-bank lender makes home loans but doesn’t accept deposits. It borrows the money it lends from investors and banks, needs the same Australian credit licence as any bank to lend to you, and sits outside APRA’s prudential supervision. That last part changes how some of them assess borrowers, which is the whole reason they exist in a broker’s toolkit. For most people with a payslip and a clean file, a bank will be cheaper, while for some people a non-bank is the only lender that will say yes.

Big four, second-tier banks and non-banks

Australian home loans come from three kinds of lender. The big four are the largest banks. Second-tier lenders are the smaller banks, building societies and credit unions, and like the majors they’re authorised deposit-taking institutions: they hold your savings, and the Australian Prudential Regulation Authority is their main supervisor, as the Reserve Bank sets out. Non-bank lenders are the third group. Some are household names in their own right, like Pepper Money, which opened in 2000 and calls itself one of Australia’s largest non-bank lenders.

Others are specialist non-bank lenders you’ll only meet through a broker. Most non-bank lenders offer owner occupier home loans, investment loans and refinancing, and some add construction loans, commercial finance, personal loans or loans to self managed super funds. “Second tier” is a label brokers use, not a legal category. What matters for you is the line between the first two groups, which take deposits, and the third, which doesn’t.

Where non-bank lending money comes from

A bank lends partly from its customers’ deposits. A non-bank can’t. The RBA’s review of non-bank lending explains the chain: a new loan is first funded through a warehouse facility, mostly provided by banks, and once enough loans are pooled they’re packaged and sold to investors through securitisation. Private investors, including high net worth individuals and family offices, supply equity on top. Non-banks were around 5 per cent of Australia’s financial system when the RBA looked.

That funding model has a consequence you’ll feel. When investors want a higher return on mortgage securities, a non-bank’s costs rise quickly, and so do its rates.

How non-bank lenders are regulated

Lending to you is regulated the same way whoever does it. Any credit provider, bank or not, generally needs an Australian credit licence from ASIC, and responsible lending rules apply to a non-bank loan just as they apply to one from a major bank. The lender has to work out whether the loan suits you and whether you can repay it without hardship.

Prudential regulation is where the difference sits. APRA supervises banks, building societies and credit unions for their own soundness, and it does not prudentially regulate non-bank lenders, although it holds reserve powers to impose rules on any it judges a material risk to financial stability. Larger non-banks, those with assets above $50 million, register with APRA as registered financial corporations and report data to it. They aren’t supervised by it.

Are non-bank lenders safe?

For a borrower, mostly yes, and the question is often asked the wrong way round. The Financial Claims Scheme protects deposits up to $250,000 per account holder at each authorised deposit-taking institution. That protection is about money you’ve lent to a bank by depositing it; with a non-bank you aren’t the lender, you’re the borrower, and you have no deposit at risk.

What you should check is simpler. Look the lender up on ASIC’s register to confirm its licence, read the loan contract for fees on early exit, and ask how long it’s been writing home loans in Australia; your broker should have those answers ready.

Why non-bank interest rates run higher

They usually do, and it’s worth being plain about it. The RBA found non-bank housing rates were about 60 basis points above the major banks’ between 2019 and 2021, widening to around 100 basis points in 2022 as securitisation funding became dearer. Part of the gap is funding cost. The rest is risk. Neither part is going away.

Non-bank borrowers are more often self-employed, work in industries more sensitive to the economy, or have low levels of documentation, which is why the RBA describes non-bank lending as riskier than bank lending on average. A lender taking on those loans prices for it, and you pay for the flexibility.

What non-banks can do that banks won’t

Some bank rules simply don’t bind them. When APRA lifted the mortgage serviceability buffer to 3 percentage points in 2021, non-banks weren’t required to follow it; some adopted it and others kept their own serviceability tests. APRA’s limit on high debt-to-income lending, which from 1 February 2026 caps new loans at six or more times income at 20 per cent of each ADI’s lending, applies to banks, building societies and credit unions only. A non-bank still has to lend responsibly. It just isn’t counting against those quotas.

In practice the flexible lending criteria show up in a few places: self-employed borrowers with a year of trading instead of two, income verified by BAS or an accountant’s letter under a low doc home loan, a past credit default that’s been fixed, some non-residents, and some property types a bank won’t take. Specialist non-bank lenders build whole products around each of those.

What you give up: banking products and offsets

A non-bank can’t offer deposit accounts or savings accounts of its own, because it doesn’t take deposits, so your everyday banking products stay elsewhere. Offset accounts vary a lot as a result, so check how any offset facility works before you choose a loan partly for it. Branches are rare, and the rate premium above costs you real money every month.

Comparing a non-bank home loan

Compare on the comparison rate, not the headline interest rate. Moneysmart’s definition says it folds the interest rate and most fees and charges into a single percentage, and non-bank fee structures differ enough from the banks’ that a lower advertised rate can still cost more. Look at the fixed rate and variable rate options separately, because some non-banks price one sharply and the other not at all. Lenders mortgage insurance applies at a non-bank too if your deposit is small, and some specialist products are priced with a risk fee instead.

Switching works in both directions. An existing loan with a non-bank can be refinanced to a bank like any other once you qualify, and a bank borrower can move to a non-bank if their circumstances change. The things that make the move expensive are the same everywhere: discharge fees, break costs on a fixed rate, and a new valuation. Ask for all three in writing before you start. It’s routine work.

When we’d use one, and when we wouldn’t

Charlie’s rule is a bank first, every time the file will pass one, and a non-bank when it won’t. Our view, which some non-bank lenders’ marketing will dispute: a non-bank loan is usually a bridge, not a destination. If you’re on one because your second year of tax returns wasn’t lodged yet, or because of a default that’s now two years old, the plan should include refinancing to a bank once the file improves, and we set a date to review it at settlement, after checking the discharge and break costs that decide whether the later move is cheap.

There’s also a case we won’t take. If the only lender that will approve you is one charging well above the market because your financial position means the repayments barely fit, the answer may be a smaller loan, not a non-bank. Responsible lending applies to us too, and we’d rather tell you that before an application than after a hardship call. The borrowing power calculator is a fair place to test the numbers first.