Mutual benefits: what's a non-bank?

Mutual benefits: what's a non-bank?

While Australia’s big four banks – ANZ, Commonwealth Bank, National Australia Bank and Westpac –often dominate headlines with their high profit returns, non-banks have been quietly raising their profile by banding together.

Unlike the publicly listed big banks, which have  a responsibility to maximise profits for shareholders, credit unions, mutual building societies and mutual banks focus on their members – or customers. Each member owns the organisation they belong to and can vote in its governance. Profits are reinvested into products, competitive mortgage rates and savings rates, or paid back to members.

Historically, credit unions and mutual banks were linked to specific professions, such as teachers, nurses or the police force. Now many are open to anyone.

Close to 4.5 million Australians are members of credit unions, mutual building societies and mutual banks, and the mutual sector has combined assets of approximately $85 billion, according to industry body Customer Owned Banking Association. The sector is made up of 83 credit unions, 10 mutual banks and seven mutual building societies.

Non-banks offer the same kind of products as banks, often at more competitive rates, including credit cards, debit cards, mortgages, term deposits, car loans and personal loans.

Stronger banking competition

Research released last month by Essential Research, commissioned by the Customer Owned Banking Association, revealed that three-quarters of Australians believe consumers would benefit if there were stronger competitors to the big four banks. Additionally, more than half (57%) believe there is no genuine competition between the big four banks.

“Unfair advantages in the system have strengthened the market power of the big four banks, meaning less competition and less choice for consumers,” Customer Owned Banking Association CEO Louise Petschler said.

“Australians understand this – 69 percent of Australians believe there needs to be more competition in the banking sector. We believe that the system must change to create a level playing field for smaller players in the market, including customer owned banking institutions.”

The fifth pillar of banking

Collectively, credit unions, mutual banks and building societies are the fifth largest holder of household deposits in Australia – with a 10.5 percent share of household deposits as at September 2013 – which has prompted observers to dub them the “fifth pillar of banking”.

Former Labor Tresurer Wayne Swan referred to credit unions and other non-banks as the  “fifth pillar” of banking four years ago, at the height of the debate about the competitive dominance of the big four. Back in 2010, the then Treasurer said: “I’m determined to see another pillar in our banking system built from the combined competitive power of our mutuals, credit unions and building societies, because I’ve always been a big believer in their capacity to be a strong force for competition in the banking sector.”

Like any financial decision, if you are considering banking with a credit union, mutual bank or building society, it’s important to do your homework and choose the best option available for your needs.

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Learn more about home loans

Do the big four banks have guarantor home loans?

Yes, ANZ, Commonwealth Bank, NAB and Westpac all offer guarantor home loans. These mortgages are also offered by many other banks, credit unions and building societies.

What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.