Navigating the lending marketplace
One of the myths propagated by the mortgage industry is that there are hundreds of lenders and thousands of loans from which to choose. The reality is somewhat less of a mélange.
The lending market can be broken up into 4 major sectors:
The major banks – the big 4 with established branch networks
The second tier banks – significant players which rely upon online channels and mortgage advisers to distribute their products
Credit unions and mutual banks – these are distinguished by the customer ownership model and usually have a strong community or ethical foundation
Non-banks – specialist lenders which raise funds from commercial banks, essentially at wholesale rates, and then re-lend these funds to borrowers with specific needs; e.g. those with a blemish on their credit history who have refused credit by a mainstream lender
Superimposed on these companies which lend their own money and manage credit risk are a plethora of mortgage managers. These companies typically originate “white label” funds at wholesale rates from bank or non-bank lenders and market them under their own retail brand. They finance their operation by adding an interest rate margin to the wholesale rate which becomes their retail rate. But it is important to note that they do not manage credit or lending risk, except under limited delegated authority from their wholesale funder. Put simply, they are brand managers, they are not lenders.
This has highlighted the need for greater research and consideration, or ‘due diligence’ when searching and applying for a loan.
The act of purchasing a property, commonly requiring the production of significant personal information, coupled with the commitment of large sums of money can be stressful.
And now, with a wide variety of new “lenders” entering the marketplace, confidently choosing a lender you are comfortable with can feel downright overwhelming. Fortunately, there are steps you can take to help you make the right choice and reduce your risk of misfortune. Trust your gut and be wary of behaviour or hints that may suggest something isn’t quite right.
There are a number of government-operated organisations and websites that provide tools and opportunities to help you to conduct due diligence checks.
The Australian Prudential Regulation Authority (APRA) is an independent authority that supervises deposit-taking banking institutions. After a bank is licensed by APRA it is subject to ongoing supervision to ensure it is managing risks and meeting regulatory requirements. APRA-regulated banking institutions are licensed, so you can check the APRA site to see if a potential bank is licensed and adhering to APRA's requirements here.
On the other hand, non-bank lenders and mortgage managers are not deposit-taking institutions or banks and are not licensed or supervised by APRA. There are generally two types – private lenders or mortgage managers/white-label lenders.
These companies do need to be licensed by the Australian Securities and Investment Commission (ASIC) and require an Australian Credit Licence (ACL) if they engage in lending regulated by the National Credit Code, which includes making loans to buy a residential property.
Any organisation which either provides advice or participates in home lending must be a member of the Australian Financial Complaints Authority (AFCA), which provides access to a dispute resolution process if things do go bad. It must also provide an Internal Dispute Resolution (IDR) service.
If the entity you are considering dealing with is not an AFCA member, the MFAA recommends you seek appropriate legal and/or financial advice or steer clear of that particular entity, as AFCA membership is a statutory requirement for such lenders.
Finally, it is always advisable to deal only with a business that has publicly listed contact details. Be sure to call the number provided, to confirm its legitimacy and consult with your broker.
Disclaimer: This article is intended to provide general news and information only. While every care has been taken to ensure the accuracy of the information it contains, neither Loanscape nor its employees can be held liable for any inaccuracies, errors or omission. All information is current as at publication release and the publisher takes no responsibility for any factors that may change thereafter. Readers are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this article as a substitute for professional advice.