A new wave of digital lenders is now offering mortgages to Australians and disrupting the traditional banking market.
These online banks, known as neobanks, are driving competition across the market, which is good news for borrowers.
Neobanks typically have no branches, are technology-driven and aim to lure customers away from traditional banks by providing an improved finance experience.
But is it riskier to take out a home loan with a neobank and are borrowers safer if they stick with an established financial services business?
What are the benefits of neobanks?
Neobanks are gaining traction in the lending space, says Akshaya Naronikar, chief executive of mortgage broking firm Iridium Private.
“It’s a David and Goliath story, but they are not going to take over the market overnight,” she said. “It will be a slow battle until the neobanks bed down their processes and capabilities to service increasing numbers of clients and find their unique space in the Australian banking industry.”
As neobanks are just starting out and have a smaller cost base, they are very competitive and also offer other benefits.
“Many have been founded by ex-bankers who understand customers’ pain points and have designed their offering to provide a better experience,” says Naronikar.
Ethan Teas, managing director of digital financial services business Novantas, holds a similar view. “For the most part, a mortgage is a mortgage,” he said. “Fintechs and neobanks seek to differentiate themselves by how customers get a mortgage and on perceived cost – not on what a mortgage is.”
“In most cases, neobanks offer straightforward pricing [and] loan structures, and work with simpler client situations,” said Teas. “So, for those customers that can work with them, the experience may be different, but the product is similar.”
There are some differences between banks and neobanks. The latter can’t offer true offset accounts as they are not Authorised Deposit-taking Institutions (ADIs) and in some cases, neobanks are still building their capabilities.
Some neobanks can’t or won’t deal with complex situations like cross collateralisation, self-employed borrowers and loans with a dual purpose. This means a surprisingly large part of the market can’t work with them.
Neobanks typically offer better-published prices than the big banks and generally favour flat pricing – but that doesn’t mean you will get a better deal than you will with a bank.
It’s worth shopping around and doing your sums when comparing loan products. New players don’t have the same depth of customer data as the big banks, so the best customers may do better with a big player.
“The good news is refinancing is straightforward with neobanks,” said Teas.
Are neobanks riskier than traditional banks?
In principle, neobanks should not be any more risky than a traditional bank, given they are governed by the Australian Prudential Regulation Authority (APRA), which monitors all loan-providing institutions in Australia.
“The possibility of a neobank going bankrupt is slim to none because of how closely regulated the industry is. But if a bank to which you owe money fails, the liquidator will come to collect the money owed to the bank,” he adds.
If a neobank with which you have a mortgage fails, it will be administratively inconvenient and require the borrower to update their payment details with the new institution that will take over the loan.
Where it may get tricky is offset or redraw facilities, says Teas.
“With redraw facilities, the money may be netted off against the loan,” he says. This could mean the extra repayments a borrower thought they had access to would simply be paid off the loan. “You’re unlikely to be out of pocket,” Teas added.
Offset balances are more complicated. “They would likely be treated like a redraw facility by a non-bank,” Teas said. “At a bank, balances over $250,000 may be at risk.”
“Suffice to say it will be a mess if an institution truly fails. But this is all academic at this point.”
Failure may be unlikely, but it is possible neobanks could experience financial stress. In this instance, lenders may be expected to exercise their rights and freeze or net out any redraw amounts.
This could be very inconvenient if the timing doesn’t line up with the borrower’s circumstances and they need this money at short notice.
If you’re in the market for a mortgage, it’s certainly worth checking out what the neobanks have to offer. The idea is to do thorough research and choose the loan that best suits your requirements.