You will often hear the terms Tier 1, Tier 2, and Tier 2 lenders used in the mortgage industry. There are hundreds of financial institutions that provide thousands of product variations, and wrapping your head around the most suitable lender or product is a minefield of information. However, brokers are a wealth of knowledge with an intricate understanding of the market, so you can generally rely on their guidance, and the information that we provide. As we’ll come to explain, the tier of lender has more to do with regulatory oversight than it does the quality of product any lender provides.
The use of the “Tier” term in finance is somewhat of an industry colloquialism, and usually less relevant to consumers as there’s significant overlap in the tiered nature of lenders and the services that are provided in each group. What matters most to a borrower is whether a lender is an Authorised Deposit-taking Institutions (ADI) or a Non-ADI Financial Institutions. An ADI – normally a bank, credit union, or building society – provide a wide range of financial services to all sectors of the economy, including (through subsidiaries) funds management and insurance services, but the overarching different between the Authorised and Non-ADI group is that the former is registered to take transactions, and more strict governing oversight is provided by the Australian Prudential Regulation Authority (APRA). while the latter group – also with some oversight by APRA – are generally regulated by the Australian Security Investment Commission (ASIC). –
ADI and Non-ADI APRA Oversight: Non-ADIs are required to meet disclosure, licensing and conduct requirements that ASIC administers in respect of all financial companies. While APRA does not prudentially regulate these Non-ADI entities directly, it has reserve powers to impose rules over non-ADI lenders that are judged to pose a material risk to financial stability.
An ADI, operating under APRA’s governance and in compliance with the Banking Act (1959).Those ADI institutions holding a banking licence are covered by the Government’s Financial Claims Scheme (FCS). The FCS is an Australian Government scheme that was established during the 2008 global financial crisis to provide financial protection for consumers in the unlikely event of a failure of a bank, credit union, building society or general insurer. The FCS provides limited protection for depositors to ADIs (banks, credit unions and building societies) for deposits up to $250,000 per account holder, per ADI. The scheme aims to return deposits to account holders within seven days of activation of the FCS.
Some Non-ADIs are covered by the FCS by virtue of their parent banking licence. Bankwest, for example, is a Non-ADI, but is covered by the Commonwealth Bank, and Ubank is covered by National Australia Bank Limited’s licence. Some lenders, such as Athena, are not a bank (i.e., they’re not an ADI), and are not covered by the scheme. In other words, Athena’s deposits (usually offset accounts) are not covered by the Government if the bank goes bust (they will have other measures in place).
Tier 1 Lenders
The tier 1 banks in Australia are the major banks in the country that are considered the largest and most financially stable. These include the Commonwealth Bank of Australia, National Australia Bank, Australia and New Zealand Banking Group (ANZ), and Westpac Banking Corporation. These banks are considered tier 1 because they have the largest capitalization and the highest credit ratings, which means they are considered the most financially secure and able to weather financial storms.
Tier 2 Lenders
In Australia, tier 2 lenders are typically non-bank financial institutions that provide financing to borrowers who may not be able to obtain loans from traditional banks. Examples of tier 2 lenders in Australia include credit unions, building societies, and specialty finance companies. These lenders often offer loans to borrowers with less-than-perfect credit or those who may not meet the strict lending criteria of banks. A tier 2 lender may or may not be an ADI (significant overlap tends to apply).
Tier 3 Lenders
The Tier 3 lenders further complicates a relatively simply concept. In general terms, a Tier 3 lender is anybody that doesn’t fit into either of the ‘other’ categories, and generally includes
Insurers and Funds Managers. Institutions might include Insurers and Funds Managers, General insurance companies, Health insurance companies,Superannuation and approved deposit funds, Public unit trusts, Cash management trusts, Common funds, and Friendly societies. The third tier provides might also include mortgage managers (although money managers may source funds from other tiered lenders).
Advantages and Disadvantages
Authorised Deposit Institutions – all Tier 1 lenders, and many Tier 2 lenders – will general offer superior transactional facilities and online tools, while other lenders may not provide full-featured facilities.
Tier 2 lenders have fewer branches, generally rely on telephone or Internet support, and don’t have mobile customer service staff. However, without the significant overheads, they often offer rates that are lower than the bigger banks and the products themselves may be more accessible as a result of less rigid oversight. The APRA buffer mandated for ADIs that are used to assess your borrowing capacity (by applying a margin to an interest rate for the purpose of serviceability) does not necessarily apply to Non-ADIs, so your borrowing capacity may be higher with a Non-ADI when compared to an ADI. Lower tiered lenders may also have products available that cater for higher risk lending, such as those cases where you have bad credit, or where you were rejected by a major bank on the basis of one of their other qualifying attributes.
As a result of a more flexible risk assessment criteria, lower tiered lenders may also provide a broader suite of products for self-employed borrowers. These products may include low-doc, no-doc, or declaration-style loans, although the rate applied to this category of product may be slightly higher than lending that carry a lesser risk.
We have access to hundreds of products but only a few will be a best fit for your circumstances. Unless you have a firm commitment to a bigger bank it’s usually worth consider the array of options availed to you. The category of lender is usually less important than the savings that will be availed to you and the features and flexibility your loan provides.