Digital home loans and neobanks: Friend or foe for your home financing?

Also known as a neobank, these newer players in the finance market are challenging traditional banks with digital-only banking services, including home loans, savings accounts and bank accounts.

A digital home loan is a mortgage that you can apply for entirely from a smartphone app.

It means being able to avoid the lengthy process of filling out multiple application forms and supplying a range of documents and waiting days to see if your application has been approved by the lender.

Digital home loan provider claim they can speed up the process by using technology, such as Open Banking, two-factor authentication and algorithms to handle parts of the approval process.

'What is LVR': youtube.com/mortgagechoice

For example, Commonwealth Bank’s digital bank, Unloan, takes minutes to apply for a loan, and offers live support from home loan specialists. Unloan also doesn’t charge application fees, banking fees, account fees or exit fees. 

Similarly, Mortgage Choice Freedom offers human support alongside the digital process, the option of speaking to a broker throughout the digital progress, and the option to change should you prefer greater choice.

Lowering costs

Fuelled by the ongoing closure of regional bank branches, digital banks, also known as neobanks, only operate online, offering competitive home loan rates. Without the overheads of traditional banks with bricks and mortar branches, neobanks can offer competitive market rates.

The main point of difference with these banks is how customers interact with them. Most digital banks funnel customers into an app that provides detailed updates on their savings and spending habits, including the ability to see your latest data in a graph.

Research shows that neobanks have gained traction across the country, with customers in both metropolitan and regional areas embracing the flexibility of digital banks. Being able to access a competitive home loan in a regional area via a digital bank is a big plus.

Some of the neobanks and digital lenders that have launched mortgage products in Australia include Athena,Tiimely Home, and Revolut. Other online banks include UBank (which recently merged with fellow neobank 86 400), Loans.com.au, ING, and ME Bank.

Neobanks are expected to grow market share over the coming decade, but as neobanks continue to merge and close downm as Volt did in 2022, customers will be looking for a neobank in it for the long haul that they can trust.

On the rise

It’s hardly surprising that digital banks are on the rise. Australia has one of the highest smartphone penetration rates in the world. According to Reviews.org, Australians spend around 5.5 hours a day on their phone, while Gen Z spend around 7.3 hours scrolling and chatting via their phone, making digital banks an appealing proposition to them.

For many, the reliability of an online bank plays a big part in the decision-making process. Just like traditional banks, neobanks are regulated by the same financial sector watchdogs – Australian Prudential Regulation Authority and Australian Securities and Investments Commission, and are required to hold an Australian Financial Services License (ASFL).

Independent finance expert Julian Finch says neobanks often have an attractive interest rate, but reminded home buyers looking for a mortgage that the interest rate shouldn’t be the only deciding factor when shopping around for a home loan.

Typically the rates are attractive at the beginning, but become less competitive over time. History tells us that banks abuse the loyalty and apathy of their existing clients by not looking after their book of existing loans. Their features are also limited, and you can’t walk into a branch and get the service you can from a bank. 

Digital-first homeloans may look attractive at the start of the process but may prove to be less financially efficient over time. Picture: Getty

“Very few people quality for home loans from a neobank – they are typically your vanilla loan scenarios. There is often no help with the application, so if you provide something the lender doesn’t need and they see something they don’t like, you’re probably going to get declined,” he says.

“Very few people quality for a digital loan. Firstly you need a loan to value ratio of less than 80%, and you can’t have any other type of income other than a salary. So, that wipes out anyone on Centrelink, with a family tax benefit, self-employed or with child maintenance payments,” Finch says.

For many borrowers, brokers offer a better service, a broader array of alternatives, continued and consistent loan review and management and may help you navigate the pitfalls that are aplenty in the loan application jungle.