Big banking changes drive mortgage market competition

New research from property exchange platform PEXA has found that the nation’s banking sector is going through major changes that should assist more Australians to own a property.  

PEXA’s “Mortgage Trends Report” finds there are fewer small banks, more digital systems, and a growing number of lenders stepping in to help people who don’t fit the traditional bank customer profile.

Small banks merging to survive

Over the past 20 years, the number of customer-owned banks (like credit unions and building societies) has plummeted by 84% — from 188 in 2004 to just 30 in 2024. 

These small banks have been merging to stay competitive.

PEXA says it’s because they need to grow bigger to cut costs, invest in expensive technology to keep up with bigger banks and are facing more demands from customers.

As people expect faster online banking and stronger protection from scams, small banks are struggling to keep up.

“Although larger banks spend more on technology and digital infrastructure, these expenses tend to be a larger share of operating expenses for smaller banks,” says Marcella Choy, a  Senior Research Analyst at PEXA.

“Consumer preferences for more digital platforms, automated processes and the need to invest in cybersecurity, scam and fraud protection has added to the growing cost pressures faced by smaller banks.”

Major banks continue to dominate, but competition is growing

The big four banks — Commonwealth Bank, Westpac, NAB and ANZ — still control most of the home loan market. 

But PEXA says other types of lenders, especially non-bank lenders (known as non-Authorised Deposit-taking Institutions or ADIs), are starting to make their mark.

Non-ADIs aren’t traditional banks, but they still have to follow most lending rules. 

Their customer base has been growing among people who may not qualify for loans from major banks — like the self-employed, people with bad credit, foreigners or temporary residents.

The Reserve Bank of Australia (RBA) says non-bank loans are often a bit riskier — because borrowers may be stretched with higher loan-to-income ratios — but there’s no doubt they do fill a gap in the market.

However, big banks and the remaining customer-owned banks are also showing they’re willing to take more risks. 

They’re now more likely to give out loans with higher loan-to-value ratios (LVRs), and more of their loans need lenders’ mortgage insurance (LMI) — a sign that PEXA says that they’re working more with first-home buyers, who often have smaller deposits.

In contrast, non-bank lenders typically give smaller loans with lower LVRs. 

That might seem less risky, but it doesn’t mean they’re safer overall — because other borrower details, like income, also matter.

Mortgage brokers are key players

Mortgage brokers now play a bigger role than ever. 

“Over one half of the aggregate value of new mortgages is sourced through third parties, such as mortgage brokers, and this trend has only increased over time,” says PEXA’s Marcella Choy.

Ms Choy says this trend benefits smaller and foreign-owned banks the most, with some getting over 75% of their loans through brokers. 

The property exchange platform also claims its digital tools are helping banks, particularly smaller lenders, complete settlements more quickly, reducing time-consuming paperwork, helping to settle deals on time and increasing competition by helping to process loans faster.

Nevertheless, the major banks still write the most loans.

In the 2024–25 financial year, they approved about 190,000 new loans across NSW, Victoria, and Queensland — a 3.9% increase on the previous year.

Victoria stands out as a state where the big banks dominate. 

Ms Choy says the state has a higher proportion of young families and first-home buyers, who “are more likely to have lower incomes and have difficulty saving for a deposit, possibly needing to pay LMI or obtain a waiver.” 

She points out that Melbourne also has lots of small apartments, which can be harder to finance through non-bank lenders.

In Queensland, smaller banks have gained a bigger share of the refinancing market. 

In 2023, when interest rates were high, these banks lured customers away from the majors with cashback deals and special offers. 

Now, with the RBA cutting rates again in 2025, more lenders are jumping back into the competition for refinancing customers.

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What’s next?

Regulators are watching all this closely. 

Australia’s Council of Financial Regulators (CFR) is reviewing the state of smaller banks.

Meanwhile, the Australian Competition and Consumer Commission (ACCC) is getting new powers to stop anti-competitive mergers and protect customers.

Starting next year, companies will need to report more details before merging, including data about competition risks. 

This move is meant to keep the banking sector competitive and prevent any one player from getting too powerful.

All in all, PEXA’s Mortgage Trends Report tells a good news story for those looking to buy a home or invest in property.

It means there are plenty of options to help get your foot on the property ladder.

And, after years of complacency, strong competition is forcing Australia’s “Big 4” banks to be more innovative and competitive in the mortgage market. 

With interest rates falling again and new digital tools changing the way loans are handled, the next few years could reshape who Australians borrow from — and how fast they get approved.