Borrowers have more home loan lenders to choose from than ever before, so why do the Big Four banks dominate the market, especially when the smaller lenders offer cheaper interest rates?
Alan Hemmings, General Manager of McGrath’s mortgage broking division, Oxygen Home Loans, says many borrowers simply don’t know how much choice they have; and they might also be worried that the small no-frills brands are not as safe as the big guys.
So, let’s get over that hurdle now.
The most important thing for you to know is that APRA supervises all of Australia’s small banks, which include credit unions and building societies, in exactly the same way as the Big Four. They’re all playing by the same rules and APRA is there to make sure every one of them is operating soundly.
This alone should give you confidence to consider the small banks and there’s heaps to choose from, with APRA monitoring 143 in total at the moment.
On top of this, you also have a bunch of high quality non-bank lenders to choose from. They’re not regulated by APRA but they all have a credit licence from ASIC and get this – many are actually backed by the big banks.
“UBank is the online lender for NAB, Tic:Toc is backed by Bendigo and Adelaide Bank and Edge is underwritten by NAB,” says Alan.
So, is it safe to borrow with a small lender?
Alan says: “Generally speaking, it is safe to borrow from the small banks. They have the same responsibilities as the large banks and capital requirements that help protect their customers. The non-bank sector is also safe – as we saw during the GFC, clients did not lose their homes through banks ‘calling in’ mortgages.”
Some examples of small banks include Heritage Bank, Bank Australia, Bank of Sydney, IMB Bank, Greater Bank, Beyond Bank, Bank of Queensland and Newcastle Permanent Building Society. You can view a full list here. Examples of non-bank lenders include Pepper and Liberty.
Alan says: “We use these lenders as they might have a niche that the big banks do not provide. For example, some of them offer a bit more flexibility when it comes to assessing clients’ affordability.”
This has never been more important given today’s credit squeeze where even good quality applicants are being rejected by the Big Four on technical grounds. Alan says this is prompting mortgage brokers to recommend small banks and non-banks more often to their clients.
“The biggest driver for our business at the moment are clients who have been knocked back by their existing bank, which is generally a big bank,” says Alan.
“More often than not the recommendation is a smaller bank or non-bank lender. This doesn’t mean smaller lenders are taking on riskier loans, they just look at customers differently.
“Five years ago, our business settled over 80% of loans with the Big Four and their subsidiaries. Last financial year, that number was below 60%.”
Why can the small lenders offer cheaper interest rates?
They’re cheaper to run – it’s that simple.
Alan says: “The big banks have large networks of branches, call centres and expensive operational areas and they need to factor this in when pricing their home loans. They also have to provide a return for their shareholders, whereas small lenders can be profitable on smaller margins.”
Let’s do a test run to see how much you could save.
Using comparison site, RateCity, I requested a quote on a $640,000 loan to fund an $800,000 purchase (LVR 80%). The best rate available was 3.54% with offset and redraw facilities with a non-bank lender. The best offer amongst the Big Four was 3.99% with redraw but no offset.
That’s a saving of almost $2,000 over the first year of a 30-year loan, without considering any offset benefit.
Alan and I aren’t advocating one type of institution over another. There are pros and cons to each. The biggest pros with small lenders are cheaper rates and slightly more flexible lending policies. The cons are very small or no branch networks, no ‘professional packages’ and fewer loan features such as offset, redraw and interest only options.
The best lender for you comes down to your individual circumstances and that’s where a mortgage broker is so valuable. A broker will sit with you, discuss your needs and goals and figure out which lender is best and most likely to approve you.
It will save you a lot of time and stress to reach out for this free, professional service next time you need to refinance or get a new loan. I’m a big fan of mortgage brokers, just make sure you find a good one!
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