Is it safe to get a mortgage with a smaller lender?

Are non-bank lenders safe, and what is the difference between taking out a mortgage with a smaller lender versus a big bank? Here are some things to know.

While Australia’s home loan landscape is dominated by the so-called ‘big four’ banks –  ANZ, Commonwealth Bank, NAB and Westpac – there are dozens of other smaller lenders, including non-bank lenders, on the market.

If you currently have a home loan and are considering refinancing to a smaller lender, or if you’re a first home buyer who’s curious about your options outside the big four, then you may be wondering – are non-bank lenders safe, and when it comes to the question of big bank vs small lender, which is better?

What are non-bank lenders?

A non-bank lender is a business that:

• holds an Australian Credit Licence, so can offer credit products such as personal loans, mortgages, credit cards and other types of finance, and
• does not hold an Authorised Deposit-taking Institution (ADI) licence, so cannot take deposits nor offer products such as savings accounts.

Is it safe to get a mortgage with a smaller lender?

Home loan providers in Australia are regulated in a number of ways. Smaller lenders are subject to government oversight and regulation, just as their larger counterparts are, so in this sense most of the risks and protections for borrowers are relatively similar regardless of where you go for your mortgage.

Banks and other deposit-taking institutions (including the big four as well as smaller lenders with ADI licences) are regulated by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) while non-bank lenders are generally not regulated by APRA but are still governed by (ASIC.

Any lender who provides a credit product in Australia is required to abide by certain rules, including holding an Australian Credit Licence. Lenders are required by law to make an assessment about whether borrowers can realistically afford to repay a loan before offering credit, and also required to make sure customers have sufficient information to make an informed decision about a loan product.

The ASIC website has further information about the rules and regulations that govern credit providers, including big banks, smaller lenders and non-bank lenders.

What happens to your home loan if a smaller lender goes bust?

Another component of whether it’s ‘safe’ to get a mortgage with a smaller lender could be concern over what might happen if that lender goes out of business. For this reason, you may feel it’s safer to take out a mortgage with one of the big four banks, as you may feel they are less likely to fail. In some cases, borrowers may be prepared to forego the most competitive home loans they can find in terms of rates, fees and features as a trade-off for the greater familiarity and sense of safety that they may feel from being with a larger bank.

One question on your mind may be if you are with a smaller lender that fails or goes bust, would you lose your house? Otto Dargan, founder of homeloanexperts.com.au, told Canstar that if your home loan is sold on, another lender will then take over managing it. He also added that, if a lender is experiencing financial difficulties, your lender may preemptively raise interest rates, in order to encourage customers to refinance elsewhere.

If you are in a position to refinance your home loan, then it is important to be aware that you may still be required to pay a break fee if you have a fixed rate loan and choose to break out of it early. Other refinancing costs can also apply, regardless of your loan type. Whether you refinance or your home loan is sold on to another lender, it is likely that your new lender will also charge different interest rates and fees than the old one.

What are the pros of smaller lenders?

Some potential pros of getting a mortgage with a smaller lender or non-bank lender include the potential for lower rates and fees as well as more personalised customer service, and the potential to have a more satisfying experience.

Potential for lower rates and fees

Some smaller lenders are able to provide more competitive interest rates or fees while still offering many or all of the same features as loans from the big banks, such as offset accounts and redraw facilities, the ability to make extra repayments, and more.

This may be because some of these smaller lenders have less infrastructure and fewer overhead costs than bigger banks. Some smaller lenders may even be online-only, without bricks and mortar branches.

Likewise, some smaller lenders may offer competitive rates and fees thanks to the fact they are customer-owned institutions or mutual banks whose aim is to provide value for their customers. This distinguishes such lenders from bigger banks, whose primary aim may be to provide profit for shareholders.

Similarly, because smaller lenders may have a smaller volume of applications to process relative to larger banks, you may find that your applications and queries are processed faster, depending on the institution.

Potential for more personalised customer service

Smaller lenders may offer more attentive and personalised customer service than big banks, and this could be appealing to you. You may find, for example, that you have just one banker or other staff member guiding you through the application and approval process for a home loan, and this person may then also be available to you later on down the line when you have questions or concerns about your loan.

This kind of personalised service may be more appealing than ringing up a larger bank’s call centre and waiting to be connected to an operator to help, especially if you happen to be experiencing financial hardship or having difficulty repaying your loan.

The factors mentioned above can combine to mean greater satisfaction for customers of smaller banks. In fact, a recent Roy Morgan survey of customer satisfaction among home loan customers found that, as of March 2024, the top five banks with the most satisfied home loan customers were all outside the big four.

What are the cons of smaller lenders?

There are also some things to be wary of when it comes to smaller home loan lenders, including the possibility that there may be fewer loan options available to you, a possible lack of branches and infrastructure, and the concern that your institution might be absorbed into a larger one.

Possibility of more limited loan options

Smaller lenders may be able to offer more competitive interest rate options and fees than their bigger counterparts, but it is also worth keeping in mind that the range of loan options available to you may be relatively limited.

This may simply be because smaller lenders have fewer staff, and therefore less capacity to keep track of the features of multiple loan products, and may therefore offer a smaller selection of one or two products.

Similarly, smaller lenders may not always be able to offer some of the packaged extras that bigger lenders can, such as bundled credit cards and transaction accounts. That said, the potential convenience of having all your banking in one place in a packaged home loan doesn’t necessarily mean you’re getting the best value for money overall.

It is also not always the case that smaller lenders will have more limited options, and if you’re curious about what’s out there on the market, you can compare home loans with Canstar to see if you can find a lender and product that is suitable for you.

Lack of branches and infrastructure

While a potential lack of infrastructure means that some smaller lenders may have lower overheads and operating costs, it can also mean that in some cases, there may not be a branch for you to visit should you wish to do business in person.

You may be happy solely doing business with your lender over the phone or the internet, but if you want engagement on a personal level and want to be able to visit a bricks-and-mortar branch to discuss business in person, this may not be possible.

Potential for your lender to be absorbed by a larger one

If you choose a smaller home loan lender because you do not like the big banks’ ethos or simply do not want to do business with them, it’s important to bear in mind the possibility that your lender may be taken over by or absorbed into one of the big banks at some point down the line.

It is worth keeping in mind, though, that some smaller lenders are owned by larger ones. For example, NAB owns smaller online lender ubank, and Commonwealth Bank owns Unloan. This arrangement can come with some potential advantages, but if your reason for choosing a smaller lender is to get away from the big banks, it is worth your while to research the ownership structure of the lender, to find out whether it is part of a larger entity.

What are the pros of a big bank mortgage?

Generally speaking, the main reasons a big bank might be attractive for a potential home loan customer are security, convenience and the potential to have a broader range of products on offer due to the bank’s size. In terms of security, large and small banks and home loan lenders are regulated in the same way, so you are at no greater risk whether you go with a large or small one – that said, the security of a big bank mortgage may lie in the knowledge that a larger institution may be less likely to go out of business or be bought out than a small one, meaning you could have more certainty in your mortgage.

In terms of convenience, the big banks tend to offer a suite of financial products alongside home loans, from bank accounts to credit cards and other types of loans, and you may simply find that it’s more streamlined to have and manage a variety of accounts with the one lender. As for the home loan product itself, you may also find that a big bank is able to offer a more diverse array of loans to suit your needs and conditions, simply due to the fact that it has more resources to do so.

What are the cons of a big bank mortgage?

When weighing up a big bank vs a small lender, there are also a number of reasons why a big bank may be less attractive for a mortgage – chief among these reasons are the potential for higher rates and fees as well as for less personalised service. Because the so-called big four banks control the lion’s share of the home loan market, they can afford to be less competitive with interest rates, meaning that small lenders may offer lower rates as a way to compete. Similarly, smaller lenders tend to have lower overheads in terms of branches and staff, meaning that they can afford to charge lower rates to customers.

That said, smaller lenders still have the potential to offer more personalised service than big banks. You may find with a smaller lender that you have one banker guiding you through the whole home loan application process, who is still present to help manage your home loan and help out with future home loan inquiries, which may not be the case with a larger bank.

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