Last time you went to open a new savings account or had to visit a branch in person, did you wonder what other options you have in terms of your financial institution? What else is out there, apart from the big banks?
Turns out there are quite a lot of options, especially when it comes to your home loan. Our CANSTAR database shows that at the time of our September 2016 Home Loans Star Ratings, we researched and rated 98 different lenders for home loans in Australia.
What are small lenders?
A small lender is almost any financial institution other than the Big 4 banks in Australia (ANZ, Commonwealth Bank, NAB, and Westpac). Smaller lenders can include banks other than the Big 4, credit unions, building societies, and non-bank lenders.
What are non-bank mortgage lenders?
A non-bank mortgage lender is a financial institution that offers home loans but is not a bank. This can include credit unions, building societies, and other lenders such as online only lenders.
Is a mortgage with a small lender better?
It can be, depending on what you’re looking for in a home loan. As with anything else, smaller lenders have their pros (possibly lower interest rates, possibly better customer service, etc.) and their cons (possibly fewer resources, possibly more limited loan options, etc.). We’ve discussed some of these pros and cons in more detail below.
Pros: Possibly lower rates and fees with the same features
Some smaller lenders are able to provide more competitive interest rates or fees, while still offering all the same features as loans from the big banks, such as an offset account or redraw facility, the ability to make extra repayments, and more.
This may be because the smaller lender is online only and therefore has fewer overheads than the traditional “bricks and mortar” bank branches. Or it could be the fact that the smaller lender is a customer-owned institutions, where the aim is not to provide profit for an endless number of shareholders but to provide value for the customer.
So if you’re after a great interest rate and features, it’s always worth looking around with the smaller lenders.
Pros: Possibly more flexibility
You’re also more likely to be dealing with a lender who understands the reality of your local area, so they may be more flexible on loan conditions such as building within 6 months of settlement. Of course, as we discuss below regarding the safety of small lenders, all lenders are required to lend responsibly, and most lenders have to follow additional lending rules. So a small lender is not a guarantee that your loan will be approved.
Pros: Possibly better customer service
Because there’s less volume of loan applications going through a smaller lender, you stand a much better chance of having your loan application approved faster.
In times of financial hardship, would you feel more comfortable ringing one of the big banks where you have to wade through an automated menu just to get to a giant call centre to ask for help meeting your monthly repayments? Or would you prefer ringing a lender you know is run locally, where a real person answers the phone within a few rings?
These are just some of the little things that make the customer service offering of smaller lenders so appealing. Check out Canstar Blue’s ratings of the customer satisfaction score for smaller “challenger” banks (as well as for the Big 4) for things like:
- Customer service
- Enquiry and problem handling
- Fees and charges
- Online banking services
- Interest rates
Cons: Possibly limited loan options
Smaller lenders vary in terms of how many products they offer – some only offer 10 or fewer different home loan products because they have fewer administrative resources, while others offer more than the big banks. While one of the Big 4 currently has 123 home loan products listed on our database, certain smaller lenders offer more than 130 (CANSTAR, 2017).
As we’ve mentioned above, home loans from smaller lenders usually have all the same features as loans from the big banks. But a smaller lender with fewer resources may not be able to maintain every possible feature on every home loan product it offers, so you may be limited to one or two loan products with that lender if you want a particular feature.
In addition, the Big 4 lenders often get the edge on smaller competitors by offering packaged home loans that bundle a home loan together with a credit card, home insurance, and other products. Bigger lenders are often able to provide bigger discounts or more products than the smaller lenders are able to offer.
Is it safe to get a mortgage with a small lender?
Yes, as long as you do your homework beforehand. Borrowers should look for a lender that is regulated by APRA as well as the usual credit laws, is not connected with recent bank failures, and doesn’t raise any red flags when you’re researching their loan options.
Laws that small lenders have to follow
Lenders that are certified under the National Consumer Protection Act 2009 (Cth) (NCCP) (which replaced the old Uniform Consumer Credit Code) have to provide a certain standard of information to every potential borrower. They also have to assess whether a potential borrower can realistically afford to repay the loan they are applying for. These rules apply to all lenders providing any type of home loan, including banks, non-banks, and customer-owned institutions. You can view these protective rules on the ASIC website.
Smaller lenders that are banks, credit unions, and building societies are all also deposit-taking institutions, so they are also regulated by the Australian Prudential Regulatory Authority (APRA). This means they have to an additional set of criteria for lending risk, just like the big banks do. However, smaller, non-bank lenders are not deposit-taking institutions, so they are not regulated by APRA.
Therefore, although smaller lenders that are banks can be said to be as safe as the big banks, the same may not be true for non-bank lenders.
Having said all of that, if you are the victim of misleading or deceptive conduct from a home loan lender – whether they are a big bank, small bank, credit union, building society, or non-bank lender, you have an ombudsman who can help resolve your issue. Either the Credit and Investments Ombudsman or the Financial Ombudsman Service will be able to help you. Each service monitors different lenders, so check the list for each ombudsman so you know you’re asking the right service for help.
Are small lenders likely to fail or collapse?
The GFC and the Australian recession in the 1990s have taught the Australian banking industry some lessons the hard way, with several institutions being acquired or going insolvent. Thankfully, it appears those lessons have been learned well by both the banks and the government.
The result is the laws we mentioned above regarding consumer protection and responsible lending, and the government guarantee for deposits up to $250,000. These days, we know that if your lender is failing, there are several likely scenarios that protect you as a borrower:
- The smaller lender is bought (acquired) by a larger lender.
- A larger institution buys your mortgage from the smaller lender.
- The government provides assistance via the deposit guarantee.
In all of these scenarios, nothing really changes for you as a borrower, except that you may get a new lender. If the new lender decides to raise your interest rates (because it cost them a lot of money to buy the smaller lender), you can always compare your options for switching your home loan to another lender.
Smaller lenders may in general be more vulnerable to economic conditions because they typically get their funding from larger lenders or other large companies. But there are pros and cons to this as well, as this funding means they are able to offer flexibility that the big banks may not be able to offer.
Red flags to watch out for
You should never have to phone a lender to find out simple things like the types of loans they offer, the interest rate, comparison rate, and fees charged on those loans, and the availability of features you are interested in (e.g. offset account, redraw facility).
With non-bank lenders that are online only, the website should show absolutely all the information you need, since you won’t be able to visit a physical branch to clarify things.
You may consider Googleing a particular lender to see whether they’ve recently been embroiled in any court cases or other scandals. But beware of using social media as a guide, since most lenders have upset a few customers in their time, often for legitimate reasons such as raising their interest rates for business reasons or rejecting a dodgy loan application. A better way to judge how well a lender does in terms of customer service is the Canstar Blue ratings of the customer satisfaction score for smaller “challenger” banks and the Big 4.
Ultimately, you need to be comfortable and trust that your lender is working for you, not against you.
Aussies trust smaller lenders
Our research shows that when it comes to financing our largest asset, more than 1 in 3 Aussies (36%) are looking for a loan from a credit union (17%), building society (17%), or a non-bank lender (2%).
Almost two-thirds of Aussies who specifically filter the home loan table results for a particular type of institution are looking for a bank (64%), but that doesn’t necessarily mean they want a big bank. Maybe a small one would do just fine.
Before you sign up for a home loan where you’ve always gone, compare home loans with CANSTAR and find out all of the outstanding value options available to you: