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Taking out a mortgage to buy a property is a big step and one of the first questions you’ll face is, which lender should you choose?
It can be an overwhelming decision because comparing home loan products is difficult.
There is a large range of features that vary significantly across home loan products and comparing these features is like comparing apples with snowmen.
As a starting point though, it might be helpful to know a few ways that the big four banks differ from smaller lenders, and how to investigate which lender is right for you.
Home loan rates
It’s easy to compare the home loan rates on offer between lenders. Just make sure that you are looking at each financier’s comparison rate, not their advertised rate when doing your analysis.
The comparison rate is the rate that is actually applied, net of fees and other charges.
The advertised rate is often a lower, headline-grabbing number that doesn’t take into account the additional costs that you’ll be charged.
When choosing between one of the big four banks or a smaller institution, it is helpful to remember that the big four all answer to shareholders and have significant overhead costs, which contribute to the markup on their financial products.
Smaller institutions don’t face the same significant expense sheet when turning a profit, so have a natural advantage in many ways when it comes to interest rates.
Features, fees, and offers
Generally speaking, smaller lending institutions offer products that will include a similar package of features as the big four.
However, an area of difference will potentially be in the offset and redraw facilities.
The big four offer the ability to redraw on your loan if you’re ahead, and also offer an offset facility, giving you flexibility in the way you manage your debt and repayments.
This can be very attractive if you’re planning to leverage the equity or perhaps are considering some debt and investment strategies.
However, smaller lenders are accustomed to competing on these issues and can potentially offer some very creative solutions to help you with your goals.
If all other areas of research are leading you towards the smaller banks, then make sure you talk to them about features that are important to you.
Credit cards, fixed vs variable, additional repayments are all areas where the big four can find good points of difference to smaller lenders so make sure you really understand what features you will need and use.
Decades ago, the bank manager had personal relationships with the customers and focused on providing excellent tailored and personalised service to keep customers at the bank.
This person acted as a trusted advisor as well as a banker.
Today, customers have a choice about the type of service they would like and for some, the personal touch doesn’t appeal.
So, an online-only service, using an app to do all their banking, with the backup of a call centre, is more than enough.
If this is you, then there are myriad smaller institutions that will suit your needs.
If you’re looking for a place with lots of convenient branches, then the big four might be a good starting point (although these continue to diminish rapidly).
If a more personal and tailored experience is important to you, then a smaller institution, such as a credit union or building society could be the best option.
Generally speaking, the more automated the process the quicker it will be.
Approval times can be an important consideration if you are buying in a hot market (a description that certainly applies to housing in 2021).
While pre-approvals can be sought quickly when going to auction or putting a deposit down on a property, the actual amount you have available to spend is the most important thing and full approval is crucial.
The big four banks have very efficient processes in place that can move standard approvals through very quickly.
However, if there’s something non-standard about your application – such as perhaps being a self-employed person or buying with a higher debt-to-income ratio, then it may take longer to hear confirmation from the bank.
Smaller institutions tend to be a little faster because there are much smaller volumes of loans to approve.
A range of banks – big & small – use technology and other means to try and “fast-track” their approval process as this is certainly a key differentiating feature.
Others have a “hands-on” approach where a full assessment may suit a client so they have more certainty with the loan application outcome.
All deposit-taking institutions are backed by the government and the level of risk is the same across the big four and smaller institutions.
However, where things differ is the possibility of being forced to change lenders.
From time to time a smaller lender might be acquired by a bigger institution.
If this happens to you, make sure you look at the features and rates that your product offers and see if the new lender can improve upon it.
So, be prepared to compare.
This is the place where mortgage brokers flourish.
Our ability to cut through and layout the options across multiple lenders can see you benefit mightily from competition in the lending space.