The online mortgage broker

Why you’ll probably pay less interest with a small lender

On the average $400,000 home loan, a difference of 1 percentage point can add up to $73,000 in extra interest over the life of the loan. It’s no wonder customers are defecting to the cheaper, smaller guys.

Unless you’ve been living under a rock (and presumably paying too much for it!), you’ll realise that if you take out a mortgage with a big bank, you may fork out more in interest.

In fact, at any given time what a large outfit and a smaller competitor will charge you will differ by about 1 percentage point.

Doesn’t sound like a lot? Well on the average $400,000 home loan, that adds up to $73,000 in extra interest.   

So it’s no wonder that customers are defecting at a rapid rate to the cheaper, smaller guys. What still makes no sense, though, is that some 80% of Australian mortgage holders remain with the banks they know but (usually) don’t love.

Here’s why.

Did you know, almost a quarter of all Aussies have a mortgage with the same bank they banked with as a child?

Small lender safety

The global credit crack-up that commenced in 2008 played beautifully into our largest institution’s hands. Aussies en masse got nervous and many retreated to the perceived safety of the Big 4, thanks to fears that smaller players might go bust.

When it comes to your mortgage, that’s a bit silly. Think about it: you’d be worried about insolvency if you were owed money… but if you owe the money, it’s an entirely different matter.

The worst case scenario in the event of a lender collapse is your loan (and all the rest of them) will be sold to another lender and they’ll more than likely jack up the rates. But remember, you have total mortgage mobility now, with exit fees banned since 2011 (unless you have committed to a fixed rate home loan). You are free to simply find a better deal.   

Sure, small banks, credit unions and building societies are all regulated by APRA, when so-called alternative lenders are not. But alternative lenders are still subject, like all credit contracts, to a (strengthened) consumer credit code (now called the National Consumer Credit Protection Act 2009). The Credit and Investments Ombudsman can also rule on small lenders, while the corporate watchdog, ASIC, can get involved if there is misleading and deceptive conduct.

You really should be relaxed and comfortable about giving them your business.

Indeed, the big banks have become so concerned about the potential loss of loans to smaller lenders that some have even started their own. NAB for instance, operates online outfit Ubank.

And you’re asking: how does this help them? Keep reading…

Small lender service

The reason that alternative lenders can offer such materially cheaper loans is their significantly lower overheads.

Often these lenders have no “shop front” or retail outlet. That means no rent and related expenses… all of which a big bank has to account for in the interest rate it charges you. They will typically have an online presence only. And this is how with Ubank, NAB can get a fresh, cheaper slice of the mortgage pie.  

But just because alternative lenders don’t have ‘bricks and mortar’ branches doesn’t mean they skimp on service. Many have fantastically responsive teams of home loan consultants. Also, there are some cutting-edge real-time ‘chat’ facilities available.

You’ll get a good gauge for how much help you’ll get from a lender you are considering, from a quick website visit. Bear in mind, too, that the smaller mobs really want your business – and often they’re willing to work hard for it.

“It’s vital when you investigate your home loan options to go straight to the comparison rate that will be listed in all product tables, and not the headline rate.”

Small lender types

Possibly the best term for small mortgage issuers is non-bank lenders. This definition obviously catches building societies and credit unions too (which as mentioned previously are, like banks, regulated by APRA).  

If your mind automatically runs to large lenders when thinking about a big mortgage, you should realise that there are some 100 lenders operating in the Australian market. That’s a lot aside from the big 4… and a lot of better potential interest rate value.

But besides a typically lower interest rate, many online lenders also offer cheaper upfront and ongoing fees. Again, they want your business and are fully aware that high upfront costs work as a deterrent to ditching your big bank.

That’s why it’s vital when you investigate your home loan options to go straight to the comparison rate that will be listed in all product tables, and not the headline rate. The former is a mandated calculation that incorporates upfront fees and ongoing charges, as well as the interest rate. The latter just reflects the interest rate. This means it could be set artificially low to come up high in interest rate searches, with the true cost being hidden in peripheral costs.

The comparison rate will give you the apples with apples comparison of the bank and non-bank options, so you can accurately gauge how much better off you could be.  

uno works with 22 lenders, with roughly a quarter of our business going to the big four banks and three quarters to second and third tier lenders. 

Get in touch.

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Nicole Pedersen-McKinnon

Nicole Pedersen-McKinnon is a financial educator, commentator and author, as well as a qualified financial adviser and stockbroker. She presents her Smart Money Start, fun financial literacy incursion, in high schools around Australia. Follow Nicole on Facebook at Nicole Pedersen-McKinnon Money.


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