Big banks versus smaller lenders: where is the best place to get a home loan?

Navigating the home loan landscape can be challenging, because the mortgage you choose needs to suits your personal situation and financial goals.

But does that mean sticking with the big four banks, or branching out to smaller lenders?

With so many providers offering different products, rates and service levels, borrowers need to consider the whole picture before making a decision.

Fees and offers

“Upfront fees will vary depending on which lender you choose,” said Canstar’s group executive of financial services, Steve Mickenbecker. “The average upfront fee for the big four banks at the moment is $520, compared to a market average of $670.”

However, as Aaron Christie-David, co-owner of mortgage broking firm Atelier Wealth, points out, it all depends on the lender.

“There’s often an assumption that smaller lenders have higher fees, but in certain cases I’ve found the opposite,” he said. “Investigate a number of options on the market to make sure you’re getting the best deal.”

As a general rule, always be on the look out for introductory offers, like cashback or frequent flyer points and consider them as part of the broader package.

Interest rates

While it’s tempting to simply choose the lender with the lowest interest rate, it’s important to assess your options using broader criteria.

“A lot of lenders will dangle low interest rates to attract customers,” explains Christie-David, “but are then unable to tackle the huge number of applications they receive, meaning it can take a long time to get your loan, scuppering purchase plans.”

When it comes to loans with fixed interest rates, the limit of extra payments that are allowed can differ.

There are differences between big banks and smaller lenders when it comes to loans with fixed interest periods, Mickenbecker said.

“For the big four banks, the average allowable annual extra payment is a little lower – $16,250 compared to the market average of just under almost $21,800.”

Customer service

“Since the royal commission, we’re seeing lenders at every level trying to lift their customer service standards,” Christie-David said.

“However, some of the smaller, challenger lenders are focusing on customer service as a real point of difference and have created slick online experiences as well as attentive call centres to take care of their customers.”

But big banks perform well when it comes to in-person service, Mickenbecker says. “If face-to-face service is important to you, then choosing a big bank with an extended branch network is a good option,” he said.

“This is particularly relevant to first-time home buyers who often prefer a personal touch when making such a big purchase.” 

Security

It’s only natural that you will want your lender to be financially secure and hassle-free.

“There are rules and checks in place to make sure your money is safe. Banks, credit unions and building societies are authorised deposit-taking institutions which means that any deposit they take under $250,000 is guaranteed by the government,” explains Mickenbecker.

“Remember that non-bank lenders don’t have a government guarantee on deposits, but, like banks, are governed by ASIC’s responsible lending rules.”

Before settling on a lender, do some research on both the company itself and any other companies within their group, looking out for potential red flags.

Making a decision 

“Really there is no one ‘better option’ that suits everyone,” said Christie-David. “It’s a good idea to be open-minded and find a solution that best fits with your situation.

“Smaller banks can sometimes offer lower interest rates, whereas the big banks will always win when it comes to special promotions. Take your time to make sure you’re comfortable with your choice.”