If you’re reading this post then you’re probably aware that the big banks aren’t the only ones who can offer you a home loan. There are also a number of small lenders in the market who can offer you a home loan as well, and they’re often more flexible than the big banks.
What is a small lender?
A small lender is any other financial institution apart from the big banks. It may be a small bank, or a non-bank mortgage provider. Examples of non-bank financial institutions offering mortgages include building societies and credit unions among other lenders.
Is it risky to get a mortgage through a small lender?
The answer to this question depends on what you seek in a home loan. There are a number of pros in using small lenders such as lower interest rates and better customer service, however their are also cons such as fewer resources and more limited loan options.
Is failure likely?
After the 2008 Global Financial Crisis, the banking industry and the government learnt useful lessons. Poor lending standards are speculated to have been one of the causes of the collapse of some lenders.
The government introduced a deposit guarantee of up to $250,000 per person per institution to protect consumers and provide more confidence that their money would be safe. While this guarantee does cover mortgage offset account, the guarantee does not extend to redraw facilities and non-bank accounts.
What happens if your lender fails
It is important to know that your home is an asset. This means it can be sold or bought by another institution whether big or small. In case the lender is failing, three possible scenarios can take place:
• The lender is purchased by a larger institution
• The lender receives government assistance.
• Your mortgage will be purchased as an asset by a larger institution
If either of the first two scenarios occur, your mortgage will stay mostly the same. If the third occurs, then it means you have a new lender.
What happens if you get a new lender
There is not much difference. However, you will receive an express notice of the assignment informing you that your mortgage has been transferred. Your existing agreement is still intact, and all the contract conditions remain in place. The only difference is that your payments will be going to a different institution. If you decide to renew the mortgage upon maturity, you can be subjected to interest rate changes.
What about small lenders
When investigating available loan products in the market, it is important to understand the institutions to know the benefits and level of risk.
Small lenders rely on external parties for the money which they lend to you. This means that for you to get that money, their cash flow rate should be high. In a nutshell, they are more prone to economic conditions. Their size enables them to offer tailored products however they tend to be less affordable than bigger lenders due to their vulnerability to economic conditions. Small lenders tend to be a good alternative for applicants who struggle to get a loan with the bigger mortgage providers.
For instance, a big lender may not approve a mortgage for a local property like a farmhouse on land covered by a subdivision. However, a small lender may have more knowledge of the area, the history of the property, and the current demand for such properties. Therefore, the small lender may be more comfortable underwriting a home loan for the property.
When working with a small lender, you’ll be closer to the decision maker who approves the mortgage. Big lenders have corporate bureaucracies that can shuttle your inquiries through multiple departments through and a lengthy chain of command. Loan applicants that use smaller lenders engage with a smaller team who usually process the applications more efficiently and quickly. Small institutions will also often offer highly personalised service which could be lacking in big banks.
In summary, you should seek a home loan that suits your specific needs, whether it is with a big institution or a small institution. When searching for a home loan, explore the various lenders available to you so you’re aware of all your options. The more research you conduct, the more likely it is you’ll get a better deal on your home loan.
If you don’t have hours and hours to spare for conducting home loan research, or find it all a bit confusing, Loantree’s home loan experts are here to help. Specialising in assisting everyday Australian’s get a better deal on their home loan, they’ll use their vast experience and awareness of current market conditions to find the best home loan solution for you.
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