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Is it risky to get my home loan with a small lender?

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.

Buying a home? Click here. If you’re refinancing, click here.

How to get a discount on your home loan

One of the first questions almost every prospective borrower asks is how they can get the best deal on their home loan. Given a home purchase is the largest purchase most people will make in their life, it makes total sense that you’d want to minimise the loan costs, and that’s why we’ve put together this post with some some home loan hacks to help borrowers get the best deals.

If you’re an experienced buyer or investor, you’ll probably know most of the stuff contained in this guide. However, if you’re newer to the game you should find these tips quite useful. If they sound basic and obvious, don’t be discouraged. We see many prospective buyers ignoring the below advice and getting sub-optimal deals on their loans as a result.

One of the biggest challenges for borrowers is navigating the multitude of loan configurations available in the Australian loan market, which make it difficult to choose which one will best suit their unique circumstances.

Additionally, the offers available from specific lenders are always changing; the deal you saw advertised last week may no longer be available this week. Or conversely, your circumstances or the market may have changed, making an offer that was a good fit last week a poor fit this week.

Fortunately, despite the variations and changes that are always occurring, there are some fundamental rules that when followed will give you a better chance of getting a great deal on your home loan.

5 tips for getting the best home loan deal

1. Compare rates and features online

Because of technological advancement, it is now easier for home loan hunters to access crucial information that previously was tightly controlled by accountants, financial advisors, banks, and mortgage brokers. Most banks offer tools such as calculators where loan seekers can simply select the product they want and put their details into the calculator to see what their repayments would be. One can compare the full range of available options and make a reasonably informed decision within minutes right from the comfort of their home. For extra convenience, you can even apply for your chosen home loan online and have sometimes have it approved with a surprisingly fast turnaround. These actions can be taken from a handheld device like a smartphone without the need to step into a lenders office or a bank to queue.

Not only is comparing online convenient and fast, it gives you access to a greater variety of loan offers than you would get if you were calling or visiting lenders directly, which enhances your chances of getting a better deal.

2. Find out your loan-to-value ratio

There are several factors that financial institutions look at before determining what deal to offer clients. The first and most common one is the loan amount. This is divided into segments such as “up to $500,000”, “from $500,000 to $750,000” and so on. The larger the loan size taken, the more bargaining power a customer has that may lead to better discounts on the home loan.

The other factor is your loan-to-value ratio (LVR). This compares the loan you seek and the value of the property you want to buy. If your loan amount requested is below 80% of the property value you want to refinance or buy, you will be in a good bargaining position. Combining a good LVR and a high loan amount gives you a very good chance of getting a better home loan discount and will often lead to obtaining the best possible deals.

The third factor is your repayment plan; this can be principal and interest (P&I) or interest only (IO). Interest only loans require the borrower to pay only the interest and nothing on the principal for a predetermined period. This is an attractive option for the investor with short-term cash flow issues or those who want to claim tax on deductions.

Those with a larger home loan or a low LVR are in a better position to bargain for highly competitive home loan deals.

3. Learn the truth about refinancing

It is no secret that banks don’t like losing their customers, and to avoid this they may use some retention tactics that in some cases are aggressive. If they pick up on signals that you may be leaving them,  usual tactic is to offer some kind of discount in rate or fees, along with describing in detail that moving involves a lot of paperwork and a lot of hassle. These offers are obviously designed to entice you to stay (or scare you off leaving) which can often leave you fairly confused about what to do.

When you begin to convince yourself to stay just because all your credit cards, transaction accounts, and personal loans are with the same financial institution, and that moving might be too expensive, you should stop yourself in your tracks and open your eyes. You don’t have to move all your accounts when the mortgage account shifts, this is only a myth. Staying may cost you more than leaving to another institution with better home loan deals. It is better to test the market and see what else is out there other than what you’re already getting. Keep in mind that even a very small reduction in interest rate can add up to many thousands of dollars over a number of years.

Remember, don’t get sucked into getting your home loan through the same institution you have all your other banking with just for convenience, it could cost you thousands per year. Also remember to always look around at what’s on offer, despite the perceived hassle, refinancing could save you a lot of money.

4. Get your financials in order

When seeking a home loan, you should push hard to get the best rate available. Having your financial situation sorted and in good order is a great way to ensure you get the best deal. A good starting point for this is ensuring you have a good credit rating. If your rating isn’t optimal now, put together an action plan to get it in order for when you want to borrow. The second thing to work on is having genuine savings to cover the deposit and make sure your LVR is as low as possible. Once again, an action plan and applied discipline will help you save a deposit more quickly. While you might have to cut some costs and go without some of your usual luxuries, putting yourself in a better financial position will give you much more bargaining power when the time comes to request a loan. Additionally, you’ll more easily be able to cover the additional costs such as stamp duty and related legal fees.

5. Get professional help

While technology has made gathering information about home loans and even applying a lot more easy and faster than it used to be, the whole process can still be very confusing and extremely time consuming, particularly if everything is new to you. In a lot of cases, finding professional help can be a much more efficient way of getting a loan and may not only save you time and energy, but also a lot of money. Finding the right help can also be tricky, and that’s where Loantree comes in. We’re here to help connect you with experienced home loan experts whose passion is helping everyday Australians get a better deal on their home loan. The process is simple and easy, and you can get started by clicking one of the links below.

Buying a home? Click here. If you’re refinancing, click here.