There are now more lenders than ever, but how do you choose which one will offer you the best deal and customer service?
- Willing to give you advice for free
- Has perfect access at any time (call centre, online facilities and branches)
- Will be completely honest with you about their rates
- Will tell you all about fees
- Will let you lock in your interest rate
- Can explain the many types of home loans
With so many home loan products on the market, it’s hardly surprising that you may feel overwhelmed by the choice that’s offered to you. Along with choosing the loan you want, you need to choose your lender.
It is important to choose the right lender because you want the process to go as smoothly as possible. You are dealing with your greatest financial asset and obligation, so you would want a lender that is willing to work with you to find the right mortgage.
A good way to find a good lender is through word of mouth. Talk to family members, friends or colleagues who have recently financed a home. Be sure to ask how they’ve been treated since settlement and the type of service they received.
How to decide on a home loan lender
There are literally hundreds of financial institutions in Australia offering mortgage products. One of the first decisions you will need to make when looking at the home loans from different lenders is the type of lender you would like to borrow from;
- Home loans from the big four banks.
- Second tier banks not part of the big four.
- Credit unions and building societies which are not publicly listed companies.
- Mortgage managers whose source their own funds to finance your home.
To help you decide on choosing the right lender, you need to see who can offer you the product which best suits your needs and the service which helps you best manage your mortgage.
Decide how much you want to borrow
Banks use LVR as an indicator of the risk of the loan application they receive. If you are considered high risk, the banks may put a cap on your maximum LVR to reduce the risk of your mortgage. For example, if you apply for a pre-approval to buy a home for $500 000 with a loan of $475 500 your LVR is 95%. If you have a default on your credit file, or a bad credit history your lender could reduce that down to 90% or 80%. This minimises the risk for the lender.
This isn’t about how much you are entitled to borrow, but instead deciding on what loan to value ratio (LVR) you want to borrow. The LVR is the percentage of the value of the property that you are using as security for the loan. The lower your LVR, the smaller your repayments. This will also affect the size of the deposit you need to secure finance. If you have at least 15% - 20% of a deposit set aside, you’ll have a bigger pool of lenders to choose from. If you only have a little saved up you’ll be looking for a lender with a high loan to value ratio of 90% - 95% available. This could limit your options dramatically.
Calculate how much you can afford to contribute to the mortgage each month. Once you have this figure, see what you can save for a deposit as well as the savings you have put towards a deposit. This is how you figure out the LVR and will give you a good indicator of what it should be. It’s important to know the LVR you want to borrow because each lender has different policies. Generally, the higher the LVR, the more loans you have available to you.
You can also decide if you want some leverage by having a loan that is significantly less than the value of your property.
Do you want a big bank?
The big four banks; Commonwealth Bank, Westpac, ANZ and NAB are estimated to support 85% of the Australian home loan market. All four offer a range of home loan products which can suit everyone from a first home buyer to a retiree.
You may also have a transaction account with one of the big four already, so if you’re confident with their home loan services you may want them as your lender. Some lenders offer preferential rates and deals to those who already bank with them. Ask your bank what they could offer you and find out if you’re entitled to any form of a loyalty offer. If you have a good relationship and history with the bank you’ll be in a far stronger position.
However, keep in mind that the big four tend not to perform as well in customer satisfaction surveys compared to second-tier banks, credit unions and building societies. According to data from Roy Morgan Research, credit unions, mutual banks and building societies beat the big four in customer satisfaction. In 2012, the smaller lenders recorded outstanding customer service with an average score of 92.65% compared the big four’s 80.3%.
Are the smaller banks as safe?
Many second-tier banks (those that are not associated with the big four) are able to offer competitive features, fees and rates because they specialise in certain types of loans and have lower running costs.
For example, the AMP Essential Home Loans offers a competitive interest rate of and has redraw and split loan facilities. The loan also doesn’t have any monthly account fees which makes it an easy, flexible and competitively priced. This ‘no frills’ home loan could be perfect for the borrow who doesn’t need extra features.
Smaller banks are also just as safe as the big ones because all financial institutions in Australia are regulated by independent government bodies. They must be authorised to operate in the financial industry and you can look at its credit rating displayed on their website.
Building society and credit union considerations
Where banks are publicly listed and have shareholders, building societies and credit unions do not. This means that instead of returning their profits to their shareholders as dividends in the way that the bank would, building societies and credit unions return their profits to their members who are essentially their customers. And as a result, they are able to offer more affordable home loan products and lower interest rates.
As a member, you are able to vote on the management of your lending institution, while still having the choice of their home loan products and features.
The difference of a mortgage manager
A mortgage manager is another type of non-bank lender as they provide their own home loan products by independently sourcing their finance from Australian and international markets.
As they source their funds by themselves, they are often able to offer a lower interest rate on your home loan because there is no middle man. While mortgage manager lenders are relatively new, they are still required to be fully registered and remain independently regulated to ensure you are offered fair and affordable products.
Be sure to conduct your due diligence when looking into the qualifications and reputation of a mortgage manager. If you’re going down the route of a mortgage manager’s ensure that they are fully licensed. The key is to do your homework and don’t jump at the first half decent offer that comes your way.
Once you have decided on the lender you want to work with, it is best to seek pre-approval in writing so you know exactly how much you can borrow. Pre-approval will make the overall home loan application process much easier as you have the greater bargaining power. When getting your pre-approval in writing you should also secure any special promotions offered to you like additional features or waived fees.
Questions to ask potential lenders
- Can you show me the last three deals you closed?
- What are some of your loan programs?
- Could you estimate closing costs for my loan?
- Could you estimate and explain your fees?
- Can you get my loan approved locally?
- Will this loan be done in time for closing?