It's your first time applying for a home loan and you have no idea whether to play it safe and go with one of the big four banks that you've banked with since you were a child, or to explore your options with smaller lenders...everyone's giving you different advice so how do you decide where to apply for your first home loan?
The big 4 banks
There's something comforting about having your home loan with one of the big four banks in Australia, the Commonwealth Bank, Westpac, ANZ and NAB, they've been around for as long as you can remember, they're well managed, regulated and secure - or that's what we've been taught to believe. Their smart marketing and advertising is effective in converting customers by making us believe they are the best option for financing the most important purchase of our lives. The big four dominate the Australian mortgage market, however, that doesn't necessarily mean they are the best option for you. There are other second tier lenders who will lend you funds for your first home with more competitive rates, you've probably never even heard of some of them, for example Rate Chaser.
Expand your options
Mortgage brokers have access to over 30 lenders with competitive home loan options, much more than any of the 4 big banks alone. The interesting thing is how many people go direct to their bank from the big four without even consulting their local broker to find out all of their options.
Smaller challenger lenders generally offer lower rates than the big four banks, according to a home loan comparison on Rate City. Take an owner occupier who wants to borrow $320,000 (80% LVR) on a $400,000 property value, we did some research which showed smaller banks and lenders held 16 of the 20 lowest comparison rates available.
It's important to understand that interest rates aren't all that matters, so you shouldn't base your decisions primarily on low interest rates, but it's good to know all of your options rather than just picking the bank that you 'know'. You should consult your local finance specialist before making any final decisions.
Smaller challenger lenders have been known to provide better customer service than the big four banks. This is because they're more flexible and their advertising budget is generally much lower than that of the big 4 banks so they need to try harder to compete, and provide a high level of customer service to retain their customers.
So why do so many Australian's buying their first home turn to a big four bank for their finance?
It's a combination of habit and anxiety. If you've used a big four bank since you were a child and your parents use the same bank, you might find yourself naturally gravitating back to that bank because it's habit and it's familiar, it's all you've ever known.
Buying the right home as your first home is a frighteningly big decision by itself, let alone then having to source finance to go with it. People tend to stick to the bank they already know and trust, they're already anxious about getting a mortgage and they don't need any added anxiety by taking a risk and going to an unfamiliar bank.
However there is an important point being neglected during this process - the borrower is not the one taking the risk on the mortgage, it's the lender. If you borrowed $320,000 and the lender went bankrupt, you wouldn't lose anything. You would still need to pay back your debt under the same terms, but the risk really sits with the bank if you default on your repayments.
Disclaimer: The information provided in this article is not legal or financial advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the recommendations, having regard to your own objectives, financial situation and needs. We encourage you to consult a finance professional before acting on any suggestions provided in this article or on this website.