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When you are in the market for a mortgage, choosing between a big four bank and a smaller lender is a big decision.
Blogger: Philippe Brach, CEO, Multifocus Properties and Finance
Approaching one of the big four banks is many people’s first choice.
It’s completely understandable why people turn to the most well-known banks when getting a loan. When you do all of your banking with one financial institution, you unconsciously build a relationship with that brand, so you naturally lean towards your own bank first when you’re in need of finance.
Many people also think that if they have a long history of banking with one institution, it may work in their favour when they apply for a mortgage.
The reality of the situation, however, is that the days of building a relationship with your local branch manager and getting better service or discounts in return for your years of loyalty – well, they are long gone. These days, it’s all about the numbers.
Banks and lenders rely on sophisticated software programs to help them assess the ‘risk’ of lending you money. They decide whether you’re a ‘good’, ‘bad’ or ‘average’ credit risk and if you don’t pass their criteria, you don’t get the loan.
But here’s the crucial difference: every lending institution uses different criteria. That’s why it’s so important to do your research when applying for a loan, because while you might sail through the application process with Lender A, you could find the door closing in your face with Lender B.
How can a smaller lender benefit you?
If you’re in the market to buy a home or investment property, or to refinance your existing loans, the best way to find a loan that suits your specific situation is to use a trusted mortgage broker.
Brokers work with different lending institutions day in, day out and know the different ‘quirks’ that can help or hinder your loan application experience.
For example, one of the big four banks currently has a policy in place that means any loan application they receive is assessed as if the applicant wants a 25-year loan. As you can imagine, the loan repayments on a $500,000 mortgage are substantially higher when spread over 25 years than they are when spread over 30 years.
This bank has recently enforced this policy as a form of risk mitigation. There has been a lot of chatter in the media recently about banks and potentially irresponsible lending practices and some financial institutions are going out of their way to ensure their customers can repay their loans.
Now, if you’re applying for a home loan and you have plenty of serviceability – which means you have a strong income position to support your mortgage repayments – then this policy won’t be a problem for you. However, if you have reached a point where your serviceability is tight, which can happen quite easily for investors who own multiple properties, then this particular lender is probably not the right fit for you.
Instead, a niche or boutique lender that has a more relaxed serviceability criteria would be a better fit. A good broker will be able to direct you towards the most suitable lender.
So while some people will always defer to the big four banks because they’re the most well-known, it often pays to work with a smaller niche lender who better suits your personal situation. This is why it’s so important to work with a mortgage broker to get the right loan from the outset.