Big Bank Vs Small Lender Mortgage: Find The Best Option (2024)

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Are you wondering what your home loan options are beyond the big four banks? While Westpac, ANZ, Commonwealth Bank and NAB are popular mortgage lenders among Aussie home buyers, small lenders offer excellent mortgage options. What else is out there?

A home loan is a significant financial commitment. When you purchase a home, you shouldn’t pick the first mortgage you see; you shouldn’t pick the first lender or assume that the big four banks are your only options. Smaller lenders offer many home loan deals, and you might find them better suited to your situation.

If you’re wondering what financial institution alternatives you have, read on to discover the pros and cons of a big bank vs small lender.

‘Small lender’ might seem a vague term – how do you know if you are dealing with a small lender or a leading bank? A small lender is any financial institution that isn’t one of Australia’s big four banks. Smaller lenders might include banks other than the big four, credit unions, building societies, or non-bank lenders.

Even if you don’t see their name advertised everywhere, small banks are usually pretty safe. If you haven’t heard of them, double-check that they have an Australian Credit Licence before committing to a home loan with them. We’ll explore the pros and cons of small lenders further on.

Bigger banks and lenders are the ones you see everywhere, including the big four:

• Westpac
• Commonwealth Bank
• NAB
• ANZ

While the number of customers each of the big four banks has each year shifts, they generally corner most of the market share of home loan applicants and other financial packages. ‘Big Banks’ might also refer to the big four’s subsidiaries (such as Bankwest), neo-banks and some online lenders. It might also include a credit union or building society.

Non-bank lenders are financial institutions that offer home loans but are not actually a bank. Examples might include credit unions, building societies, online-only lenders or other non-bank organisations.

You will recognise a non-bank mortgage lender as an institution only offering lending deals – not any bank accounts or savings accounts.

If you’re interested in non-bank lenders to help you secure your next home loan, speak to a mortgage broker with an Australian Credit Licence about which non-bank lender might have the suitable home loans for you.

The most significant advantage of big banks generally is their security level. Customers with Westpac or ANZ know that the bank will protect their money. It might be a generalisation, but most Aussies feel that the larger the financial institution, the safer their money is.

To some degree, perhaps it’s true – there is less risk of large banks going under, and they’re supported by the Financial Claims Scheme. If they were to go under, any deposit with the bank (up to $20,000) is protected.

When taking on new debt – especially one as large as a mortgage – the last thing you want is to lose any deposit you have made if your lender goes bust. Moreover, the bank may automatically transfer you to a new lender with higher interest rates and fees.

If you’re taking out your first home loan or are applying for a mortgage from abroad, there’s nothing better than convenience. The mortgage process is complex enough – and packed with jargon and complicated – without searching for an obscure lender. While you might not get the cheapest rates with one of the big four, you can trust it will be a convenient process.

Not only will you find their bank branches on every corner in Australia, but it’s often easiest to stick with the same bank for all your financial needs rather than turning to multiple lenders for home loans, car loans, and personal loans.

Furthermore, if you combine all your financial products with one lender or bank, they might offer bundle discounts. For example, if you have your home loan, bank account, and credit card with one big bank, they might offer more competitive interest rates and fewer fees than if you have products with multiple lenders.

This isn’t true of every bank, but it’s worth asking about their bundle or package discounts if you’re looking to take out a new home loan or other credit product.

Of course, big banks aren’t for everyone. There are some downsides to applying for your mortgage with one of the big four. Consider whether these disadvantages apply to you before signing on the dotted line.

• There might be fewer product options or flexibility to customise your home loan experience to your financial situation.
• Higher credit scores required – although many larger banks have bad credit loans, most might need a higher score than smother lenders. As they have so many loan applications, larger lenders can afford to dismiss borrowers who don’t meet their criteria.
• You may struggle to prove your income and find a good home loan product from the bigger banks if you’re self-employed. While most offer low-doc loan products, a specialist smaller lender may have a more suitable product for you.
• Rigid underwriting standards – bigger banks have to follow stricter protocols, and you may struggle to create a personalised loan product.
• Big banks do not always have the best rates. Despite having deeper pockets, bigger banks often don’t have the most competitive interest rates. Make sure you check out the comparison rate of each loan product.

On average, smaller lenders and banks offer lower interest rates and fewer fees than their larger counterparts. This is because they have fewer overheads – particularly online lenders. With fewer branches and staff, they can pass savings on to their customers.

It isn’t just lower interest rates; smaller lenders often have fewer fees, such as loan application costs or ongoing charges alongside monthly repayments. Therefore, you might save significant sums on the overall cost of your loan.

Smaller lenders are more likely to understand the real estate in the local area in which you wish to buy.

Of course, all lenders must follow specific rules. Going to a small lender does not guarantee that your loan application will get approval.

One way smaller lenders are breaking through the market is through innovation and the use of fintech. Big banks generally have more protocols and procedures to follow before introducing new technologies to customers. Smaller lenders can offer streamlined experiences and quickly take advantage of gaps in the market before the big four catch up.

Online banks, especially, have plenty of opportunities to catch the latest fintech trends, such as open banking. Moreover, smaller banks can partner with social media to offer prizes and rewards to their customers. If you are lucky enough to win one of their social media competitions or games, you might win a lump sum to put towards your mortgage deposit.

As smaller banks have far fewer customers and less volume of loan applications, they’re more likely to offer quick approval on your home loan application. Moreover, they can often provide a dedicated service that the large banks may struggle to keep up with.

As smaller banks want to keep your customer, they might provide better customer support and go above and beyond to help you find the right home loan.

Of course, the problem with small lenders and banks is that they are small. They might have possibly limited home loan options and inconsistent offerings. Some small banks only provide ten or fewer different home loan products. As they have fewer administrative resources than the big banks, you might not find the luxury of choice.

The loans will probably have the same or similar features as mortgages that big banks offer, but they might not have the resources to provide multiple features at a time or across all loan products.

If you’re an Aussie expat looking for a mortgage with a foreign income, you might find your home loan lender options limited. Many lenders no longer like to offer credit products to those earning foreign income as the Australian Prudential Regulatory Authority has restricted foreign lending policies. While expats are still Australian citizens, you may need a specialist lender who accepts foreign income.

The big four all offer foreign income mortgages for expats. Meanwhile, mortgage brokers can help you find the right home loan product with smaller institutions.

Whether you find the right home loan product with a big lender or a smaller bank, a mortgage broker can help you wade through the multitude of options.

As an expat or foreign buyer, you may find that many lenders only offer one or two loan products. Some lenders may not consider applicants with foreign income. To help you save time and relieve stress searching for a mortgage, we can do the hard work for you.

Big banks and small banks each offer different advantages; the right one for you depends entirely on your personal circ*mstances and what you want from the mortgage. Big banks offer security and bundle deals, while smaller lenders might provide a more individual experience and flexibility.

As an expat earning a foreign income, you might find your home loan options limited, so make sure you consider all your options and speak to a mortgage broker to secure the perfect home loan.