With more than 100 lenders offering hundreds of mortgages, Australian home buyers are spoilt for choice – it’s choosing the right loan that’s the hard part.
Australia’s big four banks – Westpac, Commonwealth, ANZ and NAB – dominate the market but it’s the smaller lenders that often offer the cheapest rates.
Commonwealth started a price war last week, slashing its five-year fixed rate to 4.99 per cent.
But even though NAB and Westpac followed suit, the average five-year fixed rate of the majors (including subsidiaries such as Bankwest and St George) was still higher than the non-majors, figures from Canstar show.
“The non-major institutions do tend to offer a lower rate across most types of home loans,” says Canstar’s Justine Davies.
Despite generally being cheaper, non-major lenders are losing market share.
Figures from mortgage broker AFG showed the market share of non-majors fell from 26.3 per cent in July 2013 to 25.2 per cent in June 2014.
AFG processes about 12 per cent of all mortgages, worth about $4 billion a month, says Mark Hewitt, general manager of sales and operations.
Before the global financial crisis, non-majors had about 40 per cent of market share but that dropped to 15 per cent as consumers flocked to the relative safety of big banks.
They’ve been stuck at about 25 per cent market share for 18 months now, and that’s because the system makes it harder for them to compete, Mr Hewitt says.
“It’s got to do with the strength of the major lenders’ balance sheets and their ability to compete,” he says.
“For every loan you write, you need to hold capital on your balance sheet in case something goes wrong.
“But the major banks, because of their size and strength, only need to hold about half the amount of capital for loans they write than non-major lenders, so it’s easier for them to compete because it’s not as expensive.”
Here are some of the pros and cons of non-major vs major lenders:
– Non-majors, particularly online lenders, tend to be the cheapest.
However, majors generally offer better package rates where for an annual fee, you could be offered discounted interest rates and extras such as free transaction accounts or discounted insurance.
– Non-majors tend to offer better customer service.
“A lot of people don’t like dealing with the major banks and non-majors tend to offer more personalised customer service,” Mr Hewitt says.
They also tend to specialise in home loans so may offer more specialised service, Canstar’s Mitchell Watson says.
On the downside, non-majors will have fewer, if any, branches.
“There’s convenience in walking into a branch and having everything with one institution, your everyday banking, being able to transfer money as you wish, having everything in one place,” Mr Watson says.
– People tend to trust major institutions.
“With some of the smaller lenders, people are unsure of the brand and there may be some reluctance,” Mr Watson says.
Young people are more inclined to deal with the non-majors, Mr Hewitt says.
“They don’t have the same preconceived ideas as the baby boomer generation about the major banks, the new generation of customer is more open to dealing with other brands.” AAP