When looking for a home loan, it’s vital to review all options, not just those supplied by major lenders. By looking at products offered by big and small lenders, you educate yourself about the mortgage market. So, you can independently judge which types of home loans suit your needs and financial situation. However, some borrowers feel smaller lenders are a greater risk. But, this is not necessarily the case.
Smaller lenders, known as second and third tiered financiers, alternative lenders or those that are not one of the big four banks. The big four being Westpac, Commonwealth Bank, National Australia Bank and the Australian New Zealand group.
Many borrowers see larger lenders as having greater security, but this is not always true. So, to dispel this myth, we’ll look at the history of Australian lenders.
Two major financially turbulent times in Australia were the 1990’s recession and the 2000’s Global Financial Crisis (GFC). Consequently, several lenders encountered difficulties; some were larger banks, and some were small. Many of us will remember the collapse of the State Bank of Victoria and South Australia in the 1990’s. Both were state-government owned and lost billions.
Other collapses included the government owned Rural and Industries Bank of Western Australia and the non-government owned Pyramid Group. There have also been many credit union collapses and mergers.
Now while this sounds daunting, it’s also important to remember that Australian banking has changed considerably over the last 30-years. Banks and governments have learned considerable lessons, and regulations are now in place to control the level of risk. For instance, the Australian Prudential Regulation Authority (APRA) imposed higher capital holding regulations on Australia’s big four banks. This regulation ensured the NAB, Westpac, Commonwealth and the ANZ remained stable. The request came after taxpayers bailed out the big four, post-GFC, using the taxpayer guarantee – a government safeguard. Thus, having a buffer or financial safety net is important to ensure financial security.
Subsequently, new policies and changes to the National Consumer Credit Protection Act ensures responsible lending practices are in place. In addition, the government has introduced a guarantee for up to $250,000 per person, per institution, to ensure greater consumer protection. As a result, this guarantee applies to mortgage offset accounts, but it does not apply to redraw facilities.
If your lender collapses, and you have a mortgage with them, then:
- Your mortgage is either bought by a bigger institution.
- The lender receives government assistance.
- Another lender buys your mortgage.
Should the first two scenarios occur, then nothing will change with your mortgage. However, if the last scenario happens then you’ll have a new lender, and your interest rate may change.
Every lender comes with risks, not just small lenders. But, you can reduce your risk by researching the market and lender history. Also, ask if APRA and the usual credit laws regulate the lender, if the lender says no, then look elsewhere.
Other considerations are small lenders typically get their funds from larger financial institutions. Thus, these lenders rely on a third party for financial backing. Additionally, they can be more vulnerable to economic changes. Nonetheless, they can tailor products better to meet customer needs, and they are sometimes much cheaper than major lenders. Another benefit is they offer a more personalised service to customers.
Hence, the size of the lender does not determine risk. Instead, the regulations and protocols of a lender govern risk. Furthermore, government assurance mitigates the risk with either sized institution. Besides, even if the lender fails, this often has only minor ramifications for you as a mortgage holder.