If you’re in the market for a mortgage and are looking for the lowest rate, you may want to consider a second-tier mortgage lender.
Home buyers are increasingly turning to second-tier mortgage lenders for help financing their house to take advantage of the lower rates usually offered by these alternative lenders, and to avoid the tougher lending criteria of the Big Four implemented since the Royal Commission.
These second-tier lenders include smaller banks (such as Adelaide and Bendigo Bank), neo banks (such as 86 400) and non-bank lenders (such as Well Home Loans), which are still tightly regulated by government bodies and consumer credit laws, and must be transparent with fees and terms.
However, their smaller size and simplified organisational structure means they have more flexibility in their rates and fees, which makes them more appealing to borrowers with smaller deposits, worse credit scores or less stable employment. This smaller, simpler structure also makes the application process easier and speeds up turnaround times – with tic:toc home loans promising to give you approval in the time it takes to eat your breakfast.
Even more appealing, these second-tier banks tend to have lower overhead costs – especially due to smaller or no physical branches – which means they can offer better rates on mortgages. They were also faster to drop their interest rates in line with the Reserve Bank’s slashed interest rate, though the Big Four have since followed their lead.
And as further incentive, many of the second-tier banks have proven themselves more flexible with customer support during the COVID financial crisis, as in the case of Macquarie Bank offering personalised monthly check ins with customers on payment holidays.
One downside of using non-bank lenders for your home loan is that they are less likely to offer you an offset account, as they may not have an ADI licence.
We ran a hypothetical mortgage for an owner-occupier property, with a loan amount of $600k with a principal and interest repayment over 30 years through Finder’s comparison service.
Unsurprisingly, 18 of the 20 best advertised rates on the July 2020 mortgage comparison were from second-tier lenders (we excluded HSBC – although it’s not a Big Four, it’s still a massive international bank).
This loan would cost 3.02 per cent with the Commonwealth Bank . The cheapest second tier lender is offering the loan at 2.22 per cent. That would save a whopping $159,995 in interest rates over the full term of the loan, or $5,333 a year.
So if you’re looking to get a mortgage for a home or investment property, or you’re checking the market to see if you can switch your mortgage provider, consider a second-tier lender for a better rate than the Big Four can offer.
|
Lender/ product |
Advertised rate |
Comparison rate |
Application fee |
Ongoing fee |
Max LVR |
Monthly payment |
|
Well Home Loans Balanced Fixed Home Loan – 2 Year |
2.22% |
2.46% |
$250 |
$0 p.a. |
90% |
$2,284.31 |
|
Virgin Money Reward Me Fixed Rate Home Loan – 2 Year $300k+ Special offer |
2.29% |
2.91% |
$300 |
$10 monthly ($120 p.a.) |
80% |
$2,305.74 |
|
UBank UHomeLoan – 3 Year Fixed Rate |
2.29% |
2.90% |
$395 |
$0 p.a. |
80% |
$2,305.74 |
|
Suncorp Home Package Plus Fixed – 2 Year Fixed Rate Special Offer $150k+ LVR ≤90% |
2.29% |
3.32% |
$0 |
$375 p.a. |
90% |
$2,305.74 |
|
UBank UHomeLoan – 1 Year Fixed Rate |
2.29% |
3.12% |
$395 |
$0 p.a. |
80% |
$2,305.74 |
|
Well Home Loans Balanced Variable – LVR 80% |
2.47% |
2.50% |
$250 |
$0 p.a. |
80% |
$2,361.38 |
|
ME Flexible Home Loan Fixed with Members Package – 2 Year Fixed Rate LVR <= 80% |
2.49% |
3.41% |
$0 |
$395 p.a. |
80% |
$2,367.61 |
|
Newcastle Permanent Building Society Fixed Rate Home Loan – 1 Year Fixed |
2.49% |
4.12% |
$595 |
$0 p.a. |
90% |
$2,367.61 |
|
State Custodians Low Rate Home Loan with Offset – LVR up to 60% |
2.49% |
2.51% |
$0 |
$0 p.a. |
60% |
$2,367.61 |
|
IMB Fixed Rate Home Loan – 2 Year Fixed (LVR 90% NSW and ACT borrowers) |
2.49% |
3.15% |
$449 |
$6 monthly ($72 p.a.) |
90% |
$2,367.61 |
|
IMB Fixed Rate Home Loan – 3 Year Fixed (LVR 90% NSW and ACT borrowers) |
2.49% |
3.10% |
$449 |
$6 monthly ($72 p.a.) |
90% |
$2,367.61 |
|
UBank UHomeLoan Variable Rate – Discount offer Borrowing over $200,000 |
2.59% |
2.59% |
$0 |
$0 p.a. |
80% |
$2,398.90 |
As always, when comparing mortgage rates, remember to check more than just the advertised interest rate.
Look out for sneaky fees, including annual fees, exit penalties, mortgage insurance, ongoing account maintenance fees, valuation fees, application fees and more. They can really add up over time, and you may end up paying more than you would with a slightly higher interest rate with lower fees.
And decide what extra features you want for your mortgage, such as an offset or redraw account, portability or split facilities. These can help you pay your home loan off faster, but can also come with extra fees.