Choosing a loan and a lender is an important decision that can save you a significant amount of money if done right and can be costly if done wrong.
There is an ever-growing number of lenders in the Australian market, and it can be difficult to judge the quality of a lender and consider what other criteria is essential beyond the interest on offer.
So, what should I look for in a lender other than their interest rate and features?
In our view, you should consider the following three factors.
Lenders are notorious for quickly increasing their interest rates in line with the RBA and delaying interest rate reductions in line with the RBA. The timing differences are material to the profits of the major banks.
Unfortunately, lenders are now less inclined to follow the interest rate changes of the RBA and now have internal policies on how to set interest rates. These policies take into account many other factors including their costs and profit targets.
It is our view that structural changes in the global financial industry will mean that over the long term, the RBA will aim to keep rates lower than what they have historically over the past 50 years. However, this does not mean that lenders will also be holding rates lower since the cost of prudential business practices and regulation has increased.
This is why it is essential that you review your loan every 12-36 months to ensure you are still on a competitive market rate.
However, if there are factors to consider that may make it more to mean that your lender will remain competitive, then we generally believe that you should consider the following factors.
Changes in the lender's variable rate
Who owns the lender?
The ownership structure of lenders in Australia varies from large ASX listed companies, ever large foreign listed companies, foreign government ownership through to smaller privately-owned businesses and mutuals owned by their customers.
The profit motive of corporately owned banks plays a significant influence as opposed to a ‘fairer' return motive of mutually owned lenders.
Lenders that are owned through mutual structures include Teachers Mutual Bank, Gateway Bank and Newcastle Permanent.
Where does the lender get their money?
Most of the money lenders have (up to 95%) doesn't belong to them. All lenders (including the major banks) have borrowed the money they lend to you from either deposit accounts or bondholder in the wholesale capital market. Some lenders even get their money from other lenders. The interest rate lenders pay changes regularly and directly impacts the cost they need to pass on to you in their standard variable rate.
How lenders source their money impacts the likelihood and size of any future standard variable rate changes.
You can expect that lenders who source fewer funds from the wholesale capital market will have smaller changes in their variable rate.
A ranking of the types of lenders with least to the most reliance on the wholesale capital market is as follows.
Foreign banks (e.g. Citibank, ING, Bank of China)
Non-banks (i.e. lenders with no deposit accounts, e.g. loans.com.au, Resimac, Firstmac, Bluebay, BetterChoice)
A recent study by the RBA has confirmed that increases in the cost from the wholesale market in 2018 impacted non-bank (or Non-ADIs) more than others. See chart.
Ability to increase change the loan
Note: If you think there is a need to change your loan in the foreseeable future (e.g. to fund a renovation), then the loan may not be suitable for you and you should speak to your mortgage broker.
There is no sure way to be satisfied that a lender will provide you with some leniency if you need to alter the terms of your loans so you can either reduce your payments or increase your mortgage to help out in unforeseen events (e.g. accidents, under-employment).
If history is the best measure, you can assume that lenders will generally be willing to help you out only when it suits them (e.g. when they are under pressure to reach sales quotas). Otherwise, lenders have the discretion to show no sympathy and apply the letter of the loan contract and their credit policies.
If you need to alter the terms of your loan it is usually best to shop around again to get the best rate, especially if your loan is 100% variable.
Some factors to consider when choosing a lender suited to you.
What is the borrowing limit they would give you today?
Even if you are not borrowing at the maximum limit, knowing what the maximum limit offered by your lender is still important since it is an indication of the possible amount they may lend to you in the future.
Lenders have different methods of assessing the maximum limit they can lend. LoanCaddie can provide you with this insight and compare your borrowing limits under our lenders even if are not going to adopt the maximum borrowing limit.
What is the lender's current attitudes towards the ability to redraw equity and extended employment absences (e.g. maternity leave)?
Despite contemporary acceptance of career breaks to have a family or to find yourself, most lenders still have very traditional measures of assessing the credit risk of someone who is going on extended employment absences (e.g. maternity leave, unpaid sabbaticals, career breaks).
If this is important to you, the best measure of how a lender would react if you approached them to change your loan when you and your employer know that you are leaving or going on an extended break is to understand their current attitudes to actual borrower applicants under these circumstances.
LoanCaddie has advised many borrowers taking leaves of absence and have been able to find lenders that better understand modern-day career habits and which lenders have more favourable terms.
If timing is critical (e.g. because you are bidding at an auction), you need to be aware of the lender's approval turn-around times.
In general, approval timing is generally going to be better with larger lenders. Smaller lenders who are offering attractive pricing are often swamped with customers, meaning their approval timelines can blow out.
In this scenario, it is not uncommon for approval to be pursued with more than one lender simultaneously (one who can get approval in time for settlement and one who can get you an approval at the best rate). This provides confidence to bid at auction knowing your mortgage approval will come through in time for settlement and also the peace of mind that you are getting the best rate.
LoanCaddie can keep you informed of approval timelines of our lenders.
For most people, branch presence should be a lower order consideration. If a customer needs to speak to someone, it is far more efficient to talk to their call centre.
Gone are the days when it was important to walk into a branch and meet the branch manager and form a ‘relationship.' Let's face it; most of us don't find walking into a branch handy for getting advice. Given modern workplace mobility, it is unlikely that the person you meet in a branch will be there in 5 years time. The concept of a ‘relationship' with a corporate institution is far different from a relationship between people.
It is also a common experience that the person you meet in a branch is unable to answer your question. As a result, many people find it far more accessible and reliable to visit a bank's website or customer portal to get the information that they need.
When it comes to speaking you your lender, the most common means is to call their customer hotline.
The ability to call someone when you need to and to speak to someone that isn't just reading off a script is difficult to find. Usually, when a lender has a large call centre, the call centre staff are primarily reading from scripts to maintain consistency of service.
Our experience is that lenders with smaller teams are usually able to have better conversations with their clients since their systems are not as rigid. Unfortunately, with a smaller team also come longer wait times and slower responses.
The importance of the lender having trust in the borrower paying back the loan is obvious.
The importance of trust going the other way is an interesting topic. We consider that it is still crucial that you have faith in a lender as they will ultimately be administering the repayment calculations on behalf of both parties. Unfortunately, even the most prominent lenders have failed at this and have overcharged customers in the past. So even thinking that a brand name will protect you will not work.
In determining trust, we consider it is essential to consider how lenders treat their customers when they stuff up. Do they automatically confess their errors, come clean and promptly compensate? Alternatively, do they hide their mistakes and wait until they are uncovered before offering compensation?
We also think it is important to consider how they treat loyal customers. Do they automatically reward loyal customers with the best rates they are offering new customers? Alternatively, do they only provide loyal customers with better interest rates when they are threatened that they will leave? Unfortunately, more often than not, lenders offer special deals only to new customers and don't allow special deals to existing customers.
Ultimately, lenders are not perfect and you can never 100% trust your lender. It is far more important that you have a mortgage broker whom you trust to keep your lender honest.
Range of other products
The products offered by lenders are fairly similar, and the need to keep your banking products in one place has diminished in recent times. There is some convenience in having all of your banking products on the same app or website, but this is changing.
In the UK, it is very typical to have products split between several financial providers. Banking data legislation has made it possible to manage products over several financial providers simply with the data being able to be held and maintained with the same spot.
We consider Australians will adopt this model in the coming years.
Hence, we do not consider the range of products a lender offers that important. The only instances where this generally should be considered should be:
If you require an offset account;
You are a business owner and need to borrow money in the future;
You are unable to be offered a credit card unless it is packaged with a home loan.