Different Tiers of Lenders

Hi everyone, I am just trying to wrap my head around the different tiers of lenders and the pros and cons of a 1st tier vs 3rd tier, etc. Would you be concerned if all your loans were with 3rd tier lenders? Thanks in advance

 

The tier of lender doesn't mean much for the most of it - generally just size of lender. There are some regulatory differences, but overall there isn't a huge amount of implications to the end borrower due to portable nature of lending these days.

The main thing to understand is how if you're reliant on certain higher servicing lenders (which might be some niche 2nd tier lenders) and they have you as an effective captive customer - if you do not have the capability to refinance elsewhere you're at their whims when it comes to interest rate movements etc. Best rule of thumbs in these cases is to have an exit strategy/plan when you take on these lenders - ie to pay down these debts and improve your borrowing position so you can potentially move lenders in the medium/long term should the situation arise.

It doesn't mean it will necessarily be the case that the lender would put their interest rates up or the like, but it's prudent planning to make sure you're not permanently boxed into a corner.

Otherwise when it comes to lender selection it's more important to heed the advice of your investment focused broker - who can help you navigate the lender strategy to maximise your ability to borrow to build a portfolio over the long term.

 

The 'Tiers' of lenders is an anecdotal description. I don't believe there's any authority that says Westpac is a first tier lender and ING is a second tier lender. As Corey suggests it's really just a general description that's somewhat aligned to the size of the lender in Australia (ING is actually significantly larger than the Australian banks if you consider its international scope).

The concern of 'first tier' vs 'third tier' lenders is probably more around if they're recognised as banks or as securetised lenders. Ideally you'd use registered banks as securetised lenders are slightly more risky.

Realistically though, depending on your circumstances there may not be a choice. The third tier lenders are getting a lot of business at the moment because they'll lend when nobody else will.

 

Great, thanks all for the explanations!

 

Just one follow up question, is there then any difference between a tier 1 and tier 2 then, particularly if they are both ADIs?

Or is there other reasons for sticking with a tier 1 in the initial stages of investing aside from their stability?

 

as @Rolf Latham , @Peter_Tersteeg & @Corey Batt said above, it is more about strategic planning, working with individual's circumstances and future plans.

 

And the deals offered. '2nd Tier' lenders are offering some tempting deals at present