Lending from small lender vs Big 4

Hi everyone,

Is there any downside when borrowing from a smaller lender rather than the big 4 for a first home loan? Especially when my goal is to own no more than 2-3 homes in my portfolio.

Here is a little bit about myself:

- Earning single income of $120,000 + super per year with 2 dependants
- Plan to purchase first PPOR this year with $700K budget
- Going for P&I loan
- Comfortable shopping around and negotiating the best rate from a lender from time to time
- Goal is to have 2-3 property max all paid off over my lifetime
- Pay the least interest rate over the course of my mortgage which is the reason why I am leaning toward borrowing from a small lender, but does that come with any risks?

I find that the general consensus is to go with the Big 4 for the first home loan but is this really beneficial to someone in my situation? And which bank would you go if you were in my shoes?

Any comment or feedback on this would be much appreciated!

Cheers

Mark

 

Hi Mark

Best to focus on using lenders that will give you the money rather than the lowest rate.

Your current situation will make it quite tough to purchase a $700k PPOR and a couple of IPs - I suspect servicing will be very tight.....which will likely reduce the scope of lenders you’ll have access to.

Cheers

Jamie

 

Need to ask yourself what kind of extra support do you expect from the lender/how active you are going to be with them - i.e Branch Support, ATM Networks, Proactive outbound calling teams, Inbound teams, Servicing support, Solid internet banking platforms, Fraud detection, Fees for amendments of the loan (Valuation fees, loan restructure fees etc...)

Think about the opportunity cost and not just the face value of an interest rate differential

If you think you will need the above then expect to pay a little bit more for the services a Top 4 can provide vs 2nd/3rd tier lenders

It terms of who to go for - they are all more or less the same...

 

Jamie is on the dot - you may struggle to borrow for PPOR with $700K budget. It'll be dependent on your Asset/Liabilities as well as your resources (cash/borrowing capacity).

In your scenario the order of considerations should be:
1. Which lender(s) can lend you up to the loan amount you need for PPOR
2. What are the associated loan facilities you need - offset, redraw, additional payments, easy to release equity later on etc
3. Is this lender a good fit for your long term view? Couple years down the track, if you need further lending to purchase IP, can you still do so? A good broker would be able to derive a roadmap which will then allow you to visualise how you can get to 2-3 property (your goal) in the long run
4. Interest rate and associated cost on the lender

Have a chat with a good broker would be a good first step. Plenty of them on this forum who'll be able to help you

Cheers,
David

 

Second and third tier lenders are often more competitive on rates than first tier lenders. Cheap rates can be fine for a simple set-and-forget loan but there is a bit more too it.

I'd avoid non-bank lenders. There's some very cheap rates with online lenders but their funding isn't quite as secure and rates may not stay quite as competitive as margins get thinner in the future.

Second tier lenders are a good compromise of cost vs quality. One downside is their serviceability calculators usually aren't quite as generous. This could create challenges in the future when you want to get into the second or third property. Post settlement services can be a mixed bag. Some are quite good, some are terrible.

Overall it's very much a mixed bag. The best option is something that's tailored to your circumstances. How good is your serviceability when measured against your ambitions? What deposits do you have available? How quickly can you save money moving forward? What's the tax implications now and in the future?

This is only a small sample of questions that go through my mind when I'm recommending a lender. A better rate might mean about $1k per year in cost difference but that's inconsequential if that lender is blocking you from buying the next property or if it isn't tax effective.

 

Thanks for your input Peter.

I see where you are coming from. Any chance of sharing which 2nd tier lenders might be good?
I've enquired with Ubank and their serviceability was not as bad and I could still borrow close to what CBA or Westpac offered.

My realistic goal is to just pay down the PPOR as fast as possible to have a better sleep at night.
Being a single income earner with 2 dependants and partner not working nor in the near future, I don't think my financial situation will be better or worse by much. Which is why paying down the PPOR might be just good enough result for me.

And even if I wanted to buy a 2nd property with, lets say, Ubank would they be the one to block me from buying the next property compared to if I had borrowed from the Big 4?

 

Also could you give an example of a lender not being tax effective? Sorry I didn't understand this last part.

Thanks

 

Hi David, thanks for the reply.
Just to answer your question.

1. Westpac, CBA offered most, MeBank slightly less than what Big 4 offered but can take it. Ubank offered a similar amount to MeBank but didn't offer offset account.
2. MeBank offers offset, additional payments
3. True- this is where I can't picture the roadmap. Would someone like a homeloan specialist help derive a roadmap for clients? or would a Broker be better at this?
4. Banks like Ubank, MeBank, RACQ have less associated costs

If I change my goal and just want to pay off the one and only PPOR would 2nd tier or even non bank lenders be worth it? compared to Big4 where I have to make bigger repayments.

Any advice would be appreciated!

Mark