Smaller "banks" with too good to refuse interest rates? Are they safe?

Hi all, I'm currently with Westpac bank and I'm paying 4.28% on a variable IP and 4.64% IO on another IP. The likes of Athena, reduce home loans, Tictoc, etc have some some awesome deals atm (around 3.5-3.7%) and I am considering refinancing with them. Are they "safe"? I realise big banks may have more features, etc, but my main concern is would there ever be a chance that I'd somehow lose my money\IP's with these smaller institutions? I have very good credit ratings.

 

Just remember, you have their money. They would be asking are you safe?
If worse comes to worse and they go under, their loan book is an asset that gets sold onto another lender who buys it. Then you loan gets looked after by a "safer" lender.

 

Athena and Tictoc are both quite new so I can't really give an opinion either way. Loans.com.au has been around a bit longer, and I do quite a few refinances away from them as they tend not to offer discounts to existing customers. Existing customers can end up on an uncompetitive interest rate relatively quickly.

A bit of a red flag for me when looking at lenders is when they offer a very sharp variable interest rate, with no fixed rates, or fixed rates that are significantly higher than their competitors. This tends to indicate they want to bait you in with the low rate, just to put the interest rate up in the future. If your situation has changed you may find you are unable to refinance and are stuck paying much more than if you just went with a 'reputable' lender from day one.

But they are obviously a potential option for someone that is done expanding their portfolio and is now focusing on paying down debt.

Edit: Just out of interest I checked out their websites, looks like Athena offers no fixed rates and Tictoc's fixed rates are about 0.30% higher than mainstream lenders. Take what you want from that...

 

Yes, this is a good point. During the GFC many of these 'types of lenders' increased their interest rates to customers, way above the big 4's market rates at the time.
The interest rate is only 1 consideration out of many, to cause you to want to refinance.

 

Tictoc and Athena aren't banks, therefore they do not enjoy the government protections that a "bank" does.

Unfortunately it's not quite that simple. It's easy to come up with examples of loans that are in place that would not be funded today for any number of reasons. Right now I have a loan waiting to settle that was approved very easily six weeks ago with the CBA. Three weeks ago the CBA had some policy changes, that loan wouldn't be approved today as it would no longer service under the new policies.

Don't ever assume that you can simply refinance at some future date if things go wrong with your current lender.


Also consider how these lenders are funded. They're not banks, they get their funding from third parties and pass it on with cheap rates. Those third parties expect a return, usually within 1-5 years. Not 30 years which is the loan you signed up for. Thus they must constantly refinance their own loans just to keep yours in place. If they can't refinance, they default and it costs them money. That gets passed onto the consumer in the form of higher rates.

The best example of this is the liquidity crisis of the GFC in 2008. A lot of smaller lenders couldn't get access to new money. Their rates increased significantly over the market and they didn't come down when the market rates dropped. An easy example is RAMS home loans. They got into trouble. Westpac bought the RAMS brand and funded that, but they didn't buy the existing loans, RHG. People with RHG loans (which they thought was RAMS) saw their rates skyrocket for years after the crisis was over.


Like @Simon Moore I've refinanced a lot of people away from lenders advertising amazingly cheap rates simply because the rates weren't cheap down the track. In an environment where we could be seeing a recession and possibly another liquidity crisis, I don't know that I would consider quite a few smaller, alternatively funded lenders to be 'safe'

 

They are not banks

 

Thanks for sharing your insights Peter.

I am sure most investors want more predictability with rates and willing to fix them instead of
go crazily cheap now but left with the unknowns going into the future.

So in terms of being a safe lender and more consistent pricing on the rates, does that translate
to big 4 being the better options to go vs others?

Thanks,
FXD

 

Not necessarily, I think most brokers have a mental picture of the lenders that have 'screwed' them in the past and we steer our clients away from them where possible. Also, brokers LOVE to ***** about lenders, so even if the broker doesn't have first-hand experience with a particular lender, they've probably heard the horror stories!

 

I don't think Athena actually offers fixed rates. That in itself could be interpreted in several interesting ways.

I'm not suggesting that people simply go with the Big 4 banks either. There are plenty of second tier lenders that are well funded via their deposit books, with significantly better rates that the Big 4.

I can't think of a lender that actually hasn't 'screwed' their customers at some point, but some are easier to recover from than others.

 

Ha ha, good point. But some are not as bad

 

Thanks for sharing the info. Very informative.

 

The key thing to consider is will you remain to be a top credit in the future (including in a market or credit downturn).

Smaller lenders have come and gone (and come again) in the Australian market. There is a cycle that can be observed. It is not new.

When the market is good, smaller lenders are great because they are very competitive.

When the market turns, smaller lenders are the ones that are most likely to screw you over. Not because they want to, but because they NEED to in order to survive.

To avoid this, you need to remain as a top credit so you are able to refinance back to a larger bank.

If you are not a top credit (e.g. higher LVR, already at servicing ratio limits, cyclical job security) then you are exposed. In a credit downturn, the major banks are also likely to be under pressure to tighten lending restrictions and you won't be able to refinance and can be stuck as explained above.

The risk of losing a lot of money/IP exists if you are counting on the ability to refinance in order to maintain repayments, e.g. an extension of IO terms.

Also, if you are getting an offset account with Athena, you should read the terms carefully and understand if their offset account is a proper offset account (as opposed to a redraw facility). I've heard that their tech marketing team has had an impact on the quality of their disclosures.

 

Why don't you look at something like Macquarie Bank?
My PPOR loan is 3.44% P&I, and my IP loans are 3.94% IO.
It's really not that far off Athena.

 

Yet Macquarie completely dudded people after the GFC and credit crunch
AMP pulled out of investor lending completely...twice.
Bankwest was belly up and got gobbled up by CBA
STG , BOM and BankSA were belly up and got gobbled up by WBC
Suncorp were nearly belly up and within a pen stroke of being gobbled up by ANZ post GFC/credit crunch

There's simply no safety guarantee with any lender, when the rubber hits the road, or when the $hi7 hits the fan