While there are certainly benefits to getting your mortgage from a major bank like Australia’s Big Four, it’s the smaller lenders that tend to offer the more competitive interest rates, fees and charges that give the big banks a run for their money.
But despite many smaller banks offering cheaper home loans and more personalised services than many of the bigger banks, many Australians are hesitant about making the big switch to a smaller lender, with security concerns being a significant factor.
Are small banks dodgy? Will they rip me off?
All banks in Australia, large and small, must abide by similar laws and regulations, designed to protect bank customers and their personal wealth. Smaller lenders are required to provide credit with the same degree of care and attention as the larger banks.
Administered by official bodies, such as the Australian Securities & Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), these laws and regulations require large and small lenders in Australia to follow certain standards when offering credit to customers.
This includes assessing whether potential borrowers can realistically afford to repay loans before offering credit, and providing sufficient information for borrowers to make informed decisions about their loans. Deposits with authorised institutions are also guaranteed under the government’s Financial Claims Scheme.
Regardless of who your mortgage is with, if you suspect your lender has misled or deceived you, contact either the Credit and Investments Ombudsman or the Financial Ombudsman Service as soon as possible.
What if a small bank fails? Will I lose my house?
For borrowers worried that the next GFC is around the corner, it’s tempting to take out a mortgage with a big bank that’s “too big to fail”, even if its loans are less competitive in rates, fees and flexibility than those offered by smaller lenders.
But if your mortgage is with a smaller lender, in the unlikely event that it goes out of business when the economy takes a hit, it’s highly unlikely that you’ll end up worse off as a result. Your lender may receive government assistance to keep it from going under, or it may be absorbed by a larger lender. Your mortgage could also end up sold to another lender.
If your mortgage ends up with a different lender, it is possible that they could start raising rates and fees. In such a case, you should be able to refinance to another lender with more favourable terms with relatively little trouble.