Refinancing Home owners looking for a better rate should not overlook smaller outfits they’ve never heard of, writes Lucy Dean.
Borrowers looking for a better rate may hover over low-cost lenders such as Athena, Nano and One Two before moving on due to their unfamiliar names, but doing so may close them off to opportunities to save thousands of dollars.
While the idea of moving to a lesser-known lender may not sit well with some borrowers, home owners should remember that when it comes to risk, it is the lender who loans the money – not the other way around, says RateCity research director Sally Tindall.
“Borrowers on the hunt for ultra-low rates sometimes hover over the low-cost lenders, but quickly move past them, based on their unusual names,” she says.
“However, if people have the time, it’s worth probing just a bit deeper into their background because often their origin and history might surprise you.”
For example, many of these cheaper lenders have been in the market for more than a decade, with Homestar Finance founded in 2004 and Reduce Home Loans in 2010. Newer lenders such as Athena, Nano and Tic:Toc have been set up by former bank executives from NAB, Westpac and Bendigo and Adelaide Bank.
“These non-bank lenders have helped drive prices down across the entire home loan market, particularly since the start of COVID-19 when record numbers of borrowers switched lenders to get themselves into a better financial position,” Tindall says.
‘‘Even if people don’t end up switching over to a low-cost lender, they can still use these low rates in their research to get a benchmark of what’s competitive and what is not.’’
Mortgage broker and founder of Madd Home Loans, George Samios, says his firm is refinancing about $20 million a week after the Reserve Bank’s decision to raise rates.
“Everyone’s looking at their loans now,” Samios says.
Any borrower who hasn’t heard from their lender in the past 12 months should be analysing their current deal and working out if they can get a better one, he says.
“If you don’t review your loan once a year, you’re losing thousands of dollars. That is the biggest takeaway point.”
Samios says it is worth considering a broker because they will negotiate with lenders to get the best rate. Every loan he has written in his 20-year career was negotiated to get the best deal.
Going through a broker can mean some borrowers who have the right amount of equity could get better deals at the bigger banks, which are now also trying to compete on price.
Generally speaking, any variable loan with an interest rate beginning with a 3 or 4 (per cent) means the borrower is “being severely ripped off”, Samios adds.
Switching a $2 million home loan from the average 3.17 per cent variable rate to one of the lowest variable rates would save home owners as much as $41,446 over two years, RateCity analysis found.
That is based on the average 2.10 per cent variable rate across three of the cheapest lenders.
A borrower with a $1 million mortgage who refinanced to a 2.02 per cent interest rate, based on the average of the three cheapest lenders for that loan size, would save $21,522 over two years.
They are huge savings, but borrowers still need to check the fine print – no matter who they are refinancing with.
“What you should be really careful about is the terms of the loan,” says University of NSW business school professor Richard Holden.
“The history of the subprime crisis in the US went well beyond subprime to people with really good credit ratings who got things like adjustable rate mortgages and didn’t pay attention to the fine print, which said, ‘It’s going to go up 25 basis points a quarter after the adjustable rate period ends’.”
He says borrowers need to make sure they understand the differences between their current and new loan.
“These smaller lenders probably aren’t going to make big inroads into the market by offering a higher interest rate, so it’s natural that they’re going to offer a lower interest rate,” he says. “You just want to make sure that you’re not paying for it in some other way.”
But he adds that borrowers need to be equally aware of the risks that come with inertia and simply choosing to stay with their lender.
One difference between a larger lender and a smaller lender is often in the level of customer service provided, adds Tindall.
“That’s not to say one is better than the other. Often it comes down to your needs and your personality” she says.
“Smaller lenders typically have fewer resources. However, you might find you like their more personalised customer service style. You won’t know unless you test it out, so do exactly that.”
She suggests potential refinancers ring the call centre at their prospective lender and “ask some tricky questions”, take a look at their website or use their online chat service to see how easy key information is to find.
For example, if information about fees and charges is hard to find, that can be a red flag.
“Customers looking for an offset account should be aware some low-cost lenders offer ‘offset’ facilities where the money isn’t held in a separate bank account,” she adds.
“While this may not worry some customers, people who like the idea of keeping their money separate from their home loan might prefer to use a more traditional offset account.”
It is also a good idea to read the reviews of what real customers are saying.
“Doing this research will also help you feel prepared and informed and that’s important,” Tindall says. “The bottom line is, it’s important to be happy with your home loan provider, otherwise you could end up feeling uneasy for years.
“If you fundamentally like the idea of having your home loan with a bank that offers a suite of other products and at least a handful of bricks-and-mortar branches, there are still plenty of competitive deals at your disposal.’
