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The 3 biggest myths about getting a home loan from a small lender

When it comes to home loans, some people assume that the bigger the lender, the better.

Australia`s big four banks are responsible for about 75% of home loans, while the 10 biggest banks provide about 90%, according to data from APRA, Australia`s banking regulator.

So, clearly, borrowers tend to gravitate towards bigger banks. But why?

Mainly, it`s because bigger banks do more marketing and have more branches, so they tend to be front-of-mind. Partly, though, it`s because of three big myths about small lenders:

  • 1. They`re unsafe
  • 2. They provide worse service
  • 3. They charge higher interest rates
Myth 1: small lenders are unsafe

Some borrowers avoid small lenders because they fear they`re unsafe; that they might go bust. However, not only is a bank collapse extremely unlikely, it also misses an important point - the party taking the risk in a home loan is the lender (which gives out the money) rather than the borrower (which pockets the money).

Also, don`t forget that if you deposit money with your home loan provider (e.g. through an offset account), the first $250,000 of your deposit is protected by the government guarantee, officially known as the Financial Claims Scheme.

< h5>Myth 2: small lenders provide worse service

All things being equal, customers are likely to choose big banks they`re familiar with over small lenders they don`t know very well. So small lenders know that if they`re going to compete, they need to find a way to differentiate themselves from their big rivals.

Customer service is one way they can stand out - which is why many small lenders offer friendlier and more personal customer service than big banks.

When Roy Morgan conducts its regular surveys of bank customer satisfaction, smaller lenders tend to outperform the big banks - in the most recent survey, Bank Australia came out on top. And the winner of Bank of the Year in the most recent Roy Morgan Annual Customer Satisfaction Awards was another small institution - Beyond Bank.

Myth 3: small lenders charge higher interest rates

Small lenders often charge lower interest rates than big banks. Why? Because this is one of the few ways they can compete.

If a big bank and a small lender offer a comparable home loan product with the same interest rate, most borrowers will choose the big bank. So small lenders know they need to undercut their big rivals if they want to win business.

  • You miss settlement - so the vendor cancels the sale and sues you for damages
  • You inherit the vendor`s land tax obligations - because you didn`t arrange for the vendor to make the payment before the sale
  • You buy a property with illegal renovations - which then become your responsibility
  • You discover important fittings are missing from the home when you move in - because while the vendor made a verbal promise to leave them behind, this wasn`t included in the written contract
  • You discover your new home includes a restrictive covenant - which limits how you can use the property


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