Whether you're buying your first home or your tenth investment property, the process of getting the right home loan can be a daunting experience. But before you go out and take on the biggest debt in your life, it's good to compare the different types of mortgage lenders and their services. Not only will this make the process a lot easier and less stressful, it could potentially save you thousands in fees and interest charges.
Many people are often surprised to find out that there are many types of mortgage lenders, and not just the banks alone, who can help you to secure a home loan.
There are many mortgage brokers who offer their services for "free", with the promise that they will find you a better home loan. There are also many private lenders who can offer financing - usually at a higher rate - to those who have a poor credit history or who cannot get a loan through the normal financing channel.
But all of this competition can make it difficult for the consumer to decide who's who, and more importantly, who will act in their best interest.
Types of mortgage lenders
The Australian banking sector is one of the most developed and secure financial institution in the world. The banking sector is dominated by just four main players - the Commonwealth Bank, ANZ, NAB, and Westpac. Many Australians prefer the security and certainty offered by the banks, and prefer to keep their money in such institutions.
The banks make their profit through deposits, fee and interest charges. They also pay interest on deposits made by their clients, but lend out this money at higher rates. While this is a cheap source of funding for them, it's also an expensive enterprise to run as they are required to open up branches, maintain complicated computer systems, and employ thousands of people in order to maintain the system.
Credit Union and Building Societies
Credit unions and Building Societies differ from banks in that they are controlled by their members, and the business is operated with the purpose of providing a financial service to it's members, or to support their local communities. Unfortunately, since the 1980's many of the smaller building societies have closed down, while some larger ones such as St. George became banks or were brought out by the big banks.
Mortgage brokers became active in the 1980's and act as a middleman for the banks and other lending institutions. Most mortgage brokers will have a panel of about 30 lenders where they can go to source their funds from.
Mortgage brokers were able to effectively compete against the banks by providing great customer service and personalised solutions, and the flexibility to meet their clients at a location and time that suited the borrower. It took the banks a long time to realise that they were beaten on price, service and every other thinkable front by these smaller mortgage brokering services, and it took them even longer to change their business model. As a result of the lax attitude by the banks, the biggest mortgage brokering firms (Aussie Home Loans, Mortgage Choice and Australian Finance Group) now account for close to 50% of the home loan market share according to a report by IBISWorld in 2014.
Unlike mortgage brokers and banks, mortgage managers such as Australian Mortgage Options, are independent of banks. They do not have a large pool of depositors to raise their funds from, but instead they raise their funds through a process called securitisation where funds originate through different financial entities. With your loan coming from a different entity, you don't need to worry if your mortgage manager goes broke, a trustee is usually appointed who will than nominate another mortgage manager to administer your loan.
Because they have significantly less overheads, mortgage managers can undercut the interest rates offered by banks, often by as much as 2 per cent less. The role of the mortgage manager if to manage your loan throughout the life of it's term, so they are therefore focused on building strong customer service and support.
How do I choose the right mortgage lender?
Your choice of a home loan provider really depends on your individual needs. Here are some questions to think about, that might help you to decide which lender might be suitable for your needs.
Do you require access to a local bank branch, or is online access sufficient to meet your needs?
Do you prefer to get discounted rates, or are you happy to pay a premium because of the security and services offered by the big banks?
Do you want the full suite of products and services offered by the banks, or do you prefer to support your local community and go with a credit union?
Choosing the right mortgage lender is just as important as signing the contract for your home loan. Make sure that you ask your family and friends, your accountant or solicitor to help you with referrals.
There is really no right or wrong answer as everyone has different opinions and preferences. The point is to know that you have several options to chose from, and to shop around for a lender with products that might better suit your individual needs and circumstances.