Time to switch home loans? Let’s check the pros and cons of smaller lenders in 2024

A lending specialists speaks to a couple seated across the table from them.

If you’re looking to get into the property market in 2024, a question you’ll have to ask when you compare home loans is whether to go with one of the bigger banks or a smaller lender.

Smaller lenders often offer lower interest rates 

Straight off the bat, one of the first things you’ll notice about smaller lenders is that they often offer lower interest rates than those from the Big 4. 

This could be because they have lower operating costs (especially if they're an online home loan lender), or because they’re a credit union or mutual fund that aims to provide value for their customers, as opposed to investors.

In fact, the average variable rate home loan (OO, P&I, $400k, <80% LVR) in the Mozo database is currently 6.85% p.a. But the same loan from a Big 4 lender clocks in at 0.63% higher – 7.48% p.a. on average. 

Using a mortgage repayments calculator, the average Big 4 rate equates to about $162 more in repayments each month, or $48,542 of additional interest after 25 years, than going with a non-Big 4 lender.

With low rate home loans, there are clear savings to be had in terms of your monthly bill and how much interest you pay over the life of the loan. So, it’s definitely worth your while to suss those out.  

A couple speak with a lender in a sleek and modern office.

“You’re just more likely to get someone that can have a real conversation with you, if you’re going with a lender that’s smaller.” – Peter Marshall

Smaller lenders rank highly on customer service

When Mozo surveyed thousands of Australians for the 2023 Mozo People’s Choice Awards for Banking, smaller lenders consistently topped the list for excellent customer service and outstanding customer satisfaction, whereas only one of the Big 4 even got a mention. 

According to Mozo finance expert Peter Marshall, smaller lenders can put a more personalised touch on the home loan process

“You’re just more likely to get someone that can have a real conversation with you, if you’re going with a lender that’s smaller,” he said. 

“With a smaller lender, particularly if they’re locally-based to wherever you are, they will have knowledge of the area, they'll have more understanding of what pressures you’re facing as a borrower, and they may be able to be a bit more flexible in how they deal with you.” 

A smaller lender could offer you more personalised service, saving you from the potential hassle of playing musical chairs with the Big 4’s call centre staff each time you need to make an enquiry. 

“If you're going with a big lender, they will have lots of great systems and processes, but every time you call you could be talking to a different person. So, you’re relying on those people being able to deal with your situation consistently,” said Marshall.   

“But there are also bigger lenders that will have ‘relationship lenders’ where one person will be assigned to your loan, and that may help overcome that to some extent, but they still may not have the local knowledge of someone from a credit union or mutual bank.” 

At the end of the day, if you require face-to-face help with your home loan, you’ll generally have much better luck with being closer to a Big 4 bank branch than with some of the smaller lenders – if they even have physical branches, that is.

So before you make up your mind, weigh up the pros and cons of smaller lenders vs Big 4 banks. 

Pros and cons of smaller lenders vs the Big 4 banks 

Pros
Cons
✔ Typically lower interest rates than the Big 4
Less (or no) physical bank branches for face-to-face contact 
✔ Generally rank higher than the Big 4 for customer service and satisfaction  
Potential for slower approval turnarounds 
✔ Potentially more flexible with rate and fee negotiations than the Big 4
May not offer bundles with bank accounts, insurance products, or other finance, unlike Big 4 
✔ May offer innovative products and keep pace with tech before the Big 4 
Might not carry the same perception of stability as a Big 4 bank can 
✔ Adhere to same lending standards as the Big 4 

The choice between a smaller lender or a Big 4 bank is really down to your personal needs and wants, and will require a bit of research. After all, not all small lenders offer the same level of customer service, or lower rates. 

Likewise, you’ll need to decide whether face-to-face contact is important to you, or if you’re happy to do everything online. 

Whatever you end up deciding on, it’s important to compare home loans to help narrow down your search to a handful of lenders.

Home loan comparisons on Mozo - last updated 25 February 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
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    6.05% p.a.

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    Home Variable Rate

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    6.15% p.a. variable
    6.15% p.a.

    Enjoy a competitive variable interest rate from Up. No application, monthly, annual, redraw, or discharge fees to pay. Up to 50 free offset accounts available. Up home loans are only available to owner-occupiers buying or refinancing in major Australian cities. Up is 100% owned by Bendigo Bank. New joiners get $10 by signing up to the app using code UPHOMEMOZO. (T&Cs apply) Mozo Experts Choice award winner.

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  • Straight Up

    Obliterate, Owner Occupier, Principal & Interest, <50% LVR

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    6.24% p.a. variable
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What are smaller lenders?

Smaller lenders can include banks (excluding the Big 4) and non-bank lenders that hold an Australian Credit Licence, selling financial products like home loans, personal loans, and car loans.

They can include: 

  • Online banks
  • Mutual banks
  • Credit unions
  • Building societies. 
Are smaller lenders safe?

While the Big 4 banks have the image of being too big to fail, smaller lenders typically have to adhere to the same lending requirements and government oversight. 

If you have money stored in an offset account or redraw facility, so long as that small lender is an authorised deposit-taking institution (ADI), your funds will be covered by the federal gov’s Financial Claims Scheme (FCS) up to $250,000 per person, if your lender does go belly-up.

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

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