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

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.  

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 

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.