Customers have more choice than ever before when it comes to home loans, but what is the best option for you?
For a long time, the mortgage market in Australia has been dominated by the Big 4 Banks: ANZ, Westpac, CommBank and NAB. If you wanted a home loan, you usually went via one of these guys. But things are changing and with new competition, it’s great for customers.
If you’re currently shopping around for the best home loan, you have probably come across some new types of lenders who operate exclusively online. These digital lenders can offer different home loan products with some tempting incentives, but do they live up to the hype?
Let’s take a look at the key differences between traditional and digital lenders, so you can make a smart choice when deciding on where to get your home loan.
What are Traditional Lenders?
When your parents or grandparents took out a home loan, they did it with a traditional lender. Aside from the Big 4 Banks, traditional lenders also include credit unions, building societies and some smaller banks. Some of these lenders still offer home loans delivered via existing banking infrastructure including physical branches. While most of these traditional lenders have online tools and banking apps, they are not digital-first businesses, and some lenders still rely on outmoded systems which were established well before the digital age.
What are Digital Lenders?
Digital lenders are a newer source of home loan financing which operate exclusively online. They don’t rely on legacy banking infrastructure and all their services are delivered through a digital, mobile-optimised, intuitive platform including apps instead of in physical branches. Most still offer call centre support for those really complicated items, but where available, digital self-service is the obvious choice.
The reason digital lenders are growing in popularity is that they are generally much faster and simpler to deal with. They make the application process quick and streamlined, and can often offer more appealing rates due to their reduced overheads.
What is Better: A Traditional Lender or a Digital Lender?
When it comes to home loans, there is no one-size-fits-all choice. What’s best for you depends on your individual circumstances, which is why it’s important to do your homework. Here is what you need to know.
Taking out a home loan with big banks, credit unions and building societies usually involves some or all of the following:
Long-Winded Application Processes
Some traditional lenders rely on existing banking infrastructure and are shackled to doing things the old-fashioned way. While most lenders do allow you to apply online, the process can be long-winded. This means that you need to either set aside a good chunk of time to get it done or you have to keep coming back to it until you answer additional questions and it’s completed. That is time you could use to do something way more enjoyable.
Longer Approval Times
Each bank or lender varies, but applications with traditional lenders can take anything from a day to weeks to be processed . This often includes the initial lender review, the property valuation, which is commonly delayed due to scheduling issues with the real estate agent and valuer, the Lender’s Mortgage Insurance (LMI) assessment (where applicable), and the final assessment.
When you find the house of your dreams or an investment property you want to buy, it’s important to be able to move quickly. Properties can get snapped up in the blink of an eye, so longer approvals processes can hinder you in your home buying journey. Also long periods of time in a home loan that is not suitable for you can cost you a lot of money, so faster refinancing is also important to your financial security.
Unintentionally Penalise Good Customers
Each person has their own unique set of circumstances—some have a reliable income and an impeccable credit history, while others might have a fluctuating income and a less
attractive credit score. Traditional lenders generally service all types of customers, which can result in cross subsidisation issues whereby customers that manage their money well get bundled in the same products with customers that don’t manage their money quite so well, so some lenders unintentionally end up charging the good customer a higher rate than they actually deserve.
If you’ve worked hard to get yourself into a great financial position, you might be disappointed to hear that you may not be rewarded by receiving a lower rate that reflects the level of risk associated with your loan. In fact, you could be unintentionally penalised.
Have Physical Branches
Some folks appreciate the ability to go into their bank and talk to a staff member, while others find the whole experience to be stress-inducing and avoid it at all costs.
Most banks and traditional lenders have physical branches, though the numbers of these are dwindling, especially in some regional areas. Many traditional banks have automated so much of their in-branch experience and cut back on staff numbers, that the “personal” feeling of visiting in-person is no longer the same.
If you need to go into a branch and speak to staff, make sure there is a location that is accessible to you and check what the average waiting times are.
Lots of Fees & Charges
If you’ve ever applied for a home loan with a bank, you may know how much some banks love fees! Some of the fees you may be charged can include account fees, application fees, overdraft fees, maintenance fees, early exit fees, and fees for having an offset or redraw facility—the list is seemingly endless.
So why do banks sting the customer with so many fees? Physical branches and a large infrastructure means some banks have high overheads. Fees, along with higher rates, are some of the ways they may recoup this cost. Before you commit to a home loan with a traditional bank, make sure you understand exactly what fees and charges will apply throughout the lifetime of the loan. All these extras will affect how long it will take you to pay down the loan and get ahead.
Honeymoon Periods & Cashback Offers
It’s not uncommon for some lenders to entice customers with “honeymoon periods” which offer a lower introductory interest rate, and “cashback” deals, which provide cash back off fees or services. Canstar recommends exercising caution with these types of offers.
A low interest period at the start of the loan or $1,000 cash back won’t seem so appealing if you end up paying a higher interest rate for the life of the loan than you could find elsewhere. The result is that you can end up paying far more than the advertised rate.
This is why it’s so important to understand the home loan comparison rate. The comparison rate factors in all the relevant fees and charges, so you have a clearer picture of the cost of the loan and how long it will take to pay it off.
Clunky Digital Tools
If you love the ease of managing your finances, including your home loan, from your smartphone, you might be disappointed by the online services offered by traditional lenders.
In some cases, these establishments have been around for over 100 years, and their systems can reflect their age. Some websites and apps are retro-fitted to work with outmoded systems, rather than being designed with the customer in mind. In order to improve their digital experience for customers, they may have to re-design their whole eco-system which is costly and difficult. This can mean a clunky and frustrating experience for the customer.
If you’re taking out a home loan or putting your life savings into a bank, you want to know that your money is safe. The Big 4 Banks in Australia are heavily regulated and protected; this means the chance of them collapsing is very slim.
Digital lenders are becoming more and more mainstream and less so looked upon as the new kids on the block, but what can you expect if you take out a home loan with one of them?
Quick & Easy Application Process
One of the big benefits of choosing a digital lender is the fast application process. With Nano, the whole thing can be done from a smartphone in minutes (not weeks) from start to unconditional approval—generally no paperwork and no visits to a branch. This means you can complete it wherever and whenever you like—on the train, on the sofa, or in the park on a sunny day. The choice is yours.
You might be thinking: But wait, how can you skip all that important paperwork? We use the latest technology and data analytics to support the application process. This means you won’t be asked to fill in lengthy forms and wherever data can be sourced without the need for input, it will all happen in the background, helping get to a decision far quicker.
Fewer or No Fees
Digital lenders have far fewer overheads than traditional lenders and that’s good news for customers. Always check the comparison rate to see if there are any hidden charges, but at Nano, we do not charge fees, which means you can pay down your home loan faster.
Whether your dream is to renovate your home or buy a second property, cutting out unnecessary fees charged by lenders will put you in a better position and get you there faster.
Tailored Home Loan Rates
Shopping around for the best home loan rates and punching them into a home loan calculator can seem like a full-time job.
Let’s clear something up first—not all digital lenders offer low home loan rates. Some non-traditional lenders offer much higher rates because they’re taking bigger risks with who they lend to. This is why it’s so important to choose a reputable digital lender.
Nano can offer competitive home loan rates because we eliminate a lot of unnecessary costs from our home loan process and we are built for customers that have managed their finances well and want to be rewarded for that. Nano customers get our best rate, no need to ask. We reward new and existing customers alike. Our rates are simple, transparent and fair.
Smarter Features to Manage Your Finances
Whether you are a first-time home buyer or refinancing your existing home loan, you want the experience to be a rewarding one. Reputable digital lenders can offer you access to smart features which streamline your loan and help you pay it off faster.
Instead of taking out multiple accounts, all of which can charge fees and make things more complex than necessary, Nano enables you to consolidate your finances into one place through the use of our flexible 100% offset sub-account feature.
This allows you to pay your salary and savings into your account which reduces the interest you pay on your loan and helps you to pay down your loan faster. Putting you one step closer to financial freedom.
For those who are used to visiting the bank in person, using an online-only lender might feel unusual at first. This is why choosing the right digital lender is so important. Digital lenders have no physical branches, but that doesn’t mean you can’t reach out to customer service when you need help. Digital lenders still have teams ready to speak to you on the phone or via live chat.
Do your homework and make sure you’re comfortable with the level of customer service on offer and don’t be afraid to ask questions. We predict you won’t miss those trips to the branch.
With slick mobile apps that give you the ability to manage your home loan at your fingertips, you will be able to stay on track and improve your financial life. At Nano, you can make instant payments in and out of your account. Make purchases via our Nano Visa card, track your spending via our Nano app, gain insights with in-app expense categorisation and tuck money away, all of which serves to help you reach your financial goals faster. Instead of yelling at your phone in despair, you can spend your time on the things that matter most to you.
So, are Digital Lenders safe?
Research by CANSTAR found that 55% of Aussies are looking for a home loan from a non-bank lender. The resounding message is that most people do trust non-traditional digital lenders, but it’s still important to do your homework before you commit.
Digital lenders are still subject to consumer credit legislation and need to hold an Australian Credit License to operate. Australian Securities & Investments Commission (ASIC) regulate all entities that hold an Australian Credit License.
Here are some red flags to look out for:
● Ensure the lender has robust data and cyber security —Nano’s cyber security and end-to-end encryption helps protect its customers.
● Take care with lenders who offer very high rates — this is usually because they are taking on riskier customers. We offer great rates that are simple and transparent.
● Ensure they are not connected with recent business failures and financial scandals.
● Avoid lenders who claim they can offer guaranteed approval—every lender must do their due diligence on an applicant and only select those deemed to have the means to repay the loan.
Find the Perfect Home Loan for You
There is no one best home loan for everyone; the perfect loan for you is the one that ticks all the boxes for your unique circumstances. The good news is that you now have more choice than ever before. You are not restricted to the rates being offered by the Big 4 Banks, and you don’t have to be burdened by long approval waiting times and confusing application processes.
The most important thing is to do your homework and know exactly what you’re committing too. A smart choice should leave you feeling great and help you get a step closer to achieving your life goals, whatever they may be.