Interest Isn't Everything When it Comes to Mortgages

By the resi financial blog team, 26 June 2014

Other things to consider on home loans other than interest

If you have taken the leap, found a property you absolutely must have, and are ready to commit to a mortgage, think carefully now: you can move out and rent it out if you get bored, you can unload it on your unsuspecting children, you can even swap it for a boat - but that monthly payment is going to remain with you for a long time, unless you decide to pay out early, in which case you will most likely have some fees to consider as well. When it comes to selecting a mortgage, it is probably the most long-term decision you'll be making in regard to your purchase.

Of course, there's the basics of taking out a mortgage for a new loan: don't borrow more than you can afford to pay, don't buy a house that is clearly overpriced and will be impossible to sell without a loss, make sure you know what you're getting into as far as the repairs and renovations you'll have to do, have the right insurance. These are all common-sense concepts - but what bank to choose for your mortgage remains a much more involved question, and one in which your personal circumstances will determine what's right for you and you alone.

The majority of Australians still get their mortgages with the Big Four: according to a 2012 report by the International Monetary Fund [PDF], the Big Four controlled 88% of all residential mortgages that year. As their share of all Australian deposits is a relatively more modest 80%, this figure indicates that even customers who choose to park some of their money with mutuals, building societies or credit unions prefer to go to one of the Big Four when it comes to buying a home.

This concentration explains why most Australians feel like there's really not much choice when it comes to choosing a mortgage: the numbers between the Big Four seem negligible. The picture doesn't change much when they go to the smaller banks, either—but part of the reason for that is that many of these smaller, similarly independent institutions, are in fact smaller entities acquired or created by the Big Four, as outlined in this research from CreditCardCompare.com.au.

But in fact, it is absolutely worth it to keep looking: last summer, the difference between the best and worst loans was found to be nearly $1,000 per year.

If that seems like a large difference to you, you should take a look at the non-Big Four affiliated institutions, such as credit unions. Because their marketing budgets don't offer much resistance to the onslaught of the Big Four, the smaller players have no choice but to fight on numbers. Some Australian credit unions even set their rates in relation to the Big Four, such as CUA, which offers a Rate Breaker Package that is 1% lower than the average advertised standard variable rate of the Big Four.

But it's not just about rates: it's also about a relationship you will have for the next couple decades, assuming you don’t switch. The Big Four offer many advantages, not least of which are name recognition and the ability to do all your financial-related business under one roof, including insurance. But the smaller credit unions typically offer a more personalised approach, and stress the case that you are more likely to be treated less as a number and more as a neighbor. In addition, credit unions and mutual building societies are very involved in the communities where they offer business. And if you're planning to be part of that community, it could help to go with someone that also supports small businesses, local causes, and local charities as part of their appeal to take away business from the Big Four.

Categories: guest blog, mortgage rates