Small banks and their attractive variable/fixed rate?

Hi all,

I went with one of the four major banks for my recent loan and my friend who is an agent asked why I didn't go with CityBank or Bankwest as they have attractive rates. He basically said I got ripped off.

I said I prefer to go with the major banks; Bankwest for example for what I know in the past has a crazy termination fee if you decide to switch lenders, etc?

What are your thoughts on this? I heard in another thread here that it's not just the rate that counts, it's the overall package. I am assuming without doing my homework that the small lenders have bigger hidden fees and aren't as flexible down the track? Otherwise, why isn't everyone going for the smaller lenders with such low rates.
There certainly are some competitive rates with the smaller lenders, but in many cases they come at the price of flexibility/policy/various other reasons.

As you've mentioned, rate isn't the most important thing. Finance which fits your needs and strategy comes at the forefront of lender selection, with rate being a distant third/fourth in importance.

If you're concerned about rate sit down with a broker who can show you a comparison of the rates within the market, but also explain the key policy and product differences between each lender.
I look over BankWest's history of what they do with their products, I suspect your friend will be the one in pain in the years to come. They look good on the surface with todays rates, but if you understand their product history and business strategy, they're far from cheap.

For about 7 years now, BankWest has a habit of introducing a new product with a killer interest rate. It replaces their previous product on which the interest rate tends to increase to become a very uncompetitive deal.

Their latest product, the Complete Variable Home Loan is simply further evidence of this, it's going to supersede their Premium Home Loan. The worst part is, we consistently negotiate better rates with some of the major banks.

Prior to this product, it was the 'Double Deal Home Loan', then the 'Rate Cutter Home Loan', all the way back to the original 'Mortgage Shredder'. None of these products are even remotely competitive these days, but to switch away from them they charge one of the highest fees in the industry.

BankWest does this on a 1-2 year cycle. They end up being more expensive than most lenders over the life of the loan, even if that life is only 2 years.

Looking at Citibank's products, there's nothing there that really stands out either. They're competitive, but they're not that good. They're also a much higher risk lender than some of the others, you don't want to be with these guys in bad times.

Incidentally I have access to write loans with both these lenders. They're so far down the list of preferred lenders that they only get considered when they've got a policy niche that nobody else can reasonably fill.
One issue presumeably with small banks and high LVR, is these banks get screwed a lot more in having to refinance during times of credit 'tightness' GFC, etc. This means they jack up rates very quickly on their customers or in the case of developers may demand an instant injection of equity, at the same time everyone is tightening their lending standards so if you have a high LVR you won't be able to refinance away. This is the value of having a buffer.

If you maintain a cash buffer elsewhere you may get the best of both worlds, but you may still lose the flexibility of that money in a 'gfc' if you are forced to refinance and dump that cash into the new loan.

As mentioned by others some lenders just use it as an 'introductory' rate, though some like Ubank seem alright, but they are a lot stricter on lending and dont have all the bells and whistles, offsets, etc.

so in good times they are good but in bad times they are generally bad.
How many investment properties does your friend own? What is his long term investmet strategy? His risk profile?
The issue with high exit cost or switch cost with the smaller lenders was abolished when "exit" fees were banned a few years back....most banks are on a even playing field now these days.

So on a variable loan, there's no real "hidden" exit or switch cost.

However Citibank and BW do tend to have a slightly higher application fee and set up cost- roughly around $600- 900 more upfront. But if you have a loan of $400,000 you can normally make this back up in the lower rate within the 1st year ( presuming you negotiated a rate that's better by 0.20%).

But yes agree rate is not the end story, really need to look at overall cost and policy as well. Citibank, bankwest and smaller lenders does fit well for certain clients and short/long term goals and LVR etc..
This means they jack up rates very quickly on their customers

That is somewhat of generality - the majors were not slow in pushing rates to their limit in the GFC. Small lenders like Heritage, ME (despite treasury concerns) were the ones who looked after their clients with competitive offers despite being seriously disadvantaged by the deposit guarantee.

The international based banks like Bankwest and Citi came close to the edge, HSBC sold their loan book - even ING looked shaky for a while. Several money managers went bad or like Macquarie pulled stumps, which is a good reason to be wary of money managers.

But ask this question, when was the last time a APRA authorised deposit taking institution went broke in this country.

Bankwest are owned by CBA - they are not a small bank having said that they come near last in my list of preferences.
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Its not so much what they did during the GFC, its more they dont link their products rate to a SVR or reference rate.

It means they can 'slice and dice' the rate they charge on any particular product. SO while wooing new clients with a great discounted rate, they are simultanously jacking up the rate on the old product that is no longer offered.

The big 4 understand this isnt the best way to build trust with their customers, finally. Some of the smaller lenders cant resist the margins on the percentage of people who dont understand they are getting fleeced, or cant be bothered/arent in a position to refinance.
they dont link their products rate to a SVR or reference rate.

Have you checked the major banks standard variables? There is no standard any more and the majors were the leaders when it came to not passing on full RBA rate cuts. Then ANZ officially broke the strings and do a fortnightly rate assessment. It is only market pressure and competition that keeps these guys under control.

And I repeat Bankwest is fully owned by CBA do you think CBA has no input into their pricing and product positioning.

Lending margins were at their highest during the GFC because the majors were so dominant - today we have some competition but no where near enough. The playing field is still on a 30 degree tilt.
The majors have a standard variable, which their basic variable, their discounted/honeymoon variable and their pro pack discounts are referenced from. When they up the rate, every product moves, as when they reduce it.

Some smaller lenders dont have the same referencing, therefore they can slice and dice each product rate individually. Old customers the rate is jacked, new ones are enticed with a great new rate.
"Some small lenders" - again a broad generality. You could say that "some" major lenders don't honour negotiated discounts after the honeymoon or after a fixed rate period ... you can say "some" anything.

There are some very good, reliable, customer focused small lenders and they should not all be tarred with the same brush.
bankwest and citibank were the ones referred to in this post, and I think some of the products were mentioned as well.
Im not sticking up for the majors, Im just elaborating on how the diferent pricing models work. They all had the slice and dice model historically, most have since changed, apart from a few stragglers.

Note, more than 80% of my business goes to smaller lenders. Just not citibank or bankwest cause they havent got the service model right yet, and they slice and dice existing customers interest rate.