Big banks vs small banks for mortgages

One of the first questions would-be borrowers face is which home loan provider to choose, and whether to opt for a big bank or a small bank for their mortgage.

Choosing your mortgage provider can sometimes involve as much research as locating your ideal property. After all, you wouldn’t purchase the first property you saw without looking inside, so why would you treat your mortgage this way?

In Australia, the big banks are Commonwealth Bank (CBA, Wetapc, NAB and ANZ - also commonly referred to as the “big four banks”. While customer numbers can shift year to year, these four banks generally have around 75% of the market on their books.

According to the Reserve Bank of Australia, mortgage lenders in Australia are broken up into two categories: Authorised Deposit-Taking Institutions (ADIs) and Non-ADIs.

ADIs include:

• Banks; including the big four banks, their subsidiaries (e.g. Bankwest or St.George) and some online lenders
• Credit Unions and Building Societies

Non-ADIs include:

• Money market corporations (brokers and dealers)
• Finance companies (some online lenders, some brick-and-mortar companies)

The major difference between an ADI and Non-ADI

One of the major differences between an ADI and Non-ADI is that a licensed ADI is guaranteed by the Australian government under the Financial Claims Scheme (FCS). This means that if you had deposits with the bank, but it went out of business, the government would be able to make sure you get your money back, by up to $250,000.

Small banks in Australia would technically refer to ADIs outside of the big four banks, but colloquially may refer to any of the above, as non-ADI online-based lenders continue to grow in popularity.

Let’s explore some of the advantages and risks of both big banks and small banks for mortgages.

The benefits of a big bank mortgage

Security

The most obvious advantage of opting for one of the big four banks is their perceived security. As the largest financial institutions in the country, they are viewed as a safe optionand carry less risk of going under.

As an ADI, they’re supported by the Financial Claims Scheme (FCS), but this is also true of all ADIs, so the big four banks are not necessarily any “more protected” than another.

But, given their success, number of customers and revenue, they carry a reputation of being less likely to close. And when it comes to paying off a large debt, the last thing you want is to worry about your mortgage provider going under, being bought out by a competitor and your home loan being transferred to a new bank with potentially greater rates and fees.

Convenience

Another advantage of opting for a mortgage with a big bank is the convenience of your banking experience. A lot of Australians may find it more convenient to just stay with the one bank for all their financial products. By being with a big bank, you have the privilege of being offered a greater range of financial products to go alongside your mortgage.

Big banks can provide bank accounts, credit cards, personal loans and more, so all your banking can be kept with the one lender, and accessed at once (online, via app, in branch etc.).

The big four banks have more branches in Australia than competitor banks, which is good news for those that rely on face-to-face customer service. ATM access is also increased for big bank customers.

The benefits of a small bank mortgage

Lower rates and costs

On the flip side, small banks may offer lower interest rates and fewer fees than big banks. This is because smaller banks – particularly online lenders – have fewer costs (branches, and branch staff etc.), so they can pass these savings on to their customers to stay competitive.

For example RateCity research found that the average big four bank owner-occupier variable home loan rate (paying principal and interest) 6.58% in March 2024. However, there are are around 30 other lenders on the RateCity database offering at least one variable home loan rate of less than 6% (data accurate at date of publishing).

And this is not just limited to mortgages. When it comes to big banks vs. small banks, some smaller lenders may win out on rates and fewer fees across other financial products as well, including savings accounts and personal loans. This can be particularly beneficial for customers who want their financial products with the same provider.

More innovation and fintech

One way small banks have been able to pull some of the market share from the big banks is through innovation, particularly with fintech. When it comes to shaking things up and streamlining change for customers, big banks generally have more red tape to work through and executives to sign off on any new products, apps or helpful tools.

Smaller banks, however, may have more free rein to try new things and offer newer technology to their customers. This can be particularly true for online-based ADIs, which tend to have their fingers on the pulse of the latest fintech trends and customer service. 

Because of their large size, big banks sometimes take longer to make updates. For example, Westpac customers were the last of the big four banks to get access to ApplePay in 2020, almost four years after ANZ allowed it in 2016.

Another example of innovation from small banks came in March 2021, when online lender Up announced it was partnering with social media app TikTokk. TikTok users were able to play a 30 second game which offered the opportunity to win $1000.

Digital lenders also tend to have the type of technology also offer streamlined application processes. For example uBank’s home loan application process eliminates the need to submit any paperwork, including payslips.

This type of forward thinking is why some home loan customers may choose small banks over big banks in the battle to be their mortgage provider.

Big banks versus small banks for mortgages – which is better?

When choosing between big banks or small banks for your mortgage, the decision is up to you. In the end, the choice of which home loan provider to go with is highly personal and will depend on your financial situation, budget, and objectives.

There are clear benefits and disadvantages of both types of mortgage lenders. While big banks can provide more convenience for customer service and the variety of financial products, you may find that interest rates or fees can be less competitive than small banks.

Depending on your mortgage provider, you may find the bigger banks to be slower on the uptake of technology. But having the newest tools and gadgets is not necessarily a priority for every home loan borrower, and neither may be having branch access.

What is worth keeping in mind is that whichever provider you choose, if it is an ADI, your saved money is secured by the Financial Claims Scheme up to $250,000. If your concern is about the safety of your deposited funds, they should be protected whether the bank is big or small.

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