Choosing a bank or lender is about much more than just the interest rate and thanks to the mortgage broking industry, customers now have choice with lender options. Deciding which bank to go with for a home loan can be overwhelming for many. Many further still, unfortunately navigate the housing market unaware of the many nuances between the lenders, and how variances in policies can either work in or out of favour for them. Once upon a time, you’d walk into the local bank branch of which you were most likely loyal, and accept the terms outlined by them. Today, we have an ever-growing list of financial institutions ready to service lending – but importantly, at differing capacities, and in some cases, very specific for whom they’ll work best. 

In a market as complex and competitive as Australia’s, where do you start your lending journey? And, how do you keep picking the right lender for you?… Tier 1, tier 2, tier 3… When it comes to building a property portfolio, in reality, it’s a careful and informed calibration of all of these. 

Most strategic roadmaps will start with one of the major banks, i.e. those in tier 1 (CommBank, ANZ, NAB, and Westpac) or the Big 4. That’s because the major banks are much more regulated and under higher scrutiny. Debt To Income (DTI) ratio is a common factor they look at. That broadly speaking, allows them to comfortably service around six times a buyer’s income in total debt. Given the major banks are more conservative in their approach, starting the lending journey with them can prolong your borrowing capacity in the long-term. Once that level of available debt is peaked, you can keep expanding your property portfolio with an assessment of lending opportunities within the next tiers.   

Tier 2 banks, the likes of Adelaide Bank, Bankwest, and online only Neobank offerings such as 86 400, can offer an alternative option and no-frills approach. Since they mostly don’t operate branches, their overheads are lower which makes them cost-effective and quick to set up a loan. 

Tier 3 institutions, such as Resimac, Firstmac, and Bluestone, provide even more niche offerings. They can source funding through their own wholesale and private channels which means there is usually less regulation and more flexibility for customers. Getting tier 3 loans is often easier too. Documentation requirements are much more flexible especially for those after a low-doc option.

In this way, Tier 3 lenders can be more comfortable with debt. Rates can vary depending on the overall financial strength of the borrower and the investment risk. That is, they consider lending it as part of a whole picture.  For investors looking to grow a property portfolio, a lot of people tend to get capped after using a tier 1 or tier 2 bank. Using a Tier 3 lender as the next layer can possibly give opportunity for more properties in their portfolio. 

It can be eye-opening to be aware of opportunities available to certain individuals. Certain industries are eligible for Lenders Mortgage Insurance (LMI) waivers. Especially those in the medical industry (e.g. doctors, dentists, and others registered on Ahpra, the Australian Health Practitioner Agency). As well as solicitors, and even accountants who have a Chartered Accountant or Certified Practising Accountant (CPA) certificate. Most within these groups are eligible with the majority of banks for waivers which allow them to borrow up to 90% with no LMI, with only some banks requiring a minimum income. That can have buyers in these industries mentally counting their deposit, sooner.

Policy choices based on an individual’s employment type are also important. Some banks will approach someone earning commission more favourably. One lender, for example, will look at an individual’s most recent three months of commission, and annualise it. Whereas, another will look at your entire year’s average – which depending on your individual scenario, could significantly reduce your borrowing capacity.  

Being self-employed brings with it a kaleidoscope of considerations too. If an individual just started a business and they don’t have financials, only certain banks will accept that. Most lenders want to see two years of financials, which can be hard for some new businesses. Thankfully, some banks only require one year. Prudent choices for this self-employed group are even more apparent as many in recent years manage the transition from full-time employment to focus on what was originally a side hustle; and the delicate art of managing cash flow associated with that.

Some banks accept 100% of overtime and allowances as income (important to frontline workers such as police officers, nurses, etc.), while others reduce the effectiveness of this amount to 80%. Some banks are better for new employees still on their probation period, where most lenders want to see minimum three months employment in a company. Some want to see genuine savings of 5% of a property’s value when borrowing more than 80%. While others don’t require genuine savings evidence, for those borrowing up to 90%. That’s helpful for those who may be receiving deposit assistance as a gift, e.g. from family members, and are therefore unable to prove a savings record. 

UX or the day-to-day usability of things such as apps and online systems can also play a part for some in their decision-making. CommBank and Macquarie Bank have been notably investing in UX within these systems. Macquarie Bank, specifically, offering up to 10 offset accounts linked to one loan. Perfect for those who love access and flexibility with their accounts. 

The old adage, ‘all banks are the same’ – increasingly, couldn’t be further from the truth. A lot of people will choose the cheapest bank, and then get stuck. Not having roadmapped a strategic long-term path. Saving 0.2-0.5% on interest rates might sound enticing, but you can just as easily find yourself giving away in those instances $2,000 a year for a saving of $200 in the short-term. 

I always start a client conversation, asking, ‘what are your longer-term property goals?’. And, work backwards, big picture, from there. Whether it’s just one property you’re after, or growing an investment portfolio, using the right banks in the right order is what’s most important to be able to achieve your individual property goals.  

As part of this, it’s important to know what industry waivers, employment biases, as well as day-to-day UX needs may be relevant to you. Sometimes exploring this initial conversation earlier than you think you might be ready to, can have you mentally counting a deposit sooner that’s truer to you. As strategic investors, we should be Informed to know the answer to which lender comes down to individuality.