Understanding Australia’s Different Bank Tiers And How To Play The ‘Long Game’
There are three different bank tiers in Australia: Tier 1, Tier 2, Tier 3 – but what does it all mean? Why does it matter? And, how can we use this knowledge to better plan ahead to help future-proof our property portfolios? It’s a burning topic we see as too many buyers still get stuck on their first 1-2 properties. Usually either from a lack of strategy or long-term planning in the investor approach.
Tier 1 (our major banks – Commbank, Westpac, NAB, and ANZ) are always generally where your borrowing journey should start. Your first home loan is best placed with Tier 1 as they accept less risk compared with other lenders. As a result, they generally have the lowest interest rates.
As your portfolio grows, likely too will your need for more serviceability and structured debt. As your serviceability gets closer towards the limit, it’s harder to get a second or subsequent loan approved with one of the Tier 1 banks after starting with a loan in Tier 2 or 3. Understanding this, means you’ll have a lending roadmap that’s set up in a smart sequence.
BY JYH KAO_PUBLISHED ON NOVEMBER 3, 2022
Above: The ‘trade-off’ with Australia’s different Bank Tiers
Tier 2 lenders (e.g. Virgin Money) are ‘almost’ like the major banks in Tier 1, except they have policies that are slightly more relaxed in place. Perfect, for when you’re looking to grow. Their interest rates are higher than Tier 1 but Tier 2 banks are happier to generally increase their loan amount to you as they are designed to take on more risk as a result of the higher rate.
Tier 3 lenders (e.g. Pepper Money, Liberty bank, and more) are usually specialist or niche lenders because they focus on very distinct areas of the market. Interest rates among Tier 3 lenders are generally also the highest. For example, a loan with one of the major banks in Tier 1 might be 3%, however in Tier 3, the rate comparably could be 5%.
The beauty though, is knowing that you can usually double your borrowing capacity with a Tier 3 lender, compared with Tier 1. And, that’s where the fun side of the borrowing trade-off starts.
At JD Capital, we are The Investment Lending Experts – so we’re very familiar with all three Bank Tiers, and how to make these work hardest for you.
As you move along your borrowing roadmap, what you’re buying into – you’ll spot – is this trade-off. The higher the interest rate generally, the higher the borrowing capacity for you. And, the higher the borrowing capacity, the higher risk for the bank, which is from where the higher interest rate first starts.
What increasingly fascinates us and our peers, and you as a savvy investor, is not the interest rate… but the ‘trade-off’. Making a search for the cheapest option, rings alarm bells. And, acknowledgement of the greatest trade-off, a most tantalising and expansive pay-off, long-term for accumulating assets.
Weighing up all your options with a trusted mortgage broker, means you’ll always have your best, most strategic roadmap in play.