Saving money by treating your home loan like a mobile phone plan
One of the little money saving games that many people play is to buy cheaper phone plans not directly offered by the three major mobile networks.
As long as you check which network the reseller is with – Telstra, Optus or Vodafone – and any limitations, if you are happy with that network coverage, you can potentially save a lot of money.
Interestingly, a similar situation is opening up with home loans, with the big banks selling cheaper “no frills” loans through their online subsidiaries that can save homebuyers potentially a lot more money than shopping around for the best phone plan.
Such loans might be missing a few bells and whistles such as offset accounts but they can save cash-strapped borrowers thousands of dollars a year with the same “big bank” backing that might be appealing.
That certainly seems to be the case given that the big four banks originate more than 70 % of all home loans, even though they charge a premium for the service.
Using the comparison website Canstar throws up interest rate differentials as high as 0.75% at certain times between the big banks and their online subsidiaries.
Significant discounts available
That represents some serious savings on the average $624,000 home loan – enough to significantly shorten the loan term or reduce repayments to create some much-needed breathing room in a very stretched household budget.
For example, when I checked out Canstar recently, National Australia Bank’s (ASX: NAB) online subsidiary UBank was offering home loans at a significant 0.7% discount to National Australia Bank loans.
It was a similar situation for Commonwealth Bank (ASX: CBA) owned Unloan which was showing refinance loans a full 0.5% lower than for Commonwealth Bank loans.
Obviously, these numbers are always changing due to the competitive nature of banking and potential Reserve Bank decisions but there is obviously an opportunity here for those whom having the backing of a big bank is important but finances are tight.
Why the banks are competing with themselves
The obvious question is though, why would the big banks cannabilise themselves like this?
There are a number of reasons, some of them competitive and others more to do with establishing new and more efficient ways of doing business.
On the competition side, it is obvious that if you want to sell a lot of loans to people searching online, you want to be at or near the top of searches through comparison websites such as Canstar.
That is certainly the case for both Unloan and Ubank which offer highly competitive rates, but would not be the case if both NAB and Commonwealth stuck to marketing their own “main bank” loans.
So having these lower rates offered by online subsidiaries allows both banks to be competitive among the price sensitive online searchers without necessarily giving up the extra margin available through those who already have a relationship with the bank and might be happy to deal through their existing bank branch connections.
Online efficiency is a worthwhile aim
On the efficiency side, one of the issues that was thrown up during the Covid borrowing boom when all of the big banks were struggling to keep up with loan demand is how quickly, efficiently and accurately banks could originate new loans.
Some of the big banks really struggled as their application systems proved too slow and clunky to keep up with a very high volume of applications – a situation which can see market share drop as customers and loan brokers alike move to those who can generate approvals and move more quickly.
Having a lower cost, predominantly online bank brand allows the big banks to increase the speed of loan approvals by automating some tasks and reducing the need for direct branch or staff contact.
These efficiencies can then be progressively fed back to the main bank loans over time once they have been proven through the online subsidiary.
A similar situation is occurring with deposits, with the online subsidiaries offering better interest rates but less human contacts as a trade-off.
Getting a big bank bargain
All of which leaves savvy consumers a chance to get big bank security at a cut price.
Naturally, you need to check out any offers very carefully to see exactly what features are missing on the online product that might be available with the main bank.
These may include things like offset accounts, limitations on the level of LVR (loan to valuation) available or other features.
However, as savvy phone plan consumers know, there is nothing like the feeling of accessing the same network for a bargain price to make your day.
It pays to shop around
A recent analysis of almost 500 home loan products by comparison site Mozo shows that there are also significant benefits to be gained by shopping outside the big four banks.
It found the big banks charge 0.5% more in interest on average than the wider market and are advertising rates 1.5% higher than the best-value loans.
The Mozo report found Australians could save thousands by switching to a cheaper lender, with consumer-owned banks coming out on top in the latest analysis, followed by online banks.
Survey data helped to point to a reason for such behaviour with 42% of people not even aware of what their current interest rate is, with a further 20% having not compared their loan to others since buying a home.
Such apathy explains why many people are prepared to pay thousands of dollars more than they might be able to by grabbing the best deal and also why many consumers never put any pressure on their current lender to match better rates available elsewhere.