Australia's cheapest home loan rates aren't from the big banks

Homeowners looking for a cheaper mortgage rate may be overlooking one of the most competitive parts of the lending market.

While many borrowers focus on the big four banks when comparing home loans, customer-owned banks, credit unions and mutual banks often offer lower interest rates and lower fees.

New research from EY Australia shows customer-owned banks are typically offering cheaper variable home loan rates than the major banks, potentially saving borrowers hundreds or even thousands of dollars each year.

What is a customer-owned bank?

Customer-owned banking institutions include building societies, credit unions and mutual banks.

In total there are 48 customer-owned institutions with around 5.4 million members across Australia, according to the EY report.

What unites them is the ownership model they share.

Unlike many of Australia's largest banks which are listed and owned by shareholders, customer-owned banks are owned by their members.

Customer-owned banks offer some of Australia's lowest home loan rates

To get a sense of the competitiveness of home loan rates from customer-owned institutions, EY compared the sector to Australia's four major banks: ANZ, CommBank, NAB and Westpac.

The analysis revealed that, in May, the majors offered basic variable rates in the 5.99% p.a. to 7.24% p.a. range, while the top 25 customer-owned banks offered rates from 5.74% p.a. to 6.19% p.a.

That 25-basis-point gap between a 5.74% and 5.99% rate comes out at roughly $120 per month or $1440 a year, based on a $750,000 loan being paid off over 30 years.

Looking at the broader market, customer-owned banks are still among the most competitive.

As the table below shows, seven of the 10 lowest rates in the Finder database are from customer-owned players (shaded).

Michael Lawrence, chief executive of the Customer Owned Banking Association (COBA), says that one of the major reasons customer-owned institutions can offer sharper interest rates is thanks to their ownership model.

"The profits are not paid away to shareholders. Instead, the money that customer-owned banks earn gets put back into the development of products, service, or into regional communities.

"That structure enables our sector to produce very competitive and, in many cases, cheaper rates."

Are customer-owned banks open to everyone?

At this point, some borrowers may be wondering if there's a catch.

What's important to know about the customer-owned banking sector is that while the players within it have a shared ownership ethos, each institution is different.

Some are relatively large institutions that operate nationally, like Bank Australia and Great Southern Bank. Others are smaller, regional institutions, like Northern Inland Credit Union and Bank of us.

Others cater to specific sectors or professions, like Australian Military Bank and Teachers Mutual Bank.

Traditionally, some of these institutions have restricted their membership to people working in those industries, but as Lawrence explains, it's no longer quite as clear cut.

"Some COBA members have their roots with a particular profession, but their business model has expanded beyond that, so they are happy to bank more broadly.

"But we've got other members that still operate tightly within their traditional bond."

In practice, that means that most customer-owned institutions accept a broad range of customers, but it's worth double-checking before applying for a mortgage or another banking product.

Are customer-owned banks safe for savings and home loans?

Bank failures are rare in Australia, but it's only natural that customers with significant sums of money in a savings or offset account will want to know what would happen if the worst was to occur.

"We [customer-owned institutions] are regulated in exactly the same manner as other banks - be it through APRA, through ASIC, or any of the federal banking laws," Lawrence says.

"And because we are regulated in exactly the same manner as other authorised deposit-taking institutions, we are also covered under the government's Financial Claims Scheme."

That means, should a bank get into difficulty, deposits of up to $250,000 per account holder, per institution, are covered by the government under the Financial Claims Scheme.

Lawrence notes that customer-owned institutions are also working with the wider banking industry to improve their anti-scam and fraud measures via initiatives like the Scam-Safe Accord.

"We signed up to the Scam-Safe Accord with the Australian Banking Association, which is about making sure that there is an appropriate level of uplift and security from all banks.

"It's all about investing in things like confirmation of payee and other safeguards to prevent fraud. So, there's a lot of work going on in that space as well."

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