Cheapest mortgage deals: Are you better off with a big or small lender?

It probably comes as no surprise that the largest mortgage lenders are responsible for a pretty chunky proportion of overall lending, but did you realise the extent of their market domination?

A massive 80.7% of all lending last year was from the six largest lenders, and the next five accounted for another 14.3%. This means that all of the other lenders put together represented a tiny 5% of the mortgage funds lent out to borrowers in 2011.

But is lending so heavily concentrated in the hands of the big boys because they offer the best deals, or are borrowers just blinded by expensive branding and marketing?

The big six

Firstly, let’s look at which lenders actually did the bulk of lending in 2011 and what their market share was:

LENDING GROUP	GROSS LENDING IN 2011	MARKET SHARE
Lloyds Banking Group	£28bn	19.9%
Santander	£23.7bn	16.8%
Barclays	£17.1bn	12.1%
Nationwide	£17.1bn	12.1%
Royal Bank of Scotland	£14.6bn	10.4%
HSBC	£13.3bn	9.4%

The total market share of the big six actually fell between 2010 and 2011, from 81.9% to 80.7%.

However, the next tier of lenders – medium-sized players – have increased their slice of the pie.

In seventh to 12th place in the lending league, and accounting for another 14.3% of all lending, are Northern Rock, Yorkshire BS, Coventry BS, ING Direct, Clydesdale Bank and Cooperative Financial Services.

But who has the best deals?

Quality not quantity

With the exception of HSBC, the big six lenders definitely haven’t dominated in terms of the cheapest deals over the last 12-18 months.

HSBC has been aggressively growing its market share in mortgage lending for the past few years with a continual stream of market-leading mortgages, making it one of the most competitive lenders around.

Frankly it’s been the only one of the big six to have employed such a strategy.

Santander has admitted it is looking to reduce market share – and indeed it did in 2011 – something that had been reflected in its mortgage deals, until last week. And while the other big lenders have had the odd great deal over the last 18 months, and generally offer decent and wide product ranges, they haven’t been troubling the best buy tables too much. Until the last few weeks that is…

The big boys are back

The so-called mortgage price war, sparked by the Government’s new Funding for Lending scheme, has surprised even the most experienced mortgage pundits. Over the last fortnight, the big lenders have come out all guns blazing with some seriously stonking deals.

The best of these are the three five-year fixed rates at under 3%, on offer from HSBC, Santander and RBS - offering medium-term security at amazingly low interest rates. And Nationwide has just offered a fantastic alternative to its own banking customers – a four year fix at a staggering 2.89%.

For borrowers who don’t want to fix for so long, or don’t have the 40% equity stake needed to bag these deals, looking outside the top six could reap rewards (although Lloyds Banking Group and HSBC have some keen high loan-to-value mortgages on offer).

The mortgage lenders just outside the top six, for example, are very active in the best buy tables and they grew their market share in 2011 by consistently offering great deals. These include some of the big building societies, like Yorkshire and Coventry, as well as mutual lender The Cooperative Bank. You can bet that at least one of these lenders has a market-leading product out at any given time.

But what about the lending minnows? Do the smaller lenders – those that account for less than 0.1% of mortgage lending – offer deals that are worth looking at?

Best things come in small packages

In fact, smaller lenders are the real jewels in the UK mortgage market’s crown. In many instances these are building societies – but not always – and they come up with some cracking deals.

Look through any best buy table and you are likely to come across one or two deals from a small building society, or perhaps from a lender you haven’t heard of. Don’t let that lack of brand awareness put you off as some lenders spend millions on marketing their mortgage products and others don’t. It doesn’t mean their products are inferior.

Small lenders can offer some real advantages to mortgage borrowers, including:

Great rates - whatever type of deal you want and whatever your deposit, when you research the best buys, there will usually be a smattering of deals from small lenders up there.

Quick reactions – as with all smaller organisations, little lenders can react more quickly to market changes than the large behemoths, and get innovative products designed and out to market quickly. In a changeable market this can really benefit borrowers who are on the ball.

Flexible underwriting – some smaller lenders will be more flexible about who they will accept for a mortgage and under what circumstances. It’s not guaranteed, but some small lenders offer individual underwriting to those with unusual circumstances rather than taking a ‘computer says no’ approach.

Good service – Smaller lenders are generally known for offering better service standards, and they consistently beat the big banks in customer satisfaction surveys.

Local deals – some small lenders, specifically smaller building societies, will offer exclusive deals for those buying a property in their heartland area. You might be able borrow more than those outside the local area, or you may be able to benefit from lower arrangement fees. Be sure to check out your local lenders to see if they have any exclusive offers.

However, smaller lenders are not perfect, and there is one notable drawback to getting a mortgage with a minnow. By definition, they have less money to lend.

When they launch a great new product there is a limited tranche of funding alongside it. So if you see a good deal on offer from a small lender, it’s best to go for it quickly, because when that money has gone, it’s gone, and the best deals frequently sell out within a week or so.

What do you think? How have big and small lenders compared in your experience? Let us know your thoughts in the comment box below.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.