Credit unions and building societies are consistently rated higher than the big banks for customer satisfaction but they have struggled to convert that into market share. Added to that, they also perform well in product comparison tables, so it's surprising that they don't have higher profiles.

Abacus, the peak body for credit unions and building societies, has decided it's time to fight back, with an 18-month campaign to raise consumer awareness of its members and what they have to offer.

Abacus's first salvo was a recent print and TV advertising campaign, which claimed that "home owners with a mortgage from a credit union or building society are $35,000 better off over the life of the loan". While the message is clearly getting through to some new home buyers, it has raised the hackles of its competitors.

The Australian Bankers' Association has lodged a complaint with the Australian Securities and Investments Commission (ASIC), arguing the ads are deceptive and misleading.

"Our main concern was that Abacus was making broad, general statements that if you go with a credit union rather than a bank you will be up to $35,000 better off," says the ABA chief executive, Steven Munchenberg. "They looked at the best rates offered by four credit unions on the day and compared that with the average of the banks' standard variable rates on the same day.

"It was a broad-brush representation and a very narrow calculation. All we are seeking is to stop Abacus repeating the claims," he says.

During the financial crisis, credit unions and building societies suffered from the perception that they were riskier than the banks, even though they were included in the federal government's deposit guarantee.

They were also outflanked as the major banks used the crisis to mop up smaller banks and distressed lenders to build market share.

The Commonwealth (CBA) took over BankWest while Westpac absorbed St George and RAMS. As a result, CBA and Westpac have more than 55 per cent of all home lending, according to the latest figures from the Australian Prudential Regulation Authority (APRA). The big four control a whopping 83.6 per cent, while credit unions and building societies control 8.5 per cent combined.

The chief executive of Abacus, Louise Petschler, says the group is trying to do what similar institutions overseas, and industry super funds in Australia, have done to raise their profile but it faces an uphill battle.

Abacus's own research shows that although about 20 per cent of the population has some kind of relationship with a non-bank financial institution, only 9 per cent of non-members are aware of them.

"We're trying to get the message out that we're mainstream and offer some great deals and that it's worth putting us on your shopping list," Petschler says.

As the table (right) of top rates shows, credit unions and building societies such as Newcastle Permanent and IMB do offer some of the cheapest rates in the market, along with small non-bank lenders such as Reduce Home Loans and State Custodians.

Of the big four banks, it's only the CBA and Westpac (through RAMS).

It is worth noting the cheapest rate - 6.34 per cent offered by Reduce Home Loans - is not so cheap after fees are taken into account to arrive at the true rate, or the actual average percentage rate (AAPR). They include all initial, upfront and ongoing fees (but not fees for redraw or offset facilities).

A researcher at Canstar Cannex, Mitchell Watson, says cheaper loan products often have fewer features and less flexibility. He says while much of the interest rate focus is on standard variable rates, a lot of bank customers go for package loan products at a discount to the headline rate (see average rates for different institutions, left).

Mortgage interest rates vary widely not only between lenders but also according to the size and type of loan and whether you are a valued customer. As the table of AAPRs shows, credit unions offer the lowest standard variable rates after fees and building societies offer the best fixed rates but the big four have the most competitive basic variable rates.

Some of the best rates, after fees, are for package loans, which are offered to customers who have multiple products such as a transaction account, credit card and home loan with the same institution. The thing to watch out for is if you ditch one of those products during the life of the loan, you lose the discount.

The big banks typically offer discounts of up to 70 basis points (0.7 per cent) on their standard variable rates for package home loans. Watson says not all credit unions and building societies offer package discounts but those that do have some good deals. Newcastle Permanent offers a maximum discount of 0.85 per cent.

The bigger the loan the better the discount. The big four banks offer average package variable rates of 6.88 per cent for a $300,000 loan but reduce it further to 6.8 per cent for a $500,000 loan. Credit unions and building societies do the same, reducing their average package rates from 6.82 per cent to 6.77 per cent.

As well as the advertised package rates, the chief executive at RateCity, Damian Smith, says there are also less visible negotiated rates. "It wouldn't surprise me if valued customers were getting 50 basis points to 70 basis points off [the standard variable rate]," he says.

While credit unions and building societies are seen as friendlier places to do business, Munchenberg says banks offer better branch and ATM coverage and potentially offer a wider range of services. The banks have also driven product innovation and technological advances.

In its 2009 annual review of building societies and credit unions, KPMG found that they had weathered the financial crisis in good shape by "sticking to their knitting".

Petschler says the sector watched on as other institutions offered 100 per cent home loans with no deposit and lost market share as a result: "We weren't part of that - we make a lot of being responsible lenders. We have also persevered with first home saver accounts, even though they haven't been very successful, because we see ourselves as being about helping people improve their finances."

The big banks have attracted stinging criticism this year from the government and consumers for lifting rates above recent increases in official cash rates. The banks claim the increases were necessary to cover the higher cost of funding in the wake of the global financial crisis but it also reflects their market dominance.

According to Smith, the average standard variable rate of 17 banks is 37 basis points higher (7.36 per cent) than that of about 100 non-banks, including credit unions and building societies (6.99 per cent). Last September the gap was 26 basis points. "This is because non-banks need to be more competitive on interest rates to attract customers. This can mean the real possibility of big savings for borrowers if they shop around," Smith says.

If the Reserve Bank keeps official rates on hold, Smith says the banks will be reluctant to make significant changes to their headline rates and risk more damaging publicity. Instead, he believes they may trim package discount rates that are less visible.

Customer satisfaction

Building societies enjoy 88 per cent.

Credit unions follow with86 per cent.

CBA, Westpac, NAB and ANZ trail with 73 per cent.

Mutuals have 4.5 million members and $72 billion in assets.

Profits get ploughed back to benefit members.

Banks have 88.4 per cent of the home loan market.

Credit unions and building societies have 8.5 per cent.

Source Abacus/ Roy Morgan Research

Service and price attractive

First home buyers Kerrie Brandon and Callan von Sanden (pictured) have just bought a one-bedroom apartment in Ultimo in Sydney.

"We see it as a stepping stone," Brandon says. "We wanted to get into the market and hopefully we will be able to buy another property — hopefully a little bit bigger — in a few years time.

"We had been looking for a while, reading the papers, watching the news, looking at the markets and interest rates and researching online at Canstar, InfoChoice and RateCity for a bit of comparison [of home loans]."

The couple took out a variable-rate loan with Teachers Credit Union. "We bank with them and when we compared it with the big banks it was very competitive," she says.

"It didn't offer the cheapest rate but it had other perks that made it attractive: some fees were waived, a mobile lender came to us at home and took our phone calls at different times. I banked with big banks for a long time and, while I had no overly bad experiences, Teachers Credit Union's service is a lot better."

Brandon says that although some products offered cheaper rates, once you added additional fees and charges they were more expensive. And, despite having a 10 per cent deposit, some lenders had more restrictions on who they would lend to and where.

"There were a lot of smaller lenders but we weren't keen on them in case they were sold off to another company and also because we didn't know their track record," Brandon says.

Saving on lower rates worth it

David Yung was looking to buy his first property and comparing home loans when the Reserve Bank lifted interest rates earlier this year. The bank a friend had recommended swiftly matched the rise in official rates and added a bit on top.

"That put me off straight away," says Yung (pictured) and tipped the scales towards credit union mecu.

"I previously hadn't taken an interest in financial products. I asked friends who had bought property or worked in finance, I went online to The Age and Canstar Cannex, spoke to my parents and looked at different lenders and their websites," he says. "I ruled out the big four banks — they offered more convenience but they added a few per cent interest a year."

Another of Yung's friends recommended mecu. "I didn't go with the rock bottom rate. I was cautious about going with the bottom of the pile in terms of price. Mecu have a decent branch presence and they were good over the phone.

"At the end of the day lenders are selling money. I didn't see the logic of paying more [than I needed to]."

Armed with a 35 per cent deposit, the first home owners' grant and state government subsidies, Yung weighed into the market in May, buying a two-bedroom apartment in the Melbourne suburb of Doncaster.