Getting into Property. Understanding Banks vs Brokers.

Getting into Property. Understanding Banks vs Brokers.

The first aspect to mention is that there are two elements. There are bank managers and there are mortgage brokers. Both of these can lead to finance opportunities however they both have different strengths and different weaknesses, and this is important to understand to make the right decision for you.

Banks

It’s important to create a relationship with your bank manager even if you never actually end up working with them as you will be corresponding with them consistently. The biggest drawback to banks is that they are a single entity. Therefore, they only have one wider strategy. Consequently, they may decide not to lend to you, and this might be nothing to do with you, your deal, or your due diligence. It could simply be because the particular property that you have put forward doesn’t fit within their distinct strategy.

From my experience many people fall into the trap of thinking this is the only way to get lending. They go to their high street bank, get rejected and they then stop there. They believe that it’s because of their actions that the banks won’t lend them the money. But in fact, this is wrong. It’s important to understand that some banks like property and some banks don’t. For example, Lloyd's, HSBC, and Santander are all fairly active in the property lending space.

The other point to know about this aspect is that it is down to you to sell yourself to your bank manager/relationship manager. So, something to consider is that it is quite a limited lending platform.

Although on the other side of things, some banks may be a great place to get started. For example if you are choosing to run with the HMO strategy a lot of the great products that you really want are with the challenger banks but they are more difficult to access until you have some experience as a HMO landlord. However, banks such as Lloyd's, will actually lend to you on a HMO, even if its your first property which enables you to gain some experience so the next time for your next deal you can go to your challenger banks. So, you could potentially view high street banks as a steppingstone to the challenger banks.

Ultimately banks have limited lending facilities as they have certain strategies to follow which is why you have to sell yourself to them and fit their criterion. Challenger banks are generally also more risk adverse and you will normally find that your high street banks will only work on Capital Repayment Loans whereas challenger banks may work with interest only loans but you may have to go through a few more hurdles to get there.

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Brokers

Then on the other side you have your brokers. You want to be looking for an independent broker as they will have access to a much wider marketplace. A broker is that one person who knows a large magnitude of people so they can get you a deal. The key aspect which is great about this space is that each broker has access to different products and its important to clarify where your broker is in the lending space. For example your residential broker who lent your mortgage to buy you first house isn’t necessarily the right broker to be using if you are looking to work in the commercial space because there are specialist brokers who focus on buy to let finance, development finance, refurbishment loan finance and these are the people that you really want to be working with.

When it comes to a broker, they represent you and they are working for you therefore its not really down to you to impress them as much as it is with banks although it is extremely good practice to present yourself professionally as it may encourage them to work that little bit harder to get the right results for you. Therefore, compared to banks where you have to sell yourself, a broker’s job is to sell yourself to others.

You may be able to take the same deal that you took to the bank to your broker and get a completely different result. And then it may be that different brokers can get you different results in that space.

This is why its really important for you to understand the market and understand what is available to you. From experience, my top tip to when it comes to working with brokers is don’t work with two brokers at once, give one broker the opportunity, see how they get on and then give the second broker the opportunity so you can compare your results.

The key takeaway here is that when it comes to property lending its not just about your bank manager its also about working with different brokers.

At Dapatchi Group we do all of our banking with the same bank, and we have built up a great relationship with that bank because we know that they are a property bank. Although the reality is that we work with our brokers in the finance space, not our bank because they simply cannot compete with the deals our brokers can get.

  • Something to consider is that typical brokers will charge a fee which is usually between 1% and 2% of the total cost of the loan compared to a bank which wouldn’t have this fee associated with it, but for this small percentage I believe its well worth having them there to guide you through the finance space.

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