I get this question quite a bit, which actually surprises me. The days of having a good relationship with your local bank manager are mostly gone, so it's uncommon to have someone you know in the bank you can approach about a loan.
Then again, most people are familiar with having their home loan with a bank, so using a broker, let alone finding one you can trust to get the best deal for you, is a step outside their comfort zone.
So let's take a deep dive into the question of whether you should approach a bank or a broker when you need finance.
First up, reality check. The most recent statistic shows over three quarters of home loans are now obtained through mortgage brokers, and that rate is climbing rapidly.
This reflects what I said earlier - the days of knowing your local bank manager, and the bank manager knowing everything about you and being able to assist, are over. Even if you have that relationship, loans are approved by automated box tickers, and if you don't tick the right boxes, there's unlikely to be much your bank manager can do to help.
All of which means that the most likely time you'd consider approaching a bank directly is if you have a Relationship Manager at the bank. Generally, you only have one of those if you have a business (which can include property development) and have a good chunk of money.
Essentially, though, the difference between a bank and a broker is that a bank can only offer you one solution - theirs. Whereas a broker has access to multiple solutions through different lenders.
There are a lot of factors to consider when choosing a loan. Interest rates are the most obvious one, but fees, eligibility requirements and timeframes are also important. Taking into account all these factors is important.
Banks may offer lower interest rates, especially to customers with strong credit histories. If you already have a banking relationship, you may receive better terms or preferential treatment.
However, banks often have stringent credit requirements, making it harder for some individuals to qualify. Also, loan structures and approval processes can be rigid, leading to longer processing times.
Brokers have access to a wide range of loan options, increasing your chances of finding the best deal overall. They also work with lenders who cater to different types of borrowers, including those with lower credit scores or unique financial circumstances.
Depending on the broker, you may be charged a fee for their service, which can add to the overall cost of borrowing. And while most brokers aim to find the best deal, some may be incentivized to work with specific lenders because they'll receive a higher commission.
Business Banking
If you're in the position to have a Relationship Manager, then sourcing a loan through your bank may have some benefits that your average borrower doesn't have access to.
The good thing about business banking is that they will look at your whole portfolio and potentially allow you to borrow more based on existing equity in other properties you own.
The bad thing about business banking is that they will look at your whole portfolio and make sure they have the ability to sell off any or all of your properties if you go into default. Commonly called cross-securitisation, it's very much a double-edged sword.
The biggest secret to business banking for a new loan is to start early. Given they're going to review anything and everything in your portfolio, as well as your capacity to service the loans, it can be a very slow process. It's possible to get prepared in advance and have funds available to use, though, so you can act quickly when you find a deal.
Protect Your Credit Rating
One of the most important things to keep in mind throughout the process of looking for finance is to protect your credit rating.
Many lenders will run a credit check on you as part of their preliminary assessment of your position. If you're dealing with a bank, that's not such a big issue as it will only happen once.
But if you're using a broker, who is potentially reaching out to multiple lenders at the same time, it can be a big problem. What if they all do a credit check on you?
It's easy to think it doesn't matter, but that's a huge mistake. If another lender comes along a few days later and sees all those hits from lenders checking your credit, but those checks haven't resulted in a loan, it's a big red flag to them.
Yes, it's annoying, because realistically the reasons you didn't get a loan from one of the first lenders most likely have nothing to do with you being a big risk, and more to do with their loan product not matching your needs.
But the new lender looks at all those enquiries and starts to wonder if they've missed something in their own due diligence. As a result they'll bin your enquiry as a precaution.
Savvy brokers know this, and either run a credit report themselves to give to the lenders, which doesn't count as a lending enquiry, or they'll make sure the lenders don't run an enquiry unless it's part of a loan offer.
I can't stress enough how important it is to avoid multiple enquiries on your credit report. So if you're using a broker, make sure you ask how they handle this issue to make sure you're protected.
In the end, your choice between a bank and a mortgage broker should align with your personal preferences, financial situation, and the complexity of your needs. Either way, make sure you protect your credit rating throughout the process.
Then again, most people are familiar with having their home loan with a bank, so using a broker, let alone finding one you can trust to get the best deal for you, is a step outside their comfort zone.
So let's take a deep dive into the question of whether you should approach a bank or a broker when you need finance.
First up, reality check. The most recent statistic shows over three quarters of home loans are now obtained through mortgage brokers, and that rate is climbing rapidly.
This reflects what I said earlier - the days of knowing your local bank manager, and the bank manager knowing everything about you and being able to assist, are over. Even if you have that relationship, loans are approved by automated box tickers, and if you don't tick the right boxes, there's unlikely to be much your bank manager can do to help.
All of which means that the most likely time you'd consider approaching a bank directly is if you have a Relationship Manager at the bank. Generally, you only have one of those if you have a business (which can include property development) and have a good chunk of money.
Essentially, though, the difference between a bank and a broker is that a bank can only offer you one solution - theirs. Whereas a broker has access to multiple solutions through different lenders.
There are a lot of factors to consider when choosing a loan. Interest rates are the most obvious one, but fees, eligibility requirements and timeframes are also important. Taking into account all these factors is important.
Banks may offer lower interest rates, especially to customers with strong credit histories. If you already have a banking relationship, you may receive better terms or preferential treatment.
However, banks often have stringent credit requirements, making it harder for some individuals to qualify. Also, loan structures and approval processes can be rigid, leading to longer processing times.
Brokers have access to a wide range of loan options, increasing your chances of finding the best deal overall. They also work with lenders who cater to different types of borrowers, including those with lower credit scores or unique financial circumstances.
Depending on the broker, you may be charged a fee for their service, which can add to the overall cost of borrowing. And while most brokers aim to find the best deal, some may be incentivized to work with specific lenders because they'll receive a higher commission.
Business Banking
If you're in the position to have a Relationship Manager, then sourcing a loan through your bank may have some benefits that your average borrower doesn't have access to.
The good thing about business banking is that they will look at your whole portfolio and potentially allow you to borrow more based on existing equity in other properties you own.
The bad thing about business banking is that they will look at your whole portfolio and make sure they have the ability to sell off any or all of your properties if you go into default. Commonly called cross-securitisation, it's very much a double-edged sword.
The biggest secret to business banking for a new loan is to start early. Given they're going to review anything and everything in your portfolio, as well as your capacity to service the loans, it can be a very slow process. It's possible to get prepared in advance and have funds available to use, though, so you can act quickly when you find a deal.
Protect Your Credit Rating
One of the most important things to keep in mind throughout the process of looking for finance is to protect your credit rating.
Many lenders will run a credit check on you as part of their preliminary assessment of your position. If you're dealing with a bank, that's not such a big issue as it will only happen once.
But if you're using a broker, who is potentially reaching out to multiple lenders at the same time, it can be a big problem. What if they all do a credit check on you?
It's easy to think it doesn't matter, but that's a huge mistake. If another lender comes along a few days later and sees all those hits from lenders checking your credit, but those checks haven't resulted in a loan, it's a big red flag to them.
Yes, it's annoying, because realistically the reasons you didn't get a loan from one of the first lenders most likely have nothing to do with you being a big risk, and more to do with their loan product not matching your needs.
But the new lender looks at all those enquiries and starts to wonder if they've missed something in their own due diligence. As a result they'll bin your enquiry as a precaution.
Savvy brokers know this, and either run a credit report themselves to give to the lenders, which doesn't count as a lending enquiry, or they'll make sure the lenders don't run an enquiry unless it's part of a loan offer.
I can't stress enough how important it is to avoid multiple enquiries on your credit report. So if you're using a broker, make sure you ask how they handle this issue to make sure you're protected.
In the end, your choice between a bank and a mortgage broker should align with your personal preferences, financial situation, and the complexity of your needs. Either way, make sure you protect your credit rating throughout the process.
