The economic crash of 2008 resulted in dramatic changes in the UK financial market. The market, which was largely reliant on the housing sector, plummeted, leaving the world in global recession. House prices and transaction volumes fell suddenly, and bank lending slowed to a trickle.
The market has managed to claw its way back over the past ten years, and has recovered (and in some cases exceeded) pre-crash levels. Banks have addressed the issues that led to the collapse and have increased the levels of security surrounding funding.
However, the recession left its mark. Those who were unable to get a traditional loan from a traditional banking service, were now looking for alternatives. This change sparked the rise in the alternative lender, and a rise in alternative lending as a means to secure a mortgage.
Alternative lending is a very broad term used to describe the options available to those seeking to borrow outside of the traditional loans available with the bank.
Historically, financial advisers have been averse to recommending alternative lending for clients. But as banks tightened their grip and loans became more difficult to come by, more clients than ever looked to their financial adviser to source alternative finance for them.
According to FT Adviser, 20% of investors seeking a mortgage to finance a property in 2018 looked to alternative lenders. These lenders are constantly expanding. Firms such as Investec offer mortgages to high-earning self-employed, while less well-known names such as Kensington Mortgages and Vida Homeloans will consider those with unusual circumstances or income.
Alternative lending is very helpful for those with non-traditional financial situations, such as self-employment or previous struggles with bankruptcy. However, there are some distinct differences between traditional and alternative lenders that you should be aware of.
Interest rates
When borrowing from an alternative lender, expect a higher interest rate. Alternative lenders do not have the stability that a traditional bank offers, and will need to raise the capital to lend themselves, often via a traditional bank or investor.
As such, they are drawing from their own funds, making the loan riskier for themselves. To cover this risk, interest rates will be higher than those in a traditional bank.
However, alternative lenders offset this cost as many do not charge the up-front administrative fees that larger banks charge. The trade-off is simple: lower up-front fees, higher interest rates.
Timing
With an alternative lender, expect to engage in a process that’s handled almost exclusively online. The online process helps to speed everything up and, in some instances, once your application has been approved your funds may be released the same day.
Airtight clauses
While alternative lenders may lend to you when mainstream lenders won’t, they are less likely to be flexible when it comes to the terms of the contract, and may be inflexible should you default on a payment.
Because alternative lenders are putting up the money themselves, they have far fewer options than a traditional bank should something go awry. As such, they may be quick to jump to repossession. Be sure to read your contract thoroughly, as some less reputable lenders could slip in an undesirable addendum.
Conduct careful research
A technique that gained popularity several years ago was the ‘sale only’ clause, which, when signed, means that the only way to break a mortgage is through selling a home.
While clauses like this are certainly in the minority, and most alternative lenders are reputable, it is worth conducting careful research and consulting a good mortgage broker to make sure everything is in order before you finance your home through an alternative lender.
Is financing through an alternative lender the right choice for you? As I tell all my clients, this varies on a case by case basis.
There can be no doubt that alternative lenders have changed the face of finance as we know it. They have opened doors never before available to private investors, but with these new opportunities can come with new risks. I recommend speaking to a mortgage broker before approaching an alternative lender.
