What is the Difference Between a Traditional Finance Lender and an Alternative Lender in Property?

When it comes to financing real estate, there are many options available. One of the most important decisions you can make when investing or developing property is securing the right finance at the best rate to generate a healthy ROI. Deciding whether to use a traditional finance lender or an alternative lender/progressive funding partner is a common conundrum.

While both have their place in the property world, they have significant differences in their approach and requirements. In this blog post, we'll explore the key differences between traditional finance lenders and alternative lenders/progressive funding partners and help you make an informed decision on which option may be best suited for your needs.

What is a traditional finance lender?

A traditional finance lender in property finance is a financial institution, such as a bank, credit union, or mortgage company, that provides funding for the purchase, renovation, or development of real estate. 

Traditional finance lenders offer conventional loan products, such as fixed-rate mortgages, adjustable-rate mortgages, and home equity loans. They have strict eligibility criteria, and borrowers must typically have a good credit score, a stable employment history, and a low debt-to-income ratio in order to qualify for a loan. The loan approval process can take several weeks or even months, and the loan terms and conditions offered by traditional finance lenders are typically more favourable to the borrower, such as lower interest rates and longer repayment periods.

Traditional finance lenders are often more risk-averse and focus primarily on financing residential properties. They typically have a more formal lending process and may require more documentation and collateral than alternative lenders.

‍What is an alternative lender?

An alternative lender, also known as a progressive funding partner, is a financial institution or investment company that provides funding to property developers, investors, or businesses. The term "progressive" implies that the funding partner is forward-thinking and willing to provide funding for innovative and unconventional projects or developments.

An alternative lender may offer a variety of financial products, such as short-term loans, bridge loans, mezzanine financing, and other alternative financing solutions. They may also be more flexible in their lending criteria and offer financing to borrowers who are unable to secure funding from traditional finance sources.

These types of lenders often have a keen understanding of the real estate market and are willing to take on higher-risk investments in exchange for potentially higher returns. They may also be more willing to support projects that are outside of the mainstream and may offer a competitive advantage in terms of speed, flexibility, and creative financing solutions.

Traditional finance lenders and alternative lenders in property finance are different in several ways:

1. Types of loans: Traditional finance lenders, such as banks and mortgage companies, typically offer conventional loan products, such as fixed-rate mortgages, adjustable-rate mortgages, and home equity loans. Alternative lenders, on the other hand, offer a wider range of loan products, including short-term loans, bridge loans, and mezzanine financing.

2. Eligibility criteria: Traditional finance lenders have strict eligibility criteria, including a minimum credit score, stable employment history, and a low debt-to-income ratio. Alternative lenders, however, are more flexible and may consider borrowers with less-than-perfect credit and financial histories.

3. Speed of loan approval: Traditional finance lenders often have a longer loan approval process, which can take several weeks or even months. Alternative lenders, on the other hand, offer a faster loan approval process, often within a matter of days.
4. Loan terms and conditions: Traditional finance lenders typically offer loan terms and conditions that are more favourable to the borrower, such as lower interest rates and longer repayment periods. Alternative lenders, however, may charge higher interest rates and have shorter repayment periods.

5. Type of properties: Traditional finance lenders tend to focus on financing residential properties, while alternative lenders may also finance commercial properties, such as office buildings, hotels, and retail centres.

In summary, traditional finance lenders and alternative lenders in property finance have different strengths and weaknesses, and the best choice for a borrower will depend on their specific needs and financial situation. 

If you are not sure what’s right for you, speak to our Funding Specialists, who will be happy to discuss your options and secure the best finance for your deal.