The different types of financial lenders
The UK market consists of many different types of lenders – from high street banks to alternative lenders such as ourselves. Determining which lender best suits you can be challenging, and the decision can become even more confusing when property or other assets are introduced.
Below, we provide you with an explanation of the different types of lenders in the market so that you have the information to determine which type of lender is best for you.
First Tier Lender
First Tier lenders are also known as institutional lenders, the most common of which are high-street banks. Funds from First Tier lenders are sourced from customer deposits, interest charges and reserves. They are heavily regulated and provide a wide range of services to consumers and businesses, including credit cards, personal loans, mortgages, savings accounts and commercial borrowing. First Tier Lenders are renowned for a 'lower leverage, lower price' approach, with a uniform attitude to case approval.
Applications for borrowing from First Tier lenders can be rigorous, time-consuming and without guarantee of success. Borrowers also have to contribute higher levels of their own liquidity into property projects, with a contribution of 30-50% of anticipated project costs ordinarily expected. Nevertheless, first Tier Lenders offer good flexibility with loan timescales, allowing the borrower to spread the cost over many years.
Second Tier Lender
Second Tier Lenders, such as Merchant Banks, operate outside of the institutional lender space and are smaller in size. Second Tier Lenders offer a similar product to institutional lenders but apply a more pragmatic approach to their underwriting processes, dealing with applications on a case-by-case basis.
Credit unions and building societies also come under this category and will often source their own funding from the wholesale market rather than customer deposits. For development finance facilities, Second Tier Lenders typically offer a loan to value (LTV) of up to 55%, and they require a considerable deposit along with solid assets to gain approval for an application.
Third Tier Lender
Specialist Lenders generally come under the category of Third Tier Lenders, with the market being occupied by a combination of regulated and unregulated lenders. It's this area of the market that Onyx operate within. Specialist lenders in this space are usually able to offer loan structures that are deemed 'higher risk' by the market, as they typically don't comply with the stricter regulatory policies that first and second-tier lenders have. This results in Third Tier Lenders being able to offer more of a flexible loan structure, but this is typically charged a higher rate of interest as a result.
Third Tier lenders are independent financial organisations who, like Onyx, may not be affected by market rate changes and, therefore, can set their own interest rates, allowances and terms. This is a significantly attractive proposition to borrowers at a time when record-breaking hikes in the Bank of England Base rate are being observed - current interest rates in England.
In order to have an agreement with most third tier lenders, borrowers must have a legal (registered) commercial operation that the money can be leant to. Borrowers however can use both their commercial and personal assets as leverage. Different lenders are able to provide a range of LTV's with most being around the 65% mark. Onyx sets ours slightly higher at 75% LTV and 100% costs and we lend upwards of £250k+.
Fourth Tier Lender
Fourth Tier lenders are private lenders that may not advertise their services and have much smaller commercial operations. They may offer a similar LTV to First and Second Tier lenders, requiring the borrower to contribute up to half the anticipated project cost. Terms are almost entirely up to the lender, with no exit fees or geographical restrictions. Fourth Tier Lenders are typically 'short-term' lenders by nature, and these lenders are a popular choice for borrowers requiring bridging loans and term lengths from a few days to 3 years.
Fifth Tier Lender
Private Investors complete the list of types of lenders and are slightly more niche. These are typically High-Net-Worth (HNW) individuals who tend to have development experience themselves and want to further their investments through joint ventures, equity participation or 100% funding for some projects. These projects tend to require loans of at least £100k or more and will consider more speculative scenarios from borrowers with and without property development experience
| Type of lender | LTV | Costs covered | Loan amount from | Exit fees |
|---|---|---|---|---|
| First Tier | 50% | 60% | £500,000 | Yes |
| Second Tier | 55% | 60% | £500,000 | Yes |
| Third Tier | 65% (Onyx 75%) | 80% (Onyx 100%) | £250,000 | Yes (Onyx no) |
| Fourth Tier | 65% | 100% | £100,000 | No |
| Fifth Tier | 100% | 100% | £100,000 | No |
*Figures are representative and may be subject to agreements and the lender. For example, Onyx provides a diverse offering, as noted above.
Onyx Property Finance primarily comes under the Third Tier lender category but may act in a manner that crosses tiers – for example, we don't charge exit fees. Regardless of type, however, we remain experts in the field of providing financial solutions for property developers. So speak to us today and get your project up and running before you know it: info@onyxmoney.co.uk.
