Alternative mortgage lenders: What are they, and what do they offer?

Given what we’ve seen in the property market in recent years, it’s no wonder we’re seeing more borrowers seek out alternative mortgage lenders. Since 2022 alone, we’ve seen a disastrous mini budget panic the market[1].

Mortgage deals were pulled[2], criteria tightened[3], and property demand waned[4], pushing prices downward[5]. At the same time, both inflation[6] and rising interest rates[7] proved to be stubborn issues to overcome.

We have seen evidence of a mortgage market recovery in more recent months[8], but it does appear that borrowers are keen to explore their alternative mortgage options. In the final quarter of 2023, for example, completions in the bridging loan market rose by 18.4%[9] on Q3, reaching £1.69 billion. Loan books also rose by 4.2%, hitting a record high of £7.6 billion.

Evidently, some borrowers are more willing to look away from the usual options to get their property plans off the ground. But what exactly are alternative mortgage lenders, and what is it that they offer? This blog will address these questions and more.

What are alternative mortgage lenders and how do they differ from traditional lenders?

Alternative mortgage lenders can be thought of as those that offer mortgage products outside of the “normal” options. The most standard mortgage type people likely think of is the residential mortgage.

This is a regulated type of loan, usually from a bank or building society, that allows people to buy a property they’ll be living in. It’s a secured loan, which is repaid over a set term, typically lasting for around 25-35 years.

Alternative mortgage lenders will offer different, more unique forms of property finance. For instance, at MFS, we provide specialist BTL mortgages for landlords looking to expand in the rental market. Our BTL mortgages cannot be used by those looking to live in the properties they’re buying, they must be used for investment purposes.

Self-build mortgages are another potential example of an alternative mortgage product. These are for people who want to build their homes from scratch, with capital released in stages to coincide with building works. There are also specialist Islamic mortgages available in the market, including Ijara, Diminishing Musharaka, and Murabaha products[10].

Outside of mortgages, or mortgage-like products, there are also other specialised options available to borrowers. Bridging loans are unregulated forms of finance designed to deliver flexible capital to property investors quickly. This funding can take shape in many forms, from auction loans, through to development exit finance.

Why might borrowers turn to alternative mortgage lenders, and what are the advantages of doing so?

Generally, alternative or specialist mortgage lenders can provide optionality to borrowers who struggle to find what they need in the mainstream market. High street banks may only provide mortgages that are catered toward the most straightforward of borrowers.

Where products get more specialised, they tend to become riskier, or more challenging.  Lenders, especially in the current market, may not be able (or willing) to accommodate that risk. This may leave borrowers that have missed payments, CCJs, and other issues in their backgrounds with limited options.

Alternative lenders, however, tend to be more willing to work with these kinds of borrowers. At MFS, we embrace flexibility and do not follow tick-box lending criteria. This means we’re able to accommodate borrowers who may have unique circumstances, or who are facing certain challenges.

Alternative mortgage lenders design their products from the ground up to adapt to the real financial world. Borrowers seeking out specialist options can still expect to receive speedy, tailored solutions – even in a difficult economy.

Although, given the risks involved, along with the niche nature of the market, these alternative mortgage options may prove to be relatively expensive. But, alternative products, especially the bridging kind, may be comparatively short term. Specialist loans are meant to be exited as soon as possible for a long-term solution, meaning heightened costs may only be a temporary concern.

How to choose the right lender

There is no shortage of alternative mortgage lenders in the market, each of which likely having a broad range of products and services. For borrowers, understanding which lender will be right for them can be daunting.

Mortgage brokers can help with this. Brokers have the knowledge and expertise required to match borrowers with the right lender for their circumstances. This can save investors a lot of stress, but brokers will most likely charge for their services. Borrowers will need to decide if this is a cost worth budgeting for.

Generally, for borrowers who plan to do their own research on lenders, there are a few key areas that could be focused on. Doing as much research as possible is paramount but at a minimum, borrowers should understand a product’s terms inside and out before proceeding.

They should also ensure they completely understand the lender’s fee structure. Many borrowers end up getting hit by hidden costs during the process. External checks should also be conducted.

Borrowers may want to check websites like Trustpilot to see if a lender provides a good service for its clients. Also, trade magazines can be checked to see if a particular company has a good reputation in the scene.

Here at MFS, we pride ourselves on our openness, and commitment to service. With nearly 20 years of specialist lending behind us, we’ve built expertise in providing tailored solutions for property investors, and BTL landlords.

All our deals are underwritten from day one, and we have a broad range of products that can cater towards several unique scenarios. From overseas trusts, to complicated corporate setups.

What’s more, with multiple institutional funding lines behind us; industry recognition via several awards; and partnerships with the likes of NACFB, FIBA, and ASTL, we’re confident that we’ll be able to serve the market for many years to come.

Tips for working with alternative mortgage lenders

Given the complexity that comes with alternative mortgage options, borrowers should be prepared to be as open and honest as possible. As mentioned, we’re able to accommodate many difficult scenarios.

But, if investors are tempted to try and conceal important information from their lender, it will likely only delay the process.

Also, having one’s affairs in order as much as possible will likely pay dividends. We will require various pieces of documentation and paperwork throughout the underwriting process. Where we get what we need, when we ask for it, we can have funding delivered in as little as three days.

Alternative mortgage lenders have a crucial role to play in the property market. One that is likely to only become increasingly important over the coming years.

We know firsthand how useful alternative mortgage options are for the market, having never stopped lending since our founding in 2006. We have no plans to stop either, and we vow to set a precedent for excellence as more borrowers discover the utility of bespoke finance.