In the vast majority of property lending, a high street bank uses funds from customers’ deposit accounts to finance residential mortgages. Banks choose to whom they lend and on what terms, and will separately set interest rates on deposit accounts. Simply speaking, their payment for arranging and managing this is the difference (or the “interest spread”) between the rate that borrowers pay and the rate that investors receive. The borrower will also commonly be charged an arrangement fee for the loan.

The same basic business model is at play on peer-to-peer (P2P) platforms - the platform charges the borrower an arrangement fee and earns a spread on interest payments. High quality P2P platforms will display all of this information clearly to potential investors. Indeed, it is a regulatory requirement to do so.

One of the biggest benefits of investing in property debt via P2P platforms is the possibility for investors to select the specific loans they want to invest in. Investors can make separate investments into multiple loans that match their risk appetite and profile. P2P platforms typically offer investors the choice to invest in loans that earn higher interest rates than banks’ saving accounts, as the loans offered by a platform are often more complicated and specialised, with banks mostly focusing on the simplest loans (homeowner loans).

As well as the difference between the traditional and P2P lending models, there can also be a difference in the type of products they offer. P2P platforms will often offer products for commercial property lending rather than the usual type of residential mortgages to homeowners.

Borrowers looking for commercial property finance will regularly talk to commercial lenders (sometimes through an intermediary or broker) rather than a high street bank. These lenders have more specialised expertise and offer a different range of products tailored to these borrowers, including bridging loans (first or second charges), development finance, and auction finance. The lenders will consider various factors when underwriting and structuring a deal which can be more complicated than normal mortgages and, depending on these factors, the interest rates can be higher than those you may see advertised for normal mortgages.

Specialist commercial lenders can take a more relationship-based approach than a high street bank. They may be more likely to offer personalised service and build long-term relationships with investors, providing ongoing support and advice.

P2P platform investors should take time to understand the different types of lending when considering which loans they want to invest in. Many investors may have not previously heard of the difference between a first and second charge loan for example.

A second charge loan is secured against a property that already has a loan outstanding (a first charge). This means it is riskier than a first charge loan as the first charge lender gets repaid before the second charge lender is repaid. Due to the higher risk, second charge loans often carry higher interest rates than first charge loans and the loan-to-value (LTV) is even more important.

When considering investing in a development finance loan, an investor should understand the difference between the value of the site at the beginning of the loan and the predicted value of the completed project.

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