Whether you’re a property developer looking to obtain a loan through the peer-to-peer space or a lender looking to make your first investment, it is helpful to know the differences between the three most common types of property finance solutions available.
A good understanding will aid in determining your risk profile as loans may not always be judged solely based on their LTV and yield.
Senior Loan
A senior loan is a type of debt financing whereby the financial institution issuing the loan will have the benefit of first charge over the asset provided by the borrower as security. It is known as a ‘senior’ loan as it takes a precedence over all other unsecured or ‘junior’ loan claims against the borrower.
In the event that the borrower defaults, the property used to secure the loan will be used to repay the loan prior to repaying any other creditors. Senior loans are typically of a longer term and can range anywhere from one to five years.
Bridging Loan
A bridging loan is a short term funding solution that allows the borrower to ‘bridge’ the gap between a debt due. A borrower could be looking for a bridging loan if they need quicker access to funds. This is due to the fact that high street banks are increasingly reluctant to lend; leading to longer processing times.
Length of bridging loans are usually between 6 and 18 months. The lending party will also take first charge over a property asset as security for the loan.
Mezzanine Loan
Mezzanine loans are loans whose security is subordinated to senior loans, in other words mezzanine loan security ranks behind senior debt security. This means that in the event of default the senior lenders are paid out first and mezzanine lenders are paid after them.
Mezzanine lending therefore has a higher risk profile than senior lending. It may also be referred to as a second charge loan.
