Julian Cork, Landbay COO, explores the 5 points you should consider before stepping into the peer-to-peer lending world as a lender.
Two: The Asset
The second thing to consider is the underlying asset you are lending on – is it secured or unsecured?
There are a wide range of loan types available to potential peer-to-peer investors. These broadly fall into three categories: Personal, Business and Property.
Ensure that you understand if the loans are secured and, if so, how formally. Someone borrowing against a car or new kitchen may have that asset against the loan but recovery is going to be through standard personal loan channels as it may not have been formally/contractually secured.
The most common secured lending is property. The credit procedures around mortgages are generally mature, tested and well understood.
It is important understand what type of property loans you are dealing with. Not all are equal and each type of property lending comes with different risks.
This graph shows a comparison of value between commercial and residential property baselined at 100 in 2002. As you can see, both residential and commercial property values dropped during the credit crisis, but by significantly different values.
When considering commercial property versus residential it is important to remember that the way in which people work and shop is changing, but that people will always need a roof over their head, regardless of the economic cycle.
During 2007 commercial property values dropped right back to 2002 levels whereas residential property maintained its 55% increase.
Buy-to-Let Mortgage and Rent Arrears - % of loans in 3 or more month arrears
At Landbay we decided to focus on Buy-to-Let Mortgages as it is a large market that allows us to scale significantly. Annual lending was £27bn in 2014 which is well off the 2007 peak of £44bn. It is anticipated to hit circa £31bn this year.
Residential Buy-to-Let Mortgage lending is, historically, a very low-risk form of lending. Even during the stressed periods between 2009 & 2012, tenant rental arrears increased by about 75% but BTL mortgage arrears roughly halved. As per the previous image, average residential property prices fell by circa 18%. Note that most of these losses were in large new developments in city centres outside of London.
The picture here with rental arrears increasing and BTL mortgage arrears decreasing demonstrates the asset’s performance in tough times and highlights the importance of understanding those ‘Five Cs’ mentioned in the previous post; NB Capacity to repay and Capital.
UK Average Quarterly Rents
One of the main reasons for strong Buy-to-Let performance is the resilience of the cash flow that services the debt. Average rents have risen steadily throughout this period and only fell by a few percent in 2008. In fact it is difficult to spot the credit crisis in this graph.
As a matter of interest, average rents have broadly risen in line with inflation (1.5-2%) per annum which does beg question as to why some politicians feel the need for rental controls….
The information contained in this blog post should not be used by consumers to make financial decisions. Consumers have a range of different financial needs and requirements and as such should always seek independent professional financial advice before making an investment decision.