On 17th September 2015, we published the results of stress tests that were independently run by MIAC Acadametrics Ltd (MIAC), a leading mortgage industry data, analytics and risk consultancy. These stress tests were conducted by MIAC to Bank of England criteria, modelled to highlight how our mortgage book would perform in both a base and stressed economic environment.
What are Stress Tests?
Using a modelled scenario, the Bank of England analyses a bank or lender’s ability to cope with the unexpected, such as a sudden recession or a spike in interest rates. Then it assesses whether the bank passes or fails the stress test. If it passes, then all is well. If it fails, the Bank of England will reveal that the bank needs to increase its capital as a “buffer” to protect itself from any unforeseen surprises. To ensure total validity and credibility, we employed an expert independent analyst – MIAC – to carry out the stress testing.
Joe Macklin, Director of MIAC said, “MIAC believes the approach to generating key assumptions in this exercise has been prudent and has therefore resulted in conservative estimates of future portfolio performance.” Landbay’s results Putting our loan book through the BoE stress tests, is another first for Landbay in the P2P sector. The very positive results provide clear evidence of our very low risk, arguably the lowest risk of all UK P2P lenders. The results of the BoE stress testing are, in summary:
BoE base case scenario – assuming the economic conditions expected by the BoE
= average expected loss rate of 0.03%, before interest payments
BoE stressed scenario – assuming GDP down by 3.5%, unemployment rising to 9%and UK house prices falling by 20%
= average expected loss rate of 0.48% before interest payments
NB – Landbay’s contingency fund is currently maintained at 0.60% of loan book, and so would absorb all of these losses.
Notably, even if the stresses imposed in the test were increased to include a 25%drop in house prices, the Landbay loss rate before interest payments, would only increase to 0.52%. These results, reflecting no loss to our lenders even in the stressed scenario provide detailed evidence of how secure lending at Landbay is. Joe Macklin of MIAC further explained, “Given the adverse nature of the stresses and sensitivities we have applied in line with the BoE scenarios, Landbay’s existing portfolio, and its anticipated future portfolio, performed with impressive resilience.” This means that even should economic conditions bring about big falls in property values, given the demand for rented accommodation will be unaffected in the short or even medium term, Landbay’s lenders remain shielded.
John Goodall, our CEO and co-founder explained, “The great strength of buy-to-let lending is that your return is secured primarily by the rent received by buy-to-let landlords, rather than the underlying property value. So you are really investing in the health of the private rental market rather than the UK property market. Currently for Landbay’s mortgages, average rents are 68% higher than the average interest payments required to service the mortgage, which is a key element of Landbay’s lending policy of focusing on the serviceability of the mortgages (and thus risk of default). The results of this stress test vindicates this approach, over and above those that purely focus on the asset value.”
Our commitment to transparency
Given that P2P lending is a relatively new concept and one that involves an element of risk in comparison to investing funds in bank savings accounts, we take pride in our fulsome commitment to transparency. Following on from being the first P2P platform to publish our whole loan book, this new first in lending transparency and the results themselves further support our mission for lender protection, having designed our platform as a low risk P2P lending offer.
Discussing the results of the test, John Goodall, our CEO said, “These impressive results provide a firm vindication of our work to make lending at Landbay a low risk proposition –arguably the lowest risk of any P2P lending in the UK. For investors seeking better returns than those from bank savings accounts (3.5% and 4.4% currently) but without the radically higher risk of say funds investing in stock markets, Landbay is an ideal solution worthy of serious consideration.”
When asked whether other P2P lending platforms will follow suit and conduct external stress tests to BoE standards, John further explained “In the same way as some other platforms were encouraged to be more open about their loan book after we published our own details in full, we do expect others to think about putting themselves through the same stress testing that we have. It would be good for the sector to do this and publish the results as we have, as it would prove to the public that although P2P lending is a relatively new concept, we have nothing to hide. It would also help the public to realise that there are significant differences between the various P2P platforms available now in terms of the risk they pose to anyone lending. Risk and reward go hand in hand and more information about relative risk would equip people with the clarity and knowledge that they need to make more better choices and to get the outcomes that suit their needs.”
To hear further information about the results of our stress test, listen to the London Fintech Podcast featuring our CEO, John Goodall, here:bit.ly/1KrEQmv
The information contained in this article 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.