Getting started with peer to peer lending can be daunting for the new investor, especially when there are numerous lenders and a myriad of ways for you to invest. Some investors, eager to get started, jump in to lending without considering all the options available to them and can end up disappointed with their returns or even putting their money at risk. The shrewd investor should undertake some background research on each platform in order to get off to a great start. Here are a few points to consider to help you do just that.
The Asset Class
Researching the underlying asset class of a P2P investment and specifically how that asset has performed through financial cycles is critical to fully understand the potential performance of your investment. This will help you weigh up the risk you may be taking vs the financial reward.
Landbay only lends against prime buy-to-let (BTL) mortgages, statistically the safest asset class within the UK peer-to-peer market. Driven by increasing rental demand in the UK, the private rental sector is a resilient, secured lending market. In addition, it is also a sector that continues to grow, with UK buy-to-let mortgage lending currently accounting for over £30 billion pa. This ensures that we can hand pick the best lending opportunities without having to increase the risk profile.
It’s crucial to understand how each platform tackles underwriting and the conditions they use to assess whether or not an applicant meets their borrower criteria. After all, your monthly interest is heavily reliant on a trustworthy borrower making their monthly loan repayments.
At Landbay we focus on lending to experienced, professional and ethical landlords, with no adverse credit history in the last three years. We fund mortgages from £70,000 - £500,000, provided this represents less than 80% of a property's value. Currently it's an average across our book of circa 65%*. This is done to maintain a sufficient buffer in case property prices should fall. You can read more about our stringent underwriting criteria here https://landbay.co.uk/underwriting-criteria
Loan Period & Type
Research the detail of the loan(s) you are investing in. For example; how long will your funds be invested for, what are your options if you want to withdraw your money and how quickly can you access it.
With Landbay you can choose from one of our two investment products, our 3 Year Fixed Rate or our Tracker product. You can withdraw your investment at any time and at no cost, subject to Landbay’s ability to reallocate the loan parts your investment is in to new investors on the secondary market. We typically only require a few days’ notice to facilitate withdrawals.
With investing, the old saying ‘don’t put all your eggs in one basket’ rings true, every P2P platform approaches diversifying your investment differently, make sure you understand how your funds are managed once they are invested.
Landbay automatically diversifies your investment across multiple loans by borrower, property type and geography to help protect your money from the effects of any one borrower missing a payment, defaulting, or if demand falls in a particular area.
Transparency of Loan Book
Check if a platform publishes their loan book and loan repayment data openly. If they don't, it's important for you to question why.
At Landbay we stand behind the mortgages we underwrite, which is why we've championed transparency within the sector. We were the first P2P platform to publicly publish our loan book in full (including the rate that the borrower pays) and we maintain our full statistics, including default and arrears data, on our website at all times.
The sole and exclusive purpose of a Reserve Fund is to compensate lenders should a borrower miss a payment, or if a loan falls into arrears. Check whether a peer-to-peer lender has an emergency fund. If so, how much of their loan book does it covers and what are the terms for payments to be made from it.
Landbay’s Reserve Fund is a discretionary fund derived solely from our margin, which can be called upon to make up any shortfall should a borrower default or fall into arrears. If we move to repossess a property and a shortfall remains, a claim can be made to make up any difference with interest due. Our Reserve Fund is not made from an arbitrary number but based on comprehensive, independent Stress Testing of our mortgages and underwriting criteria. To date there have been no claims on the fund.
The results of a Stress Test will help a company plan for potential future economic scenarios and define what will happen to their loan book should the asset class see a downturn. A stress test should be carried out by an independent body and it should inform the size of any reserve fund.
We commit to regular and independent Street Tests of our loan book (current and forecast) to Bank of England Standard. These tests, performed to the same standard that banks are subjected to, measure the performance of our business model in stressed economic environments akin to the Global Financial Crisis of 2008. The results of these tests provide the basis for how much we provision for via our Reserve Fund. Review our latest Stress Test results here https://landbay.co.uk/reports
*data correct as of 22.6.16