Our Stress Test
What would happen to your investment if the economy took a severe turn for the worst?
Deciding where to invest your money is not to be taken lightly. As part of the decision whether to invest with us or not, you want to know how safe your investment will be and whether your returns will be stable. Ultimately, you are investing in our expertise to manage our business well and make smart lending decisions.
At Landbay, we are committed to transparent about the way we do business. Whether you’re an investor or borrower, or if you’re just trying to find out more about us, we will share information with you so you can make the right decisions for yourself.
We wanted to know what would happen if the economic took a significant turn for the worst, so we recently engaged MIAC Analytics (MIAC) to perform an industry best practice ‘stress test’ on our buy-to-let loan book. This used the Bank of England macroeconomic scenarios to project what a severe downturn would do to our portfolio.
The scenarios are designed by the Bank of England and aim to explore the capital adequacy of the UK’s major banks and building societies. The ‘stress’ scenario simulated the following:
A recession with GDP falling by 5% (from a base of 1.6-1.8 p.a.)
Unemployment rising to 9.5% (from 4.1-4.2%)
House prices falling by 33% (as opposed to growing 3% per year)
Base rate of interest rising to 4.25% (vs a gradual move to 1.55%)
CPI Inflation rising to 5% (compared to a steady 2.1%
It sounds complex, but it allows us to simulate how much of a return we’d be able to offer our investors, and it’s something which top UK financial institutions are undertaking, so we’re in good company. It’s also above and beyond our regulatory requirements, because we think it’s an important thing to do.
The results show that even under severe conditions, returns over 3% could be expected. Landbay’s buy-to-let mortgage portfolio would remain a robust choice of investment.
Landbay has a reserve fund which can cover shortfalls, typically from defaults or arrears, and this fund could cover a portion of the losses, so even under this stress scenario investors are incredibly well protected. Today, Landbay offers a 3.5% return.
We believe undertaking these stress tests, and sharing the results, is the responsible thing to do, and supports investors as they seek strong, sustainable returns across economic cycles. It’s also important to remember this is a worst-case scenario, and exactly that, a scenario. This is not a forecast and we hope it doesn’t happen, but it’s important to understand the potential impact, however unlikely that might be.
The results demonstrate the robustness of our business in making sound decisions on how and when we lend your money.
We will continue to undertake stress tests on an annual basis. You can read more about our lending, the reserve fund and other useful statistics here.