Whether you're selling your house or buying wine, cutting out the middleman can help you secure a better deal. Peer-to-peer (P2P) lending works on this principle too. By bringing together investors and borrowers, a P2P platform can offer each party terms they wouldn't have been able to access readily through a more traditional financial institution. For the investor, who lends the money, it's the prospect of a higher return; for the borrower, it's the potential for a cheaper rate, a faster application process (hours rather than days in the case of P2P business lending) and a higher probability of getting a loan.
A selective market for borrowers
For those seeking to invest directly in property, borrowing from a P2P is an option, but it's a selective market. It doesn't generally cater to people buying houses to live in, nor for investors who want a long-term mortgage (although some platforms, including Landbay and LendInvest offer buy-to-let mortgages with terms of up to 30 years). On the more standard buy-to-let products the rates aren't especially low. Landbay offers a two-year fixed product at 3.09% for up to 75% loan-to-value (LTV), but it's possible to secure rates of 1.59% and 1.73% from Post Office Money and Virgin Money respectively.
But go more niche and the P2P lenders come into their own. For instance, LendInvest's five-year fixed rate of 3.19% at 65% (LTV) for buy-to-letters who are limited companies is very competitive in that market. It is possible to go lower with Keystone's 2.99% rate, but this comes with a 2% fee, double the fee charged by LendInvest.
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However, the primary focus for the P2P platforms is short-term lending, especially for bridging and development finance. For example, on its residential bridging products, LendInvest offers rates from 0.55% a month for up to 18 months on properties with an LTV of 50% or less. It is possible to edge below these rates specialist lender Precise Mortgages offers bridging from 0.49% but with other factors such as fees and terms also important, the P2P platforms look appealing.
Choose your risk level when lending
These platforms rely on investors to fund their lending, so this is another way to gain access to the property market. The returns of the property-backed loans you are financing will be linked to the fortunes of the housing market.
It's possible to select the level of risk you can tolerate. Some platforms will allocate your money to a selection of loans while others allow you to select those you want based on factors such as the interest rate and LTV. Minimum investments of £1,000 are standard, although it is possible to start with just £100 with Landbay. Given the breadth of risk, rates vary. LendInvest quotes a target annual return of 4%-7%, while Landbay flags up an annualised projected return of up to 3.54%.
Importantly, however, these rates are far from guaranteed. Any defaults will erode the return and investors' capital is at risk. Sarah Coles of fund platform Hargreaves Lansdown points out that just because your investment is secured against the properties backing the loans, it doesn't mean you would get all your money back in the event of a forced sale.
How will P2P fare in a downturn?
Note too that P2P platforms have yet to experience a severe downturn, while they're also not covered by the Financial Services Compensation Scheme (FSCS).
There are already signs that the market is getting tougher. Demand for loans has fallen. At the end of May, property platform Lendy went into administration. This left more than 20,000 of Lendy's individual investors exploring legal action to recover the £165m plus they had invested. A catalogue of errors may lie behind Lendy's spiral into administration, but the Financial Conduct Authority (FCA), the City regulator, is keen to ensure that investors don't fall victim to the overambitious marketing claims of P2P lenders.
It is also introducing a cap on the amount they can allocate to P2P arrangements. To avoid overexposure to risk, this is set at 10% of investable assets where the investor hasn't taken financial advice. Platforms will also have to "assess investors' knowledge and experience", says the FCA.
Expect a shake-out
The upshot, according to Matt Hopkins of accountancy group BDO, is not that the P2P market is a bubble about to burst, but that there is likely to be a shake-out over the next few years as tougher conditions lead to consolidation in the number of platforms. We may end up with a handful of larger platforms alongside a few niche ones. In the meantime, given the recent turbulence in the sector and the uncertain macroeconomic outlook, investors should tread extremely carefully.
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