Peer to peer lending UK (property-backed loans)
Peer to peer lending is basically lending direct to your peers via a lending platform which allows borrowers and lender to be matched. Property backed loans via peer to peer lending platforms primarily target building developers who need a bridging loan in order to finish their development and sell the properties. These are often high-risk investments because they have not yet been sold or even built. Thus, developers find it difficult to secure the capital to complete their project and turn to peer to peer lending platforms to fund them instead. Buy to let landlords also typically look to peer to peer lending platforms to fund their buy to let portfolios. Moreover, mortgage providers and real estate lenders also look to peer to peer websites to provide capital funding.
Peer to peer lending versus traditional lending
Returns on peer to peer lending tend to be higher than traditional lending via banks and this reflets the risk involved as peer to peer ending is not covered by the Financial Services Guarantee. Returns for property backed peer to peer loans are around 4-8% which provides quite a good return on your investment if you are a lender and a fair rate if you are a high risk borrower who finds it hard to achieve capital.
Rising interest Rates & property portfolio
With rising interest rates loan to value rates are becoming less attractive via formal lending platforms such as banks. Buy to let landlords are finding it increasingly difficult to access finance to fund their portfolios via banks and so, peer to peer property funded ISA’s are becoming increasingly important. Property is a tangible asset which can be put forward as collateral for a loan. The one downside with property is that it very much depends where it is located as to how valuable it is. Property is also more exposed to rises and falls in relation to the economy. If there is a downturn property will be adversely affected so lenders and borrowers need to be aware of this and factor this into their peer to peer lending.
Equally when property prices rise, then peer to peer lending can be quite attractive if is backed by property. However, lending rates need to be cognisant of the factors relating to property risks and benefits where loans are secured against property. At present with interest rates on the rise, property can be a potential powder keg, particularly in the buy to let sector, because rising interest rates mean that buy to let properties are becoming less attractive.
Geography matters in Peer to Peer Property Markets
It’s important to be cognisant of the geographic region where you are investing and the subsequent risk you are taking. Banks have traditionally been affected badly by fear whereby they tend to sell off their assets at the slightest hint of falling prices. If you are lending via a peer to peer platform you are more likely to be locked into the long term and find it much more difficult to cash in your loans. this ironically makes the loans more stable and gives the buy to let/property developers the opportunity to add value and mature their loans and then repay the balance.
You will of course be exposed to the risk of defaulting on loans an d this will not be covered by any government financial services compensation scheme. However, you will be partially covered if your platform maintains a contingency fund which will compensate you should your borrowers default on their loans. whatever lending mode you choose, make sure that you do you research and understand the risks behind peer2peer ISAs backed by property.