Octopus Choice (Octopus) is a peer to peer lending platform where investors can lend money to property borrowers, typically seeking buy-to-let (BTL) loans. All loans are secured on a 1st charge over physical assets, typically residential property but also commercial property. Octopus pre-funds loans before passing them on to new investors on the platform, and they also invest in up to 5% of each loan in a ‘first loss’ position (riskiest portion of the loan). The target rate of return is 4% per annum, however, each loan an investor holds in their portfolio will have its own personal rate, therefore actual returns can vary. The platform’s ultimate parent company is Octopus Capital Ltd (the Group), which builds products and services for the intermediary market and has over £8bn worth of assets under management.
Risk and Security
A primary risk is market concentration risk. Loans are made into the UK property market, therefore if the property market took a significant downturn, this may impact investors’ portfolios negatively should defaults increase. To mitigate this risk, Octopus secures all loans with a 1st legal charge over physical assets. They also lend at conservative loan-to-value (LTV) ratios, never exceeding 76%, meaning the asset securing the loan would need to drop in value by 25% before investor’s are exposed to potential losses. To further combat this risk, Octopus invests in 5% of each loan, in the riskiest portion, and will forego its returns and capital before any investor loses funds. Investor portfolios are typically diversified across 10-60 loans.
In the event of a default, Octopus Choice can step in and recover the assets. If a loan is in default, it has suffered more than two months of missed payments or has exceeded the loan term. In this instance, the loan is passed on to the Security Trustee in order to recover the debt from the sale of the property underwriting the loan.
Octopus operates a secondary market where investors can buy and sell loans, thereby returning cash early before the loan term matures (when capital is returned). Octopus may also buyback loan parts to ensure capital is returned quickly. This is not guaranteed, and the time it takes to sell on the secondary market is subject to the liquidity of the platform at the time.
In the event of insolvency, Octopus Choice has a fully funded wind-down in place to run off the loan book should the company (Octopus Co-Lend Ltd) become insolvent. Loan contracts exist between investors and borrowers, therefore loans should continue to be serviced.