This is a guest post from Sam Handfield-Jones, Head of Octopus Choice, one of Orca’s partner platforms held within the Orca portfolio. Octopus Choice is a property-focused peer to peer lending platform, which has had over £200 million invested by users since the platform was formed in 2016. Investors can gain exposure to Octopus loans via the Orca portfolio – read on to find out more about the platform and sector in which it operates.
Peer-to-peer (P2P) lending comes in all shapes and sizes. Perhaps the most obvious point of difference lies in the types of loans made available to invest in.
One increasingly popular type is property loans, which, according to Orca research, accounted for 20% of all P2P investments as of August last year (over £2 billion).
So why has bricks and mortar proven to be such a pull to investors? Well, it’s perhaps because, alongside being able to target an attractive return, they are potentially less risky than other types of P2P loan.
The reason for this is that the loans are secured, which means that should the borrower fail to be able to repay the loan, the property can be sold in order to fund as much of the debt as possible. This differs from most consumer or business loans – known as unsecured loans – where, if a loan goes bad, there’s no asset to fall back on to try and pay you back.
Of course, as in all forms of P2P investing, your capital is still at risk and you may get back less than you put in – while because of their property-backed nature, they could be affected by a material downturn in the property market. Also, property-backed P2P is not covered by the Financial Services Compensation Scheme.
Another reason for the popularity of property-backed P2P may be in the changing nature of the once-popular buy-to-let market. In 2016, a raft of new regulations made owning a second property much less profitable – including increasing stamp duty by three percent, and higher-rate tax-payers being told they are no longer able to offset their mortgage interest against rental income before calculating the tax they’re due to pay.
For landlords looking to exit the sector, property P2P provides a way to access the asset class indirectly, without the usual cost or hassle of managing a portfolio of properties (and their tenants…).
So if you’re considering property P2P, what should you be looking out for? There’s a broad range of providers out there, all with slightly different models. Here’s a quick overview of some of the considerations you should take into account when weighing up whether it’s right for you.
What’s the loan-to-value?
Unlike with unsecured lending, a big factor when looking at investing in loans secured on bricks and mortar is the loan-to-value (LTV) ratio. It’s a way to measure the size of the loan compared to the value of the property, and essentially determines the amount of breathing space you have in the instance that the borrower can’t repay, and the property must be sold to fund the debt.
For example, at Octopus Choice we only make conservative loans, with a maximum LTV of 76% – although the average is more like 61%. This means that the property has to fall in value by a significant amount before you’re at risk of losing any money.
Did you know Octopus is integrated with the Orca portfolio? Find out more here
Who are the borrowers?
Not all property loans are the same, so you should make sure you know the nature of the borrowers and what it is you’re lending on. Some platforms will lend directly to consumers seeking a standard mortgage. Whereas you’ll also find platforms that make all sorts of other property loans.
Take Octopus Choice as an example. Powered by our specialist lending team – Octopus Property – we provide loans to a range of borrowers, making buy-to-let, bridging, bridge-to-let and commercial loans.
It’s a matter of liquidity
When it comes to investing in property loans, we think the main risk to investors is more one of liquidity. This is particularly the case for those platforms that stick to making loans with conservative LTVs. This is because, if a property needs to be sold to recover a debt, it can take considerable time (as anyone who has bought or sold a property will know). And, during this period, investors won’t be able to access money they have in the loan.
What happens if a property does need to be sold?
Make sure you’re clear about the process if a borrower does default on their loan and a property needs to be repossessed. Does the provider have a plan in place to recover the money? And if it can’t all be recovered, who stands to get paid back first?
At Octopus, we invest 5% alongside all our investors and would lose our money first: putting our money where our mouth is, and aiming to protect your investment with ours.
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Building on strong foundations
Unsecured lending still accounts for the bulk of P2P loans. However, in today’s fast-changing property market, where alternative means of investing in bricks and mortar are set to become more and more popular, we predict this won’t be the case for long.