5 Reasons Why Lending to Residential Landlords Is The Lowest Risk
Lending to residential buy-to-let landlords is intrinsically the safest kind of lending available to lenders through P2P.
I'll give you the five reasons for this in no particular order, since it's all good:
The bricks-and-mortar are already there
Firstly, since the properties already exist and are not merely building sites with promise (like lending to property developers), it is relatively easy to value the properties independently and to assume that over the long run the price of that property will rise – with other types of secured loans, the security often falls in price, such as loans against most cars or yachts.
And there is a lot of data for making forecasts about what you might get for the property if it needs to be sold at distressed prices in a rapid sale.
Residential property bears up better in a recession
Secondly, although you might have to accept a cut price in a forced sale, especially in a recession, that cut price is usually nothing like as severe as you would expect for almost all other types of property or possessions that need to be sold in a hurry to repay debts.
This is not least because there are not enough properties to meet long-term demand in the average town in the UK.
These properties are earning income for borrowers that cover the debt
Thirdly, landlords are earning a steady income on the properties that help them to keep meeting their monthly mortgage payments. When it is the security itself that is producing income, that is a real advantage over security offered by borrowers that just sits there and looks pretty, like gold, a yacht or an untenanted property.
That income will rise with inflation over the long run, while the landlord's mortgage costs will forever be tied to the initial purchase price. Therefore, all else being equal, it will become even easier, as the years go on, for the landlord to meet the mortgage payments.
The income means that most landlords can afford to keep the property for longer than intended if needed, such as during a property crash. This adds protection against default.
The property is relatively easy to repossess
Fourthly, unlike with homeowner loans, court judges rarely have qualms about forcing buy-to-let owners to sell their properties when they are unable to pay the mortgages, because the tenants will still be able to continue to live in the properties if sold to another landlord, and they have fewer rights to remain in place anyway even if sold to new homeowners. (Not a fair state of affairs, but it's unfortunately the way it is for renters that they are more easily kicked out.)
Its relatively easy to spread across lots of loans
Fifthly, as lenders you can generally build up a wide, diversified portfolio to protect yourself from bad luck, because there are a huge number of buy-to-let landords and BTL properties. It is not like developments, which can get tricky since you can easily end up lending more money to fewer borrowers on massive, multi-million pound projects.
Here's how lending to landlords can go wrong
Of course, you can't say this intrinsically the safest type of lending and then just trust any old fool to select borrowers for you.
You need to know that the people behind the P2P lending site have the skills they need and the discipline to stick to sensible selection standards.
Lines in the sand could be moved again and again. It goes wrong when there is no discipline in selecting borrowers or ensuring landlords are already earning an income that easily covers the monthly mortgage payments. You also want to know that they use independent surveyors to value properties and understand how to go about recovering any bad debts that occur.
Note that it could also go wrong if interest rates are allowed to go too low for the risks. This has not been a problem at the prime end for a great many decades in both banking and P2P lending, but it is always something to keep an eye out for.