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Rising Mortgage Rates: Their Impact On P2P Lending Bad Debts & On House Prices
Lenders who subscribe to 4thWay are asking about P2P borrowers' ability to pay back their P2P loans, while their home mortgage costs are going up.
Rising rates can also potentially knock house prices down, so I'm covering that too. Especially with latest headlines on falling house prices in recent months.
What can we read into all this and what should the lending strategy be?
We've covered rising rates, falling house prices and inflation from a few other angles this year and previously. See links at the end of this article.
Rising mortgage rates and impact on P2P lending bad debts
In the 70s and 80s we saw rising mortgage interest rates that were many, many times higher than they are today. Back then, though, regulations were more strict and banks more cautious.
Homebuyers put down much larger deposits and borrowed far less relative to their incomes, because property prices were more under control and bank managers would not take such large risks.
Today, it's a completely different story. House prices are so high compared to incomes that even low rates of interest are a stretch for many borrowers.
It's impossible to forecast, but clearly a small increase in mortgage rates has the potential to put at least as many borrowers in trouble as in the 70s and 80s, and it could certainly be worse.
That means that people who have bought property using P2P loans could be hit. It also means that home owners with mortgages who have borrowed additional money (for one reason or another) through P2P lending providers might struggle more to meet their commitments to repaying you.
P2P lending's in-built defences
However, not all P2P borrowers have substantial mortgages outstanding. Many will have paid off enough mortgage debt that they're able to extend their mortgages to lower their monthly bills. And many will still be on their old fixed rates and have time to prepare for higher rates later on.
P2P borrowers, on the whole, are very creditworthy and this has only improved over the past few years, as platforms have been particularly disciplined in who they allow to borrow since the pandemic started. Standards are high.
On top of that – this isn't a P2P defence, but relevant – bear in mind that many borrowers' salaries will also be rising to combat higher bils, offsetting the increased costs they face.
Property prices and P2P lending bad debts
I'll thread together the two themes of rates and property prices later, along with what this means for lenders. But let's now home in on property prices first.
Falling house prices negatively impact many people's financial health and can particularly hurt loans that are secured on property.
Wealth managers Quilter plc said recently that forecasters were predicting a big crash after the Brexit vote. It didn't happen. So it's just another typical result from economic forecasting.
In two of the past three months, Halifax has reported a slight fall in house prices. There has been a lot of coverage about this in the national press. People are picking at the bones of this minimal information to say what it means for house prices in the future.
Don't even think about listening.
I once did an assessment on house-price trends covering data starting in the early 1950s and extending well into the 21st century. If I recall correctly, it was largely based on Nationwide data starting in 1952.
While I'm not sure I remember that source correctly, I certainly didn't forget the clear results.
I found that if you look at house-price moves over the previous month, quarter or year, it doesn't help you forecast what will happen in the coming 12 to 36 months. It was completely random whether the future meant more or less of the same that had just occurred in the past.
So all the current reports about small falls during two months of the past three mean absolutely nothing. Diddly squat.
This all reminds me of a book my eldest daughter is currently reading, which has a guy who can tell the future by cutting open teddy bears and reading their “entrails”. You may as well try that yourself if you're going to do forecasts. Seriously.
Your strategy around falling house prices and rising rates
Indeed, these reports are not just useless but can lead you to make the wrong decisions. You shouldn't base your lending and investing on the fanciful idea that we can consistently read the future of the economy, rates or house prices.
It's not my job, 4thWay's job or your job as a lender to read teddy-bear entrails.
It's all our jobs to ensure that we see where there's a large margin of safety when putting your money into particular P2P lending accounts and loans.
When making money decisions (whether that's buying a house or investing in P2P), you need to make practical decisions based on your own circumstances, your needs, and your cash situation. You ask yourself questions such as: how much of a buffed do you have? How long are you lending for? How stable is your job and home situation?
And you need to base your decisions on an assessment of the investment you're actually considering. What are the risks? How high are the risks? How high could those risks get if something terrible happens? Do the rewards beat those risks comfortably?
If you do those assessments thoroughly on P2P opportunities today, it should lead you to feel very positive of the future – come what may to the economy, interest rates or house prices.
P2P lending providers with the top 4thWay PLUS Rating have a huge margin of safety even against worse than typical increases in bad debts during a combined severe recession and property crash. Both of which could potentially be caused, at least in part, by rising rates.
So all of these possible scenarios are factored into our stress tests – in readiness, regardless of whether they actually occur or whether anyone correctly predicted (i.e. guessed) it to happen.
P2P lending survived the 2005, 2008 and 2020 recessions with great ease and very positive real returns, unlike many other types of investment. It is still very well placed today to take on the next storm, whatever the cause.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
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