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The lengths that Somo goes to reduce risks when assessing borrowers are beyond what I’m used to seeing in bridging lending
Somo's Bridging Lending Account received an Exceptional 3/3 4thWay PLUS Rating.
These loans have been paying lenders 8.88%. That's before bad debts, although historically losses have been virtually zero.
Visit Somo* or keep reading the Somo Review.
Somo is available to sophisticated/wealthy investors only
Before you read on, note that there’s a high minimum lending amount of £5,000 per loan.
Plus, to use Somo, you need to have:
- Invested in more than one unlisted company in the past two years (such as through crowdfunding websites).
- Or you need an income of at least £100,000, or savings and assets excluding your own home worth £250,000.
- Or you have an up-to-date certificate from a regulated financial firm declaring your competence.
What does Somo do?
Somo* does short-term property (bridging) loans typically from £30,000 to £1.5 million, mostly on residential property.
The loans can be for two years, but most loans are shorter than that and on average they’re repaid after about 12 months. Borrowers often pay the loan and all the interest in one go at the end.
When did Somo start?
Somo started doing loans through its online lending platform in 2015, although non-platform lending started in 2010.
Total lending since April 2017 is now £298 million. Possibly a further £70 million was lent between 2010 and 2017.
What interesting or unique points does Somo have?
Somo had been a mystery to a large extent until 2023, as it hadn’t provided a large amount of data, access to key people, or responses to our queries for many years. This had always surprised us, because Somo gets some of the most consistently positive reviews from lenders.
Now that it’s hugely opened up to us over the past few months, we see that it has kept up attractive lending rates even as it’s grown, while maintaining its lending standards.
Based on all the information and data available to 4thWay – which is a lot now – Somo’s claims to have processed thousands of loans over many years and never lost money are highly plausible.
It approves a lot of loans, so that you have a lot of opportunities to lend in. And yet lenders have reliably been paid back over a long period of time.
Somo review: how good are its loans?
The split between senior and junior lending is close to 50/50.
With junior loans, you’re second or sometimes even third in the queue to get your money back if the borrower’s property needs to be repossessed and sold. For the additional risk of not being paid first, you’re currently earning about 10% on average.
The typical loan size of 60.97% of the property valuation is highly creditable for junior lending. The lender that is senior to you, which will typically be a bank, usually holds just a small share (which is better for you), averaging 37.10%.
You’re getting 7.5% on senior lending, with the average loan amount being just 55.00%, which is very low.
The maximum you will lend through Somo* on most types of loans is 70%. Somo does go up to 75%, but that is always funded externally, i.e. not through the online lending platform that you will be lending through.
70% is a tick up on the 65% Somo started at when it launched, but it’s still a solid maximum loan amount for these kinds of loans.
The overall average loan size compared to the property valuation is 58.10%, which is where it was in 2016. This is somewhat on the lower (i.e. better) side compared to competing providers with similar quality loans.
Somo doesn’t do full-on development loans, and yet borrowers can use the bridging loans for heavy refurbishments and other bespoke projects. I’m pleased to see that in these cases Somo bases its decisions on the current property valuation, not the hoped-for future value after works are completed.
Some additional reassurance is offered by the fact that Somo will pay out to lenders all its fees earned on a loan if that loan turns bad and isn’t recovered in full.
How much experience do Somo’s key people have?
Somo* has proven itself over many years, and my assessment is that this family business has all of the relevant skills and experience we’d expect to see in property lending and bad-debt recovery. It also has complementary skills, such as relevant legal backgrounds. The latter is nice to have, since legal matters are usually outsourced.
Somo has no specialists for quantitative risk modelling, but such modelling is unusual in this kind of lending.
Somo review: lending processes
Somo talked us through its lending processes, which are high quality, professional and appropriate for these kinds of loans. While we need to arrange fresh rounds of interviews with Somo’s head of risk, I don’t have any reason at all to expect that its processes have deteriorated in the meantime.
Its processes centre around looking for a margin of safety in worst-case scenarios and – very important for this kind of lending – a strong and realistic exit strategy for repaying the loan.
Fraud can be a problem in property lending, but clearly Somo has this very firmly in hand.
It’s lending processes reveal a deep familiarity with all of the possible risks that can occur in this kind of lending, even long-shot risks, and it has these in mind when reviewing borrowers. The lengths they go to are beyond what I’m used to seeing in bridging lending.
That said, Somo’s overwhelming focus is on quality of the property security rather than quality of the borrower. While this leads to a lot of loans falling behind schedule and even needing legal action, its bad-debt recovery processes kick in suitably quickly (indeed, aggressively).
Rapid action is an absolute necessity for these kinds of loans to reduce the risk of losses, and so Somo* has an impeccable record of paying lenders in full.
You earn interest while waiting for the bad debts to be recovered. This is important, because, despite acting quickly, getting the recovery can sometimes take a very long time.
How good are Somo’s interest rates, bad debts and margin of safety?
I’m delighted that Somo has opened up to us this year, because I’m now able to answer those three key questions, and with confidence.
Somo lenders are currently earning 8.88%. Over many years, lenders have lost just a very, very small amount of interest to bad debts, imperceptibly impacting the overall return. Lenders have lost none of the money they put into any loan.
A super important question that we were not able to answer until now is about whether Somo had been kicking the can of bad debt down the road, by extending loans and re-lending to borrowers, which would lead to a massive collapse for lenders at a later date. I’m glad to report it has not been doing so.
Just to pull out one of the features of the detailed historical data provided to us, looking at the oldest half of all the loans, barely one month’s interest has been lost to lenders overall on the loans that suffered problems during those years. That’s one month out of dozens of months.
We are also now in the position to conduct our stress tests that calculate what might happen to lenders putting their money in today, if there was a sudden, severe recession and major property crash.
In so doing, we find that Somo lenders who spread across lots of loans are still very well protected from the risk of losses. The returns offered by Somo are attractive versus the risks.
Has Somo provided enough information to assess the risks?
Somo* now provides 4thWay with sufficient access and information for us to assess it on an ongoing basis. There are a few minor gaps, but these are not substantial and even these are steadily being filled.
A small disappointment is that it’s only able to provide its most detailed data starting from April 2017, which was three years after it started. Nevertheless, there’s a history of lots of loans in that data, and we are able to combine it with other submissions, evidence and sources.
When it comes to providing information to you lenders directly, unfortunately you have to sign up and log in, and then click on its logo and scroll to the bottom of the page, in order to see its lending statistics and even the website’s FAQ page!
Its website statistics for lenders are a little primitive and often somewhat out-of-date, but still useful. Somo should provide a lot more information on its people to its website users as well.
Is Somo profitable?
Independently audited accounts from Somo* show that it has made profits for many years, and these profits have usually risen. Three years ago they were over £3 million, in 2021 they were £4 million and last year they were over £5 million.
This record is still unusual in this industry, where many companies are only now beginning to show smaller profits. Indeed, Somo is number one on the list in The 3 P2P Lending Providers With The Best Financial Health.
I don’t know the auditors, but it’s always good to see that an auditor has given a clean bill of health.
What can you tell me about Somo’s cybersecurity?
Somo’s website security is in great shape, according to information provided to 4thWay by Sucuri. It finds no known malware, website errors, out-of-date software or entries on blacklists.
Somo’s website is listed as clean by Google Safe Browsing, McAfee and Yandex. The website is secure and carries a valid security certificate, helping to protect you when you supply your personal data. It has a firewall in place, which helps to block outsiders getting access to the data Somo holds.
This assessment is not based on a full attempt to penetrate the website’s security, but rather on arm’s length tests.
Is Somo a good investment?
Wealthier lenders should feel reassured by Somo’s exceptional record, experienced team, and its rapid, successful response to problem loans. I certainly think Somo* is a good investment if you put your money in lots of loans.
What is Somo’s minimum lending amount and how many loans can I lend in?
Somo is very exclusive, with a high minimum of £5,000 per loan.
You choose all your loans yourself. Somo has been approving over 30 property loans per month, so I expect it will be easy to build up a portfolio of loans pretty quickly.
Does Somo have an IFISA?
Somo does not have an IFISA.
Can I sell Somo loans to exit early?
You can sell your loan parts to other lenders or to Somo, if either are willing to buy, through its online secondary market. Somo* makes no charge for this.
You can list your loan parts for sale for the full amount. Alternatively, if you want, you can sell your loans for a discount. E.g. if you want to sell a £10,000 loan part, you might try to speed up the sale by offering it for £9,800.
Somo has a great record of enabling a very swift sale, but you just have to realise that this will not always be the case. You absolutely have to understand that at some point your money is likely to be tied up for longer, because that is simply the nature of money lending. That is even the case at high-quality online lending providers, since market forces are not under their control.
If you can’t live with that, you should lend less money.
Most providers argue that lenders pay no fees and Somo takes the same position.
However, I assess your true costs in the same way that I previously used to assess costs in investment funds. (And fund analysts to this day still continue to do the same.)
To that end, 4thWay’s specialists look at what the borrower is paying in order to borrow money from you (the fees and interest). We then convert all the fees and interest into an annualised rate, deduct from that the annualised amount that Somo passes on to you, and then the difference is Somo’s cut.
The larger the cut, the less downside protection you have and the lower your lending returns.
I find that the costs are very reasonable for these kinds of loans, considering the large amount of human effort required in pulling in borrowers and assessing them, as well as taking care of problem loans.
I estimate lending costs are a little over 5% of the loan amount. These all-in costs compare pretty well to Somo’s most similar competitors.
What more do I need to know?
Unusually in this wider industry, online direct lending through Somo* is not regulated by the Financial Conduct Authority or any other authority. You’re also not likely to be able to complain to the Financial Ombudsman Service.
Somo is what 4thWay would define as peer-to-peer lending as the risks are effectively the same as direct lending to the end borrower, but our definition is not the same as others. Read about Somo’s structure here.
Somo’s structure and lending contracts are such that, for tax purposes, you won’t be able to offset any losses at Somo with gains at other P2P lending companies, and vice versa.
However, interest is technically paid to you from a trust. I’m not an accountant, but I think it’s therefore likely that lending through Somo qualifies you for three tax breaks: the income-tax personal allowance, the starting rate for savings and the personal savings allowance. Read more on those in How Does Peer-to-Peer Lending Tax Work?
Thank you for reading the Somo Review! Visit Somo*.
Somo: key details of its lending account
4thWay PLUS Rating
3 PLUSes is best. What does the 4thWay PLUS Rating tell you about the risks and rewards?
Interest rate after bad debt
Here we show the P2P lending site's own estimate (or 4thWay's if theirs are not appropriate)
4thWay Risk Score
Lower Risk Scores are better. How is this different to the 4thWay PLUS Rating?
£298 m since 2014 in secured short-term (bridging) loans, with early exit. MIN £5,000 PER LOAN. SOPHISTICATED/WEALTHY INVESTORS ONLY
Minimum lending amount
Exit fees - if you sell loans before borrowers fully repay
Early exit is not guaranteed. Usually, other lenders need to buy your loans
Do you get all your money back if you exit early?
Loan size compared to security value
Reserve fund size as % of outstanding loans
Company/directors lend alongside you/first loss
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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.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
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