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Q&A With 4 Property P2P Lending Websites
Last Friday I chaired a panel show for the first time. It was the property peer-to-peer lending panel at the Property Investor Show in ExCeL, London, and there were a lot of great questions from the audience.
The panel were representing P2P lending websites that do developer loans, buy-to-let residential, mixed use, straight commercial property – basically any non-owner occupied loans and mortgages. The panel was:
- David Penston, property MD of Assetz Capital. (First loan two years ago.)
- Simon Zutshi, founder of Crowd Property. (First loan in late summer 2014.)
- Luke Jooste, Head of Property, Funding Circle. (First loan in spring 2014.)
- David Serafini, COO, LendInvest. (First loan two years ago, although record stretches back to 2007 as Montello Capital Management.)
Here's what I remember was said from memory.
Repossessions and losses
All the P2P lending websites have had no repossessions between them and zero or virtually zero losses.
Luke Jooste mentioned the first troublesome property loan was starting. After the show he informed me that he expects it'll just be 60 days late, but then lenders will receive their loan and interest.
Just one interrupted loan out of £45 million of property loans is fairly impressive, even if most of those loans are still currently live and not paid off.
Simon Zutshi emphasised to individual lenders that losses and repossessions will happen in property P2P sometimes, no matter how rigorously they scrutinise the borrowers on our behalf.
Why are interest rates so high?
The broad answer from the panel was basically that they all do loans the banks can't easily do. They also offer a speed of service that the banks can't.
Since the loans and mortgages are typically shorter than bank loans, the costs are higher because of the effort involved – on many of the loans, we lenders are unable to keep getting ongoing interest payments from the same loan for many years.
In addition, it's harder to quantify the risks of any of these deals, which can be highly tailored to the individual borrower. And far fewer deals can be completed in this way, meaning it's harder to spread the risk across a higher number of loans. Therefore the lenders need a good margin to make up for it.
How much does P2P lending cost us?
Where I had the most feedback from the audience and the panel after the show was about the costs to the lenders – how high they are and how they should be calculated.
The actual, total cost to us lenders is the difference between what the borrower pays (that's all the interest and fees expressed as an APR) minus what the lender receives (before bad debts, which are an investing loss rather than a cost of investment).
Not one on the panel could give me the actual figure. Indeed, 4thWay® has never been given this figure by any P2P lending company, although we're sometimes given enough information so that we can calculate or estimate it for ourselves. (The lending costs are in the 4thWay® detailed comparison tables, where possible.)
4thWay® estimates costs can be as low as around 1.5% (with Landbay, another property P2P lending website) and up into the high single digits – at least.
You can read more about the true and total costs that we lenders pay in There's No Such Thing As “No Lender Fee”.
Costs versus the banks
David Penston added that we should also compare the spread between what banks earn in interest when lending our money and what we get in savings accounts and cash ISAs. Now that's a huge difference!
The rewards are higher in P2P – we get a greater cut – but we also take just about all the risks.
David called it an uneven playing field due to the Financial Services Compensation Scheme, which is relatively new protection for savers that protects the first £85,000 in the event a bank fails. However, the safer something is, the lower the interest we receive too.
No “us and them”
The panel was adamant that individual lenders like you and me get equal footing with institutions like banks and hedge funds when we lend through their P2P lending websites. The institutions are not allowed to cherry pick better loans.
(By the way, Zopa said the same thing to me last week. Indeed, the institutions can only take a bite on a given day if there is no individual lenders' money left to lend at that time. Institutions get the same rates and same terms, and no cherry picking.)
Luke Jooste told me separately that all its property loans have been funded by individual investors, not banks, hedge funds or other institutions.
How important is FCA regulation?
There were some interesting comments, largely from David Penston, on the protection offered by financial regulation.
He struck a balance between how useful it is.
Firstly, he said it's a filter and a barrier to entry for many fraudsters and blag artists. Note: he didn't say all of them, and I'm sure he didn't mean that.
But he also said that the platform itself is responsible for lowering the risk. And that the investor has to take some responsibility, since it is an investment, not a savings account.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Funding Circle and Landbay, and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.