Savvy investors understand the benefit of a diversified portfolio – especially during times of economic volatility. The post-Covid investment landscape has been characterised by uncertainty and has led many seasoned investors to reimagine their portfolios in a way that is better suited to the current investment landscape.
For some, this may mean choosing more fixed income opportunities and carving out a small portion of high-yielding investments.
Peer-to-peer lending can offer fixed returns which are competitively priced. As with investment products, investors should always carry out their own due diligence to ensure that they have chosen a regulated platform which has a good reputation in the market.
Why diversification matters
Diversification is a cornerstone of sound investing. By spreading investments across different asset classes, sectors, and geographies, investors can reduce the risk of large losses from any single investment. P2P investing is not correlated with the stocks and shares market, or with the public bond markets, so it offers a way to diversify your money outside of the mainstream. If the stocks and shares portion of your investment portfolio sees a sudden drop in value, the P2P segment of your portfolio is unlikely to be impacted.
Creating a diversified portfolio can also mean choosing a variety of yield opportunities. For example, the majority of investors will choose to keep a certain amount of their investment portfolio in a low-interest cash account, or in low-paying government bonds. These types of investments exist at the lower end of the risk spectrum and offer some reassurance to investors that in the event of a market crash, at least one part of their portfolio will be shielded from the risk of capital loss.
For most investors, a diversified portfolio is about creating balance. Higher-yielding investments often come with higher risk. It is possible to earn double digit returns but there is a risk that in the event of a borrower default, some or all of the investor’s capital investment could be lost. The risk of capital loss has to be weighed up against the opportunities to earn a higher return. In a well-diversified portfolio, higher risk investments should be balanced out by the inclusion of lower-risk strategies elsewhere.
Diversification within P2P
It is also possible – and advisable – to add diversity within the P2P segment of your investment portfolio. You can do this by investing your money with more than one platform, and by choosing to spread your investments across multiple P2P loans, rather than manually selecting one loan at a time.
By spreading your investment, you are also reducing the risk of capital loss. If all of your money is tied up in one P2P loan, and the borrower goes into default, you could lose some or all of your initial investment. However, if you are invested in 100 loans and one of them goes into default, that would represent a maximum loss of one per cent of your overall portfolio.
Additional P2P diversification can be added by splitting your money across several different types of P2P loans. It is possible to use P2P investing to access property-backed loans, consumer loans, business loans, and even litigation loans. Research the market and ensure that you have all of the information you need before committing your funds.
P2P lending can be a valuable component of a diversified investment portfolio. By adding an alternative asset class that offers the potential for higher returns and lower correlation to traditional investments, retail investors can enhance their portfolio’s risk-return profile while maintaining a focus on long-term growth.
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2024 was not without its surprises – a new UK government, ongoing geo-political tensions across the world, and the end of an era of stubbornly high base rates. Yet throughout the year, the peer-to-peer property lending sector remained relatively robust. In fact, 4th Way published research this year showing that P2P returns have outpaced the stock market over the past decade, with annualised returns after costs of 7.36 per cent per annum, compared with 4.9 per cent per annum for the stock market.
Despite macro-economic volatility and the difficult lending environment, platforms like Loanpad continued to grow their loan books and attract more investors, proving the resilience of P2P property lending. Loanpad passed its £100m lending milestone while maintaining its zero loss record, further demonstrating the growth potential of P2P even during tough years.
While no one knows what 2025 has in store, a few key trends are already emerging that give us an idea of what we can expect in the year ahead…
1. Increased IFISA uptake
The Innovative Finance ISA (IFISA) is now a well-established part of the financial services landscape, and uptake is likely to grow as sophisticated investors seek higher yields for the tax-free elements of their portfolios.
In the November 2023 Budget, then-Chancellor Jeremy Hunt extended the remit of the IFISA to include open-ended property funds and long-term asset funds for the first time. These changes came into effect in April 2024, and since then a number of IFISA-eligible funds have launched, raising awareness of the structure and its benefits to investors.
The upcoming ISA season will further spotlight the IFISA, giving another boost to the tax wrapper and the P2P platforms that offer it.
2. Consolidation
The P2P market has come under increasing regulatory scrutiny in recent years, and this has led to the departure of a number of platforms which were unable to meet the high standards of practice which have been set by the Financial Conduct Authority.
While some P2P lenders have opted to trigger the wind-down provision in their business model, others have simply pivoted away from P2P and rebranded themselves as alternative lenders. Further consolidation could take place in the market next year as smaller players wind down or are bought out.
3. Bank retrenchment
Banks have been lending less money to small and medium-sized enterprises (SMEs), and this has allowed the alternative lending market to boom in recent years. Banks have shown little willingness to resume these lending activities, and this creates a huge opportunity for alternative lenders to step in and supply much-needed funding to businesses, consumers and property investors across the country.
4. The rise of AI
Alternative intelligence (AI) entered the mainstream in 2024, but 2025 will see even more fintechs attempt to harness the power of AI to grow their businesses and reduce their overheads.
AI is already being used by some alternative lenders to collate and analyse data, and provide customer service via the use of chatbots. In the wider credit ecosystem some firms are using AI to create credit scoring models with the intention of speeding up their underwriting process. If successful, P2P lenders could dramatically enhance their loan decision processes to attract more borrowers and originate more loans.
5. ESG redefined
Environmental, social and governance (ESG) issues have been a corporate buzzword for years, but in 2024 the sheen came off ESG investments a little, as investors prioritised yield and became sceptical of the term ‘ESG’ amid a number of high profile greenwashing scandals.
The new eco-buzzword of the season is ‘impact’ investing, which focuses on biodiversity and longer-term results such as the green energy transition. The redefinition of ESG is likely to continue across 2025, particularly if stability returns to the markets, and investors feel that they can be more considered with their portfolio allocations.
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
P2P INSIDER
Supercharge your understanding of Peer to Peer investing todayThe UK’s property market can be seen as a key indicator for the economic health of the country. A prolonged housing shortage means that in theory, demand is outpacing supply. However, the Covid pandemic, rising interest rates, the higher cost of living and a lack of wage growth has led to a recent slowdown in property sales, and a drop in house prices over the past two years.
This property slowdown has been widely documented, and it has understandably rattled many property owners and investors. However, independent industry analysis suggests that there is less reason to believe that we are headed towards a property crash. In fact, according to most sources, the UK’s property market recovery is already underway.
The most recent Halifax1 data found that average house prices fell by 0.1% in May 2024, month-on-month, and by 0.3% quarter-on-quarter. However, on an annual basis, property prices are actually up by 1.5%.
In certain areas, this annual growth was even more pronounced. Halifax reported that the strongest performing area in the UK was the north-west of England, where house prices grew by 3.8% on an annual basis in May. In Northern Ireland, prices were up by 3.2% over the same period.
And while the base rate remains stubbornly high at 5.00%, a slew of analysts have predicted a rate cut by the end of the year. This appears to have reassured house buyers, who have been actively seeking out mortgages again. In March, the Bank of England confirmed that UK mortgage approvals reached an 18-month high2, with lenders approving a total of 61,300 home loans.
This suggests that would-be homeowners are regaining their confidence and showing a willingness to invest in property again, despite the market’s recent volatility.
This has also been reflected in the housebuilding market. In a recent trading statement, housebuilder Bellway3 reported a rise in customer demand as a result of “an improvement in affordability, driven by a moderation of both mortgage interest rates and consumer price inflation and an increase in wages.”
By June 2024, the average rate for a two-year fixed mortgage at 75% loan-to-value was 5.89%4. This is more than double the average rate of early 2022. However, property buyers may be willing to stomach these rates in the expectation that they will come down again by the time they need to refinance. In the meantime, they can take advantage of slightly lower property values to buy their dream home or investment property now.
Historical data from the Office for National Statistics5 found that by the end of 2023, average UK property prices were at a 12-year low. By December 2023, the average home was selling for £285,000, £4,000 lower than 12 months previous. In many ways, it is a buyers market – just as long as buyers are willing to stomach a couple of years of higher rates.
Seasoned property investors know that this is a cyclical market which is closely tied with macro economic movements.
[1] bit.ly/3NNhwpu
[2] bit.ly/3YpRspj
[3] bit.ly/3YvvfXb
[4] bit.ly/3C4xPvA
[5] bit.ly/48ugQ1U
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
Interest rates have been on a rollercoaster ride in recent years. Covid saw the base rate fall to an all time low of 0.1 per cent1, and these record low rates were held until December 20212, when the Bank of England began to make small quarterly increases as the economy returned to normal working conditions.
However, a new blow was dealt in October 2022, with the now-infamous Liz Truss budget3. This caused inflation to spike, and the Bank of England began accelerating its rate hike plan. 18 months later, the base rate was at a 15-year high of 5.25 per cent4.
The base rate is a key indicator of market health. The central bank sets the rate at which banks can borrow from it, and this duly informs the rate at which loans are set.
Any changes in the base rate are therefore likely to have a knock-on effect on the price of lending, and this includes the price of peer-to-peer loans.
“You have to take into account interest rate changes,” says Neil Maurice, Chief Operating and Finance Officer at Loanpad.
“In the year or two coming up to the interest rate rises we were already talking about the potential impact of interest rate rises.”
In order to manage this risk, Loanpad made the decision to place the majority of its new loans onto variable rates to enable more flexibility in increasing its rates to investors as base rates increased.
From July 2022, Loanpad began been increasing investor rates by approximately 0.1% per month. This was done with the full co-operation and support of the platform’s lending partners.
“We had that conversation with our lending partners and we learned that borrowers don’t want to be exposed to massive interest rate rises throughout the term of the loan but they’d accept a smaller capped movement,” explains Maurice.
“So in October 2022 onwards, we moved most of our new loans onto a variable rate structure.”
As of June 2024, Loanpad was targeting returns of between 5.5% and 6.5% for investors, representing an increase of almost 2% from June 2022. However, Maurice notes that these rates could also drop again in the future, depending on the movement of the base rate.
“As interest rates come down our rates should also come down as well,” he says. “We have to be able to adapt to the market and pay our investors competitive rates.”
By implementing variable rates, Loanpad can ensure that investors are getting competitive returns on their investments. However, it is important to note that higher rates for investors means higher rates for Borrowers, so there is an important balance to be struck to ensure both investors and borrowers are offered a competitive product.
With any lending product, it is important to do detailed due diligence to ensure that you understand the risk involved, and are not merely looking at the target returns. While Loanpad works hard to manage its risks – including interest rate risk – no investment is entirely risk free. Market conditions can change dramatically, as we have seen in the recent past, and past performance is no indication of future success.
Loanpad is committed to doing what’s best for both its lending partners and its investors, through the active and prudent management of the loan portfolio.
[1] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2020/march-2020
[2] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021
[3] https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html
[4] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/may-2024#:~:text=Monetary%20Policy%20Summary%2C%20May%202024,maintain%20Bank%20Rate%20at%205.25%25.
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |