Property lending is as popular as ever in the UK, but no investment option is entirely risk free. In property lending, the key risk is that the value of the underlying property will decline substantially, thus making it harder for investors to recoup their capital if need be.
Many investors will remember the early months of the global financial crisis in 2007 and 2008, when house prices fell by between 20% and 30% in some areas, causing property-heavy investment portfolios to sink in value.
As a recession loomed at the start of 2023, UK house prices began to drop again, sparking concerns that another property crash was on the way.
However, this time around the property dip has been much less severe. By the end of last year, property prices had fallen by an average of 1.4%, with the average property in the UK valued at £285,0001. By April 2024, the average house price in the UK was £281,0002, but there were already signs of recovery in the market. According to the Land Registry’s House Price Index, property prices rose by 0.3% compared to the previous month, and were up by 1.1% compared to the previous year. This is a far cry from the double digit losses that property investors suffered during the 2007-2008 crash.
However, property lenders are understandably worried, and may choose to review their portfolio allocations in the light of these new values.
How do falling property prices affect Loanpad investors?
Loanpad’s investors back shared short-term property loans and earn interest daily. Loanpad partners with a select group of property lenders and spreads investor money across a carefully-chosen portfolio of secured property loans. All loan values are capped initially at 50% of the total property value. This means that the value of the underlying property would need to fall by at least 50% before investor capital is at risk.
“Loanpad has always taken a very conservative approach to lending,” says Neil Maurice, Chief Operating and Finance Officer at Loanpad.
“Loanpad only ever lends initially 50% of the value of any property, so if there is a property price crash of 30% or even 40%, it shouldn’t affect our stake in the properties in our portfolio.
“Yes, we’d be much more exposed at that point, but we would expect to recover our money back. Someone who is lending 70% loan-to-value would be much more exposed than we are.”
Maurice doesn’t believe that there will be a significant property crash in the UK this year, due to the extremely high demand for housing and the lack of supply. But the fluctuating value of property is something that lenders such as Loanpad pay close attention to throughout the loan cycle.
Loanpad will never initially lend more than 50% of the value of a property. However, when a valuation changes due to refurbishment or development, Loanpad can amend its funding to fit the new value.
“We do increase the value throughout the project, but it’s only based on the work that have been done,” says Maurice. “We don’t account for any development profit during that process either without an updated valuation, so we’re very conservative in our valuations.”
This conservative approach also involves applying rigorous due diligence at the start of Loanpad’s lending process. Loanpad only works with approved lending partners, and monitors each project from the very start of the term. This allows Loanpad’s management to identify any early issues and step in to protect investor funds if necessary.
This is the level of due diligence that property investors should expect from their investment provider, whether the property market is booming or declining. There are no guarantees when it comes to investing, but market awareness and prudent management can help to manage any potential risks, both now and in the future.
[1] https://www.gov.uk/government/news/uk-house-price-index-for-december-2023
[2] https://www.gov.uk/government/news/uk-house-price-index-for-april-2024
| 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. |
Loanpad is updating its software. We have taken this decision in order to make the site even more user friendly for our investors, and to ensure that it we are up to date with the latest development standards in the industry.
Fintech companies are innovative by nature, and software updates are an important part of a platform’s evolution. We hope that this new version will improve the overall site experience for our users and allow us to implement future updates even more seamlessly.
How will the software update affect investors?
There will be no significant change in the way that investors use the Loanpad platform. Our users will still be able to access their profiles as usual, and allocate funds in the usual way. However, the look of these pages will change once the new software has been rolled out.
“We have rebuilt the foundations of the back-end architecture in order to speed up processing times and enhance the user interface,” says Neil Maurice, Chief Operating & Finance Officer at Loanpad.
“For us, it is about being able to be nimble and able to make the most of modern technology. What we’re building now allows us to bolt on new solutions and build something really lean that is representative of the Loanpad brand.
“Users will see a different interface, but the actual day to day stuff won’t change massively for them.”
The software update is currently ongoing and is set to be rolled out by the fourth quarter of 2024.
So what will be different on the new site?
- More self-service features
Once the update has been released, investors will be able to take more control of their account settings by making use of a range of self-service features. For instance, users will be able to set a wider variety of interest preferences such as re-investing their interest or auto-lending all available cash, change their phone numbers and email address themselves, and speed-up the processing of investments from Standard into ISA accounts.
- Smartphone app
Loanpad will launch a smartphone app in the App Store and in the Google Store, so investors can track and manage their investments on the move.
- New profile page
The profile page will look different, with a new design that will make it easier to navigate the website.
- Streamlined onboarding for all
The onboarding process will be more streamlined. Individuals, companies and LLPs will be able to sign up separately using their own pathway.
- Biometric ID checks
Facial ID recognition will be introduced for the passport selfie. This will be integrated into the onboarding process to improve security and ease of use for new and existing investors.
| 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 todayAlbert Einstein once described compound interest as the eighth wonder of the world. “He who understands it, earns it … he who doesn’t … pays it,” he famously said.
For investors, compound interest represents one of the best ways to build wealth with minimal effort.
What is compound interest?
Compound interest simply means that after you make your initial investment, you commit to reinvesting any interest earned year after year. If you have invested in a fixed return product, or in an investment portfolio which pays even a small amount of interest each year, these compounded returns can quickly add up.
For example, if you are earning five per cent per annum on an initial investment of £1,000, reinvesting the interest each year and assuming no losses, by the end of year one you will have earned £50 in interest, bringing your overall portfolio to £1,050.
During year two, you will earn five per cent on £1,050, rather than your original £1,000. This means that by the end of year two, you should have a portfolio worth £1,102.50.
If you continue to reinvest any interest, by the end of year ten, your portfolio could be worth approximately £1,628.89. That’s over £628 in interest, from a one-time investment of £1,000.
If you are topping up your account on a regular basis, the amount of money earned through interest will be even higher, and compound interest can accrue at an even faster rate.
How to make the most of compound interest
Any investment can benefit from compound interest, but the best results could come from fixed-rate products such as bonds, savings accounts and peer-to-peer loans.
However, it is important to remember that not every investment will result in annual returns being paid. For example, investments in the stock market can lose money during times of macro-economic stress. The past few years have shown us that the stock market is capable of exciting highs and crushing lows. While this can make it an appealing market for traders, it is not necessarily an attractive option for investors seeking to earn compound interest.
Compound interest rewards consistent returns, even if they are small. A small return every year could do more good for the overall size of an investment portfolio than the peaks and troughs of the stock market.
Of course, every investment comes with risk. In P2P lending, the key risk is the possibility of defaults due to borrowers being unable to repay their loans. While P2P platforms work hard to minimise this risk for investors, there are no guarantees and losses do occur, particularly during an economic downturn. While P2P lending has a track record of delivering relatively stable returns, past performance is no indication of future success, and investors are always encouraged to do their due diligence before making any new investment, and to maintain a diversified portfolio.
Having said that, where fixed returns are available, the possibilities for compound interest are compelling. Over time, compounded returns can add a huge amount of extra value, without the need for ongoing investments.
| 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. |
The peer-to-peer lending sector has undergone a remarkable evolution over the past 20 years. Since the first UK peer-to-peer lending platform launched in 2005, the sector has been through a rollercoaster of changes, from ISA opportunities and regulatory changes, to a handful of high-profile insolvencies.
Today, peer-to-peer lending occupies a key role in the UK economy, offering inflation-beating returns and flexible lending solutions to borrowers.
So what does the peer-to-peer lending space look like in 2024?
Better regulation
Two decades after its arrival, peer-to-peer lending is well established in the financial services landscape. It is regulated by the Financial Conduct Authority (FCA), and all peer-to-peer platforms must adhere with a strict set of standards and rules in order to be allowed to operate.
These rules include the requirement that every peer-to-peer platform maintains a wind-down plan, which lays out how investor money will be protected and returned in the event that the platform ceases to operate.
Investor education
FCA-regulated platforms must also get would-be investors to complete an appropriateness test before any funds are invested. The content of these tests will vary from platform to platform but the intention is to learn whether or not a prospective investor is aware of the risks of peer-to-peer lending and therefore whether the investment is appopriate.
According to the FCA, peer-to-peer lending is not suitable for all investors, and so not everyone will pass these appropriateness tests. This means that the investor community of 2024 is a lot more savvy and risk-aware than they might have been in the past. Indeed, there is anecdotal evidence to suggest that present-day peer-to-peer investors are more educated, and more engaged with the industry than ever before.
Larger loanbooks
This has also been reflected in the rising values of peer-to-peer lending platform portfolios. A number of platforms have now crossed the £250m lending mark, including Loanpad. As of May 2024, Loanpad had total live loans worth in excess of £90m.
Last year, it was estimated that the global P2P market was worth $133.47bn (£88.19bn)1, and it is growing year-on-year as more and more investors seek to diversify their portfolios and seek to earn market-beating returns.
Tax-free investing
This year, it has become much easier for investors to make use of the Innovative Finance ISA (IFISA) tax-free investment wrapper. In April 2024, new legislation was introduced which removed some of the obstacles faced by new investors, such as the ‘one IFISA per year’ limit. During the current tax year, IFISA investors can diversify their £20,000 ISA allowance across multiple IFISAs for the first time. The IFISA has also been expanded to include long-term asset funds and open-ended property funds.
Bridging the funding gap
Peer-to-peer lending has also changed the game for borrowers. There has been a well-publicised funding gap for small and medium-sized enterprises (SMEs) in the UK in recent years.
After the global financial crisis, many mainstream banks opted to stop lending to SMEs, and their lending appetite has yet to return. This left a gap in the market which alternative lenders such as peer-to-peer lending platforms have been able to fill.
Peer-to-peer platforms work with many SME borrowers to help arrange funding for everything from business expansions, to property developments, and bridging deals. For many SME borrowers, this is their best chance to secure a loan in an unforgiving economy.
New risks
Economic uncertainty has persisted for several years in the UK. At the start of 2024, the country was in a recession, and interest rates were stubbornly high. This has presented a few new risks in the peer-to-peer lending space.
The main risk in peer-to-peer lending is the risk of a default if a borrower is unable to meet their repayment terms. When interest rates are higher, so too is the risk of missed payments, and this could translate into losses for investors. Peer-to-peer lenders such as Loanpad have been working to reduce this risk by enhancing their borrower due diligence and – where appropriate – offering loan extensions or refinancing options. Loanpad also maintains all of its loans at a maximum of 50% loan-to-value providing a significant buffer in the event that the security needs to be sold to recover investor funds.
| 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. |