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.
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Loanpad grew its profits again in the year ended 31 December 2023, according to the company’s most recent financial statements.
During the 12 months ended 31 December 2023, Loanpad’s net assets grew to £1,183,852, from £725,454 in 2022 with nearly £700,000 of cash. This accords with Loanpad being profitable on a monthly basis since mid-2021.
But what does this mean for Loanpad’s investors?
All limited companies are required to submit annual financial reports to Companies House, where they are published online and easily available to members of the public. This is where Loanpad’s annual financial statements can be found, along with other administrative information about the firm.
It is important to note that this information relates to the Loanpad business itself, not the company’s loanbook performance. For more information on the loanbook performance or the performance of individual loans, investors can visit www.loanpad.com.
However, many investors are interested to know how robust their chosen peer-to-peer lending platform might be. Reviewing a company’s financial records is a great way to learn more about the underlying health of a business, and its growth trajectory since inception. Of course, past performance is no indication of future success, so this information should be used as a research reference only.
What do Loanpad’s results say about the company?
Loanpad has been publishing its accounts on Companies House since 2016, so investors and other interested parties can parse multiple years of the firm’s finances if they so wish.
One line to look for is ‘net assets’, as this can give an indication as to the overall financial position of the firm.
Loanpad has been profitable on a cash basis every month since the middle of 2021. Furthermore, the company has been narrowing its accumulated loses year-on-year, and increasing its total equity.
However, for Neil Maurice, Chief Operating and Finance officer, the company’s most significant financial feat is the fact that it the majority of its revenue is recurring.
“We are particularly proud of the fact that our income and expenditure is highly predictable and stable,” says Maurice. “We run a very clean, robust business and we are very transparent when it comes to our balance sheet and operations.
“We have grown the business steadily into profitable territory, and we are proud to say that we have increased our profits year-on-year between 2022 and 2023.
“Loanpad’s business model is built on transparency, and we want our investors to be reassured that they are working with a robust company.”
A big feature of Loanpad’s business model is that its revenue is almost entirely recurring and based on a share of interest alongside investors. Loanpad’s revenue is very consistent month on month based on the size of the loan portfolio. This means that Loanpad is not reliant on writing new loans to generate revenue. For example, if there were another economic shock, such as during Covid, where economic activity is heavily curtailed, our revenue would barely change meaning there would be no pressure to reduce costs or write new loans.
Loanpad’s investors can earn daily interest of between 5.5% and 6.5% by backing short-term property loans alongside a suite of experienced property lenders which have been hand-picked by Loanpad’s team.
All of these loans are initially secured at a maximum of 50 percent of the property value. There are no fees for investors, so Loanpad makes its money by taking a portion of the interest earned on each loan. To date, no investor capital has been lost.
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P2P INSIDER
Supercharge your understanding of Peer to Peer investing todayLoanpad is proud to announce that it is one of the primary constituents of the newly-launched 4th Way P2P And Direct Lending (PADL) Index1.
The index covers more than half of the UK’s P2P lending market by current volume, at more than £745m.
It allows borrowers and investors to directly compare the performance of various P2P lending platforms and online direct lenders for the first time.
Loanpad is one of six lenders represented on the index, alongside CapitalRise, CrowdProperty, Invest & Fund, Kuflink, and Proplend.
Research and ratings company 4th Way collected ten years of historical performance data from these constituents ahead of the launch of the index.
An analysis of this data found that the annualised returns for P2P and online direct lending after costs have averaged out at 7.36 percent per annum.
Furthermore, there have been no down years for P2P investors, and existing investors have more than doubled their money over the past decade.
“We are proud to be among the first cohort of P2P lenders to be listed on the PADL Index,” said Louis Schwartz, Founder and Chief Executive of Loanpad.
“Creating this index required an enormous amount of research and we were happy to help by sharing our historical performance data with 4th Way.
“We are proud of our track record as a company, and we were delighted to see proof of the success of P2P lending over the past ten years.
“This is a fantastic asset class which allows investors to earn competitive returns while supporting the British economy. We hope that this index will help to shine a spotlight on this market so that more people can discover the benefits of P2P in a diversified portfolio.”
Neil Faulkner, Co-Founder and Managing Director of 4th Way added that the index launch shows the longevity and stability of P2P lending.
“We are finally able to show that P2P and other online direct lending is no longer new and the reason why it has survived now for nearly two decades with a very loyal investor base is because it has outperformed so many people’s expectations by a long margin,” Faulkner said.
“Not just in overall gains, but in its reliability and stability too.
“At the same time, money lending directly with borrowers who are putting the loans to good use brings many benefits to the nation as a whole, since banks often do not handle certain types of property-secured loans.”
The PADL Index is now live.
[1] https://www.4thway.co.uk/4thway-p2p-and-direct-lending-index/
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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. |