How platforms have adapted to a variable interest rate environment
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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