Now you can even get a mortgage from the P2P innovators…
As alternative finance becomes an increasingly popular option for adventurous investors, the platforms are looking to raise money to fund their own rapid expansion plans. One particularly interesting recent deal involves small mortgage lender Landbay, which has recently announced a gigantic £250m infusion of institutional cash for its buy-to-let lending platform. What’s potentially ground-breaking about this is that it could help to bring mortgages into the mainstream of peer-to-peer (P2P) lending.
In simple terms, Landbay allows individuals to provide the capital for buy-to-let (BTL) mortgages. Investors on its marketplace can fund either variable-rate (tracker) or fixed-rate mortgages through small loans to a diverse bunch of underlying properties.
The tracker rate pays out 3% a year over the base rate, which currently amounts to 3.5% a year, while the fixed-rate mortgages are fixed for a three-year term and pay 4.4% a year during that time, reverting to a tracker rate afterwards. Both products currently run for five years and the minimum loan is for £50,000, while the maximum is £500,000. To date, £5.5m has been lent out across 33 different properties, with 70% in the greater southeast/London region. The average loan-to-value ratio on the platform is around 66%.
Landbay also charges the landlord between 2% and 2.25% in fees for the mortgage, plus a margin of around 0.9% to 1% a year. By my calculations, this means Landbay is very much not the cheapest on the market. Five-year fixed-rate BTL mortgages can be picked up for between 3.5% to 4% a year (plus fees that are usually somewhere around 2%) from a wide panel of mainstream bank lenders.
But there’s still a big market out there, especially working through specialist brokers such as Mortgages for Business or The Buy to Let Business (both intermediaries for Landbay). In the first quarter of 2015, total lending to this sector stood at £36.2bn, a year-on-year increase of 5.4%. And the £250m deal, which is due to come online in July, should help Landbay grab a bigger share of that, by making it a bigger, more liquid, proposition in its fight against competitors such as LendInvest (which has focused more on bridge lending to buy-to-let landlords) and Proplend (specialising in commercial mortgages).
So what does this deal involve? Landbay will get a funding line of £250m a year, split into subordinated junior (15%) and senior (85%) debt. A European asset management firm is providing the junior debt, while the senior portion is from an unnamed major UK bank. The whole £250m won’t come straight away – there’ll be a gradual build up with say just £5m deployed in September and more following monthly. This extra liquidity should make investors take note, since with three-year government bonds yielding around 1%, Landbay’s yield looks attractive.
By comparison Zopa will offer you 4% per annum and RateSetter 5.1%. But both of these platforms lend unsecured loans against consumers. With Landbay, loans are secured against real assets in the form of property. Landbay also mimics its P2P consumer rivals by having a protection fund, currently running at 1% of the total loan book value. It reckons that the average UK buy-to-let repossession rate is running at under 0.10% though investors should probably play closer attention to rent arrears rates which are currently running at around 1% for three months. This measure hit a peak of 3% back in 2008/2009.
The big question for me is not whether the Landbay yields stand up to the competition. Instead, the real challenge is its ability to scale up and find enough credit-worthy borrowers. In turn, that depends on the health of the BTL market. This is looking expensive, and unrewarding in terms of potential capital gains. And there’s a real risk that a future government will curb the tax advantages BTL landlords enjoy.
What’s more, any big influx of institutional money ready, willing and able to fund a massive increase in new corporate-run private rental accommodation will help push down rents overall. Many existing BTL landlords will struggle to cope as this surge hits the market in the next decade.
Set against this is the stark reality that we need more houses. UK government forecasts show that, in the 25 years between 2012 and 2037, the UK is expected to see an increase of just under 10 million in its resident population, or 400,000 a year. Those massive numbers could be more than enough to allow for sustained BTL expansion, higher rents and an influx of big corporate private landlords.
So regardless of my mixed feelings about the BTL sector, Landbay could be set for rapid growth – helped along by its own equity fund raise on the Seedrs platform earlier last year. Fund raises like this by the platforms themselves are interesting because they allow individual investors to bet directly on the rise of alternative finance. Hence this strikes me as an interesting growth story – although it would involve investing in early-stage, unlisted private businesses, with all the very obvious risks that brings.