Thinking about a loan, but want to avoid the banks? You can still borrow money without having to get into a traditional relationship. Peer-to-peer (P2P) lending allows you to borrow money directly from another investor, but it's important to understand what's involved, the risks, and the benefits.
In traditional lending, a bank puts up the capital for individuals to borrow, however in the case of P2P lending, investors become the bank. Investors typically engage with a lending platform or provider that acts as the middleman, completing the credit checks, loan appraisals, matching borrowers with investors, and managing repayments.
This platform can be a win-win for both investors and borrowers. Each provider operates differently, although most loans are short to medium-term in duration, meaning your funds are locked away for months, all the way up to three years. Repayments can be paid in monthly or quarterly instalments and return on capital can fluctuate. This depends on the type of loan, duration, interest rate, and numerous other variables.
Each loan is different, but at Hewison Private Wealth you could expect a net return (income) of 5-10% which is quite attractive in comparison to term deposits and other credit investments which you would only expect a return of 1-3%.
With such attractive returns, many question the risks associated with these loans and how you can achieve such an appealing rate of interest.
One of the major reasons these loans yield a higher rate is due to the time in which these providers can execute a loan agreement. As lending restrictions tighten, obtaining finance through a bank can be quite a laborious process and can take up to six months. A high proportion of these borrowers need to transact quickly to settle on a property, refinance for business opportunities and cover any costs associated with development. Utilising P2P lending over a traditional bank can see deals executed in line with the borrower’s preferred time frames.
The biggest downside to these loans is if the borrower defaults whereby, they can no longer make repayments. At Hewison Private Wealth (HPW), we have been utilising P2P lending for over 25 years through exposure to Secured First Mortgages. These are direct loans that involve investing your money for a pre-determined amount of time and in return, the borrower pays you interest. A mortgage is taken out or secured against the property at a specified Loan to Value Ratio (LVR). The higher the LVR, the higher the risk. We use several first secured mortgage providers with each offering complimentary characteristics to our client portfolios.
To manage the risk of these loans, our internal Investment Committee reviews each individual mortgage on its merit to ensure it is appropriate for our clients. We will not invest in a mortgage if this LVR is above 67%, which provides a considerable margin of safety for investors if the property falls in value or the borrower experiences difficulties in making repayments. Generally, LVRs are around 50%.
Recently clients were provided an opportunity to invest in a Registered Secured First Mortgage to fund the construction of a Richmond office complex comprising six levels of office and ground-floor retail. The developer intended to retain the ground floor retail space as well as levels 5 and 6, with the sale proceeds from levels 1 to 4 used to repay the loan in full. The loan to value ratio was 63.8% upon completion in September 2020 and the net return to investors was between 7.5% to 8.5% per annum paid quarterly.
These investments become appropriate for individuals when the loans are reviewed with high scrutiny and form a small piece in the total portfolio allocation. The above example provides a small insight into how Hewison’s clients smooth returns and maintain income.
Secured First Mortgage investments have been used to generate strong cash flow for our clients and at Hewison Pirvate Wealth we are experienced in selecting quality mortgages. It is always important to seek professional advice to ensure your investment strategy is tailored to your own personal goals and objectives. This is what we at Hewison Private Wealth specialise in; for a broader view on wealth creation, we welcome a conversation with you.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.au
Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.