Risk summary for P2P agreements or P2P portfolios

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

1. You could lose the money you invest

  • Many peer-to-peer (P2P) loans are made to borrowers who can’t borrow money from traditional lenders such as banks. These borrowers have a higher risk of not paying you back.

  • Advertised rates of return aren’t guaranteed. If a borrower doesn’t pay you back as agreed, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.

  • These investments can be held in an Innovative Finance ISA (IFISA). An IFISA does not reduce the risk of the investment or protect you from losses, so you can still lose all your money. It only means that any potential gains from your investment will be tax free.

2. You are unlikely to get your money back quickly

  • Some P2P loans last for several years. You should be prepared to wait for your money to be returned even if the borrower repays on time.

  • Some platforms may give you the opportunity to sell your investment early through a ‘secondary market’, but there is no guarantee you will be able to find someone willing to buy.

  • Even if your agreement is advertised as affording early access to your money, you will only get your money early if someone else wants to buy your loan(s). If no one wants to buy, it could take longer to get your money back.

3. Don’t put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.

  • A good rule of thumb is not to invest more than 10% of your money in high-risk investments.

4. The P2P platform could fail

  • If the platform fails, it may be impossible for you to collect money on your loan. It could take years to get your money back, or you may not get it back at all. Even if the platform has plans in place to prevent this, they may not work in a disorderly failure.

5. You are unlikely to be protected if something goes wrong

  • The Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover investments in P2P loans. You may be able to claim if you received regulated advice to invest in P2P, and the adviser has since failed. Try the FSCS investment protection checker here.

  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA’s website here. For further information about peer-to-peer lending (loan-based crowdfunding), visit the FCA’s website here.

Did you know...?

Did You Know? 12 Jan 2023
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Five things to consider when securing development finance in 2023

We are undoubtably living through times of exceptional economic uncertainty and financial volatility, the consequences of which are being felt most severely by many in the housing market. As 2023 gets underway, we discuss the five things you need to be thinking about when trying to secure development finance this year.

  1. Building Cost Contingencies

  2. Development Exit Strategy

  3. Net Asset Position

  4. Loan Term Extensions

  5. Gearing

1.       Building Cost Contingencies

If there’s one thing we’ve learnt over the past two years, it is to expect the unexpected. In the context of a residential development scheme, even though a great deal of thought, planning and experience goes into each project, we still regularly come across unexpected items, most often either at the start of the project or at the very end. Most common unexpected items that come up are things like:

  • Unsuitable ground conditions due to things like contaminated earth, sewers, concrete, slab

  • Adverse weather

  • Unsuitable service connections such as drainage

  • Sharp increase in the price of items that go in last such as kitchens and bathrooms

As such, we typically advise developers to set aside a 10% contingency of total build costs to mitigate any unforeseen circumstances, even though this could be broken down to 15% contingency in the feasibility stage, 10% during the elemental cost planning stage (getting quotes in) and 5% on award of the contract.  As lenders, we want assurances that the developer will be able to deal with any of the unexpected items listed above. The building cost contingency serves exactly that function.

Additionally, on large projects, contractors may offer what is called a 'performance bond' which acts as a guarantee from the construction companies undertaking the development project.

 

2.       Development Exit Strategy

Assessing the exit strategy on a scheme is becoming increasingly important, even more so in the current market environment. To highlight the importance of the exit, having a poor exit strategy was the second most frequent reason why we at Blend rejected a scheme over the past 12 months.

What, then, is the typical exit strategy? Well, quite simply, it is either to sell or to keep and refinance into a buy-to-let mortgage – in turn, the selling may include selling into the open market or selling into housing associations and councils. There are many reasons why a borrower would want to keep and refinance. It may be that it is not the right time to sell, something we’ve increasingly seen over the past few months, or more likely, that it was never the borrower’s intention to sell. In any case, it is very important that the borrower knows at the outset what the exit strategy will be and plans for it. For example, if the intention is to keep, it is important that the borrower knows that they are going to qualify for the long-term loan and gets a Decision in Principle (DIP) from a mortgage lender. This acceptance only lasts for about six months, but it gives us, the lender, the comfort that the borrower will be eligible for a mortgage at some point in the future and also that he has been organised and forward thinking enough to make an application. When the scheme is completed, the borrower can invoke his DIP, or re-apply if it has expired, to get a mortgage that will be used to repay our development loan. But really, at the end of the day, it all boils down to us, the lender, being comfortable with the valuation when the project is completed, or the Gross Development Value.

 

3.       Net Asset Position

Establishing the net asset position for borrowers is becoming increasingly important. In any market environments, but more so in the current market environment, cash is king and lenders like us will assess the borrower’s liquidity in order to mitigate any time delays, cost overruns, or slow sales.

As such, we always advise developers to spend enough time ensuring they are able to demonstrate strong finances that will allow them to solve any challenges. That will allow them to be in a better position to secure development finance at a more competitive rate. 

 

4.       Loan Term Extensions

A pandemic, supply chain disruptions and labour shortages against a backdrop of weak economic growth mean that over the past couple of years, development schemes have faced severe delays and increased time pressure to achieve sales. As a result, many lenders have had to rummage through their lending terms to approve loan term extensions to mitigate the risk of default by the borrower. Here at Blend, we’ve always had a 6-months loan extension automatically built into our development loans, even prior to the current market challenges. That’s because we understand that in property development, it is not about ‘if a challenge comes up’, it is about ‘when the unexpected happens’. That’s why we stand ready to support our borrowers through the tough times and the great times.

Understandably, developers will not always be comfortable with higher loan terms due to the higher interest costs as many lenders treat the loan term extension as a default and apply exorbitant penalty fees. Not so at Blend where our built-in 6-months loan extension comes with the same terms and the same interest rate agreed on the outset for the entire lending facility. No penalties, no sticks. Just alleviating the stress off of our borrowers and supporting them through the tough times.

5.       Gearing

The market prior to last September’s ‘Mini Budget’ debacle was generally offering leverage at 60-65% LTGDV. Then, liquidity drained significantly overnight due to the confidence in the market in the aftermath of the UK financial meltdown. The market has now started to re-open and here at Blend we have now pushed our leverage further up to 70%. Borrowers should expect to obtain 65-70% with the right schemes currently, while we can increase the LTGDV to 75% if additional security is provided.

Whatever you are up to in 2023, we are here to support you with your development schemes. Whether you've heard of us but we’ve never spoken with you and you’re exploring your options, or whether you’re feeling positive that now’s the right time to proceed with a project and want to ensure you have the capital to opportunistically do this, feel free to get in touch and we’ll see if we can help. And always remember, your interests as a developer and our interests as a lender run in parallel and are virtually the same. You do not want your project to fail and neither do we because it puts the loan at risk. So, that means that sometimes we will need to have tough conversations and ask difficult questions, but that is only because they are prudent questions usually borne out of the greater experience of projects that we will have.

 

Good Luck!

The Blend Team.

Blend is a specialist development finance lender that works with experienced mid-sized property developers in the UK.

For more information, please visit www.blendnetwork.com or email us at [email protected]

BLEND Loan Network Limited is authorised and regulated by the Financial Conduct Authority (Reg No: 913456).

BLEND Loan Network Limited is registered in England and Wales. Registered office: Evelyn House, 142 New Cavendish Street, London W1W 6YF.

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.

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