How are Loans Secured on Property?
How are Loans Secured on Property?
Whether you’re a complete beginner or an experienced investor, investing in peer to peer loans secured on property can open the doors to a very lucrative market.
Traditionally, investing in property has been perceived as a risky option, with buy-to-lets, DIY renovations and badly managed development projects exposing investors to the risk of market crashes, changes to tax rules, and other issues.
So, why is investing in peer to peer loans secured on property a viable option?
Unsecured vs. Secured Loans
Firstly, let’s look at the difference between a secured loan and an unsecured loan:
Unsecured: An unsecured loan is not protected against any asset or collateral at all. If the borrower defaults, your money is unprotected.
Secured: A secured loan is guaranteed against the value of the asset or assets – for example, a property or a car. In this case, if the borrower defaults – and a legal charge has been put in place – your money can be reclaimed as the lender can legally take possession of the asset or assets and sell them on.
However, the value of the asset can go down as well as up so this does not mean that your money is guaranteed to be returned to you.
Securing a Property Loan
When a loan is secured on property by a peer to peer lending platform, there are several different ways the security of the lender’s money can be improved:
Background checks and due diligence: The first way is to take actions to reduce the chances of the borrower defaulting on their loan in the first place. These include thorough background checks and due diligence by RICS-qualified surveyors – so if the borrower does not meet the strict lending criteria, they are not awarded the loan to start with.
LTV: Secondly, it’s important to ensure there is a sensible loan to value (LTV) ratio. This is a comparison between the loan amount and the value of the asset purchased. Say, for example, a loan had an LTV of 60% and the borrower wanted £1,000,000, they would receive a maximum of £600,000. At the House Crowd, loans never exceed an LTV of 75%, meaning that the property market would have to fall 25% in value for there to be a chance of investors losing their money.
Legal charge: The third way is for the lender to take legal charge over the borrower’s asset – the property – until the loan is repaid. A legal charge represents the lender’s rights to a property and is enshrined by HM Land Registry. In this case, if the borrower defaults it means penalty interest can be charged or, in more serious circumstances, the sale of the asset can be forced.
Why Invest in Property Backed Loans?
All of this means that investing in peer to peer bridging loans (to homeowners) or development loans (to property developers) offer viable alternatives to traditional property investment options and open doors in an industry typically aimed at higher net worth and adventurous investors.
Starting at just £1,000, The House Crowd provides secured peer to peer lending opportunities secured by property that netted investors an average return of 9.2% p.a. between 2016 and 2018*.
*Average returns based on bridging loan portfolio 2016 – 2018. Average retrurns by year: 2016 = 8.8% p.a., 2017 = 9.7% p.a., 2018 = 8.9% p.a. Remember, past performance is not a reliable indicator of future performance.
However, it’s important to remember that no investment is completely risk-free. The property market can fluctuate, and borrowers can occasionally default. The House Crowd has put several measures in place to protect against such eventualities but is unable to offer completely risk-free investment. Read our Risk Warning here.
If you’d like to learn more about The House Crowd’s various property investment opportunities and how you can start investing in property backed loans, register now or contact our customer support team.