Frazer’s blog – how our peer to peer lending process works
Take a peek behind the scenes to discover how our loan process works
This month (September 2017) several bridging loans were redeemed – some of which were repaid on time and one of which was not, which meant investors, whilst waiting patiently for the borrower to repay, received a rate of 12% pa whilst the loans were in default. One investor received over £27,000 in interest which he has now reinvested along with his original capital.
So, I thought it was a good time to explain a little more about how our bridging loan process works and all the hard work our bridging team do to deliver a very attractive return to you including, if necessary, dealing with any defaults.
This is Charlotte – who has worked at the House Crowd since January 2015:
She undertakes the initial review of loans that come in from brokers and our HCF website.
If they pass our underwriting criteria she will send to Jane, our specialist property lawyer who we have been working with now for over five years – she’s an ex UK Kickboxing champion by the way. We love Jane (well, we have to – she’s super tough).
Jane will do some initial checks and analysis, discuss with Charlotte and decide whether we want to accept the loan and, if so, on what terms. If its above £350,000, or has complications, Charlotte compiles a summary for Lewis and me to review and the four of us discuss and make a joint decision as to whether we proceed.
If we decide to proceed, the borrower then pays a commitment fee and survey fee. We conduct in-depth analysis of each borrower’s financial position, assessing their credit history, undertaking comprehensive identity and fraud checks, and making sure we’re confident in an ‘exit’ (i.e. that they’ll be able to pay back the loan).
A RICS survey is instructed and the legal due diligence begins. We also only lend at a maximum ‘loan to value’ ratio of 75%. In other words, a £750,000 loan would have to be secured against a property worth £1 million – giving a substantial 25% cushion against any fall in the value of the property.
This is a team effort including Charlotte, the staff at Jane Hartley and our introducers.
If you would like to see our underwriting processes in more detail you can view them here: https://www.thehousecrowd.com/contents/p2p-underwriting-procedures.
If everything is looking good we will start to raise funds at some point during this process. However, there is still a risk that at the 11th hour we will uncover something that either delays the loan or means we do not consider it prudent to continue in which case we would pull out and return investors’ money. This is an inconvenience for all involved but it’s clearly better than taking an unwarranted risk with your money.
Simultaneously with making the loan, our solicitor registers the legal charge at the land registry so the property cannot be sold or further encumbered without our permission.
Once the loan is made, we keep in regular contact with the borrower to see what progress they are making with their exit strategy. In most case the loans redeem on time or even early, but in some cases the borrower does not repay on time.
Repayment by the borrower is something beyond our control.
If this happens, our only recourse is to issue a default notice and begin legal proceedings. The borrower is at liberty to continue trying to sell or refinance in order to repay and we will keep in regular contact with them, but we cannot force them to do anything.
Once the legal process starts, we are at the mercy of the courts and it can take several months to get possession and then additional time to sell the property to recover what our investors are owed.
This is not ideal but it is the nature of the bridging industry. People are paying a high rate of interest as they have limited borrowing options and loans are sometimes not repaid on time. This something you need to accept before you make a peer to peer loan. If you want the certainty of being able to access your money exactly when you want it then a simple savings account may be a better option for you. But, of course, they will not pay anything close to the returns a peer to peer loan offers.
So, all investors must accept that repayment dates can vary but in return you are earning an excellent interest rate during the agreed loan period and a very attractive 1% a month (12% p.a.) whilst it is in default.
To give you an example one loan which redeemed this month (Westminster Gardens) was repaid 138 days late. We repaid investors the £353,000 capital invested plus an overall interest rate of 9.8% p.a. We had a lot of happy investors.
Jane has kindly drawn up flow charts of how the default process works for commercial and residential properties so you have a better understanding. Just click on the below links for further details.