P2P Guide

29 P2P IN ACTION: BORROWER CASE STUDIES P2P in action: BORROWER CASE STUDIES Case Study: Loan Underwriting – Residential Property Loan We’ve used our sponsor, Octopus Choice, as a case study of the underwriting process for P2P property loans. Of course different platforms will have different processes, but we think this is instructive of just how safe the lower-risk end of the P2P sector can be. THE LOANS The loans originated for lenders in Octopus Choice are carefully selected by their dedicated lending team, Octopus Property. They do all sorts of lending, but the loans that are made available for investment through Octopus Choice have a few things in common: 1. Octopus Choice co-lends 5% of each loan in the first loss position. This aligns their objectives with those of the other investors. 2. They’re all secured. All loans are secured against bricks and mortar with a first charge, and the focus is currently on residential property, although commercial property is also available. 3. They’re all conservative. The maximum ‘loan to value’ (LTV) ratio is 76%. This means that, if a borrower were to fail to repay their loan, the property taken as security would have to fall in value by 24% before any capital would be lost. 4. They’re typically short term. Octopus Choice generally make loans of between nine months and two years, although they can extend beyond this. THE BORROWERS The borrowers tend to be property professionals who require a level of speed, flexibility and certainty that traditional lenders can’t provide. They may use the money for a variety of reasons, for example: • To add to a buy-to-let portfolio. • To diversify their funding away from one bank. • To renovate a property. • To buy a property at auction, where full payment is required within 14-28 days. • To raise short-term capital. • To secure a discount on a property by buying it quickly. TYPES OF LOAN • BRIDGING RESIDENTIAL: bridging loans with terms of up to 18 months. • BUY-TO-LET LOANS to landlords, with terms of between two and five years. • BRIDGE-TO-LET: a hybrid bridge and buy-to-let loan in one - loans last either two or three years, with the option to exit within the first seven months. • COMMERCIAL and longer-term buy-to-let. UNDERWRITING PROCESSES THE ASSET: Octopus commission an independent RICS valuation, and assess the location, condition, rental possibility and alternative use value of the property. THE BORROWER: Octopus don’t rely on credit scores, but instead undertake full credit profiling looking at the borrower’s track record, exit strategy, the equity in the deal, additional security of offer and their total exposure to borrowing. This process is not automated and instead relies upon careful, expert scrutiny. THE EXIT: If the proposed exit is via a sale, Octopus look more closely at the valuation of the asset; if the exit is via refinancing, Octopus place more emphasis on the strength of the borrower and their creditworthiness.