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The Reality of Investor Risk in P2P Lending

The big four banks in Australia. Westpac, Commonwealth, ANZ, NAB.

In the wake of the 2017 banking scandals where the Big Four were reported to have engaged in “profit at all cost” schemes, financing options for developers and investors alike are drying up leaving a market of opportunity for alternative financing platforms. Enter Fintech and peer-to-peer (P2P) private lending platforms.

Some of the wealthiest families have accumulated affluence by lending to others. They have provided direct first mortgage investments as part of a diverse portfolio. They understand that mortgage-backed loans are an asset class where they can get the highest risk-adjusted returns. 

With the rise of private lending/P2P platforms, the opportunity to invest in mortgage-backed loans is now available to investors worldwide. There are a plethora of related products such as commercial mortgages, property development financing, bridge financing, and interest-only loans.

Here to help you, as an investor, understand the potential of this opportunity, we examine some of the risks, some risk mitigators, and touch on the investment benefits of the private lending market.

Underwriter Risks

P2P lending is an exciting new investment opportunity. But as with any investments - and especially those with the potential for high returns - there are risks that you need to be aware of, such as:

Default: There are two types of default deadbeats: intentional and capability. The latter has gotten in beyond their ability to repay, typically by being overleveraged. The first has no intention of paying off the loan. 

To minimise default risk, full credit checks, background checks, and situation assessment need to be thoroughly analysed to determine whether a borrower presents a low, medium or high risk. The best way to reduce default is to increase the quality of the borrower and keep the loan-to-value ratio (LVR) low. Easily said. Keep reading for more...

Fraud: As an investor, you need to be watching both sides of the aisle. You need to know who the P2P operator: Are they who they say they are? Do they have credibility? Do they have the expertise they claim and can they deliver?  On the other side, you need to understand the borrower profile. Are they who they claim to be? Some P2P providers will perform borrower due diligence on your behalf, others give you the information and make your sort it.

Cybersecurity: The media loves bad news; and therefore, barely a day goes by when someone isn’t reporting yet another cyberattack. Of obvious concern, this should not deter you from venturing into the Fintech market with the right P2P partner. Advanced security technologies are setting a hard pace; DTL (distributed ledger technology) and blockchain technologies are making things harder to hack, and current encryption technology exceeds the capacity of today’s “hacking” powers.

Changing Regulations: While admittedly struggling to keep up with the rapid changes, there are governing bodies who are monitoring developments in Fintech. Australia’s government intelligence agency, AUSTRAC, collaborates with startups to identify needed regulatory safeguards. As an investor, it’s unlikely that any new regulations will impact you directly, but you want to ensure your P2P partner is staying abreast of any new regulations as they happen.

Benefits of Private Lending Investing

Risk is a matter of personal taste, yet high yield is likely on everyone’s preferred menu. If you’re still undecided if this is the investment market for you, here are some of the benefits for your consideration:

High Return Rates: While there are never any guarantees that you will receive high return rates, P2P lending is looking strong with some investors reporting up to 12% p/a. And, in light of the current savings rates across Australia (the low at 1.70% from CBA (Big Four) to the market leader, UBank at 2.87%), it’s not surprising that “savers” are looking for alternatives to grow their nest-egg - even using SMSFs (self-managed super fund) to get in on the action. 

Ease: As your partner, P2P platforms are making it easier than ever to invest. They handle the paperwork, legal documentation, and perform borrower due diligence, including background and credit checks. Most P2P platforms also provide automated monitoring and reporting of your portfolio performance.

Security: P2Ps are obligated to lend responsibly and conduct security checks on borrowers. While not regulated by APRA (Australian Prudential Regulation Authority), they are required to be licensed by the Australian Financial Services (AFS) and are under the purview of the ASIC (Australian Securities and Investments Commission).

Risk Mitigators:

Once you’ve determined your risk tolerance and ROI comfort level, common sense is your next best ally. Use it to mitigate your investment risks:

  • Everything in moderation: You should always be mindful of investing only that which you can safely and comfortably risk losing. 
  • Diversification: Probably the number one rule in any successful portfolio: don’t put all your eggs in one basket. Consider investing in multiple P2P platforms with different target markets. Also, consider diversifying within a single platform by selecting different types of borrowers with varied risk assessment.
  • Due Diligence: Choose your P2P partner wisely. Ask about the platform’s overall volume, their average returns, their default numbers, and their recovery processes. Understand the market in which they specialise. Are they investing in single-family homes, commercial real estate or property development financing? Not all loans are created equal — likewise, your P2P platform. 

Bringing the Rewards and Reducing the Risks

With a combined 38-years experience, Acumen services a niche financing arena that has led to their phenomenal success. Currently, their core product is Direct First Mortgage investments with a low LVR backed by multiple exit strategies. As a true partner, Acumen is also a co-investor; sophisticated investors can rest assured that their best interests are at heart, receiving the same attention, due diligence measures and servicing that you would do for yourself. 

Acumen Finance specialises in Property Development Finance, offering direct first mortgages, bridge financing and interest-only loans. Working on exclusivity, their settlement rates are higher than others in the industry. 

Acumen is only lending directly on a mortgage, with real dollars and secured with property. They take a first mortgage security position and reject deals that are borderline or not of a commercial standard. When appropriate, loans are further secured with other assets: real-value, commodities that keep the borrower motivated. 

As a partner investor with a long list of resources and a trusted history, Acumen Finance can write private loans for clients when the big banks can’t. Armed with a staff of creative, experienced brokers, consultants and documentation specialists, they can write loans that appease all parties - often under tight deadlines.Contact us today and speak with our experts to see if we might hold the investment opportunity that will help you improve your investment returns and secure a brighter, prosperous future.