Farewell 2017, I’m glad to have known you but honestly, I’m happy you’re gone. Personally, 2017 was a difficult year as I went through a major life change that resulted in some financial implications (more about that in another post). As I learn to accept this change, I’m looking forward to a positive 2018 where I can be of service by providing information on this website to those beginning or continuing on their investing journey.
From the introduction of the IFISA to the fluctuation in interest rates, 2017 saw many changes within the peer to peer lending and crowd-lending sector. Despite the falls in lender interest returns, I still think peer to peer is an attractive investment vehicle and I continue to remain invested.
For me, here are some of 2017’s highlights, both good and bad.
The IFISA
Most of the major peer to peer lending companies including Ratesetter, Zopa, Lending Works and Assetz Capital launched their IFISA’s. The confusing government rules on IFISA allocations didn’t help boost the popularity and have left inexperienced lenders confused. Here’s the IFISA breakdown in a way my simple mind can understand it.
You can use your current years ISA allocation and place it into one new IFISA (for example, a peer to peer lending company). You can split your allocation however you please but you can only use one IFISA. For example, you could place 50% into your Assetz Capital IFISA, 25% into your cash ISA and 25% into a stocks and shares ISA.
You can place existing ISA money from previous years however you like. For example, you can take £10,000 and open 10 IFISA’s and split the money however you’d like.
Why the government doesn’t allow one to split current year ISA allocations into multiple different IFISA’s is a mystery but that’s the government for you.
I’m often asked which peer to peer company IFISA I choose? Personally any peer to peer company I invest through using a regular account, I would be happy to use their IFISA.
I will be writing more about IFISA’s in a separate article.
Loan Droughts
2017, in general, was a good peer for peer loan supply, but several of the more popular companies experienced periods of new loan infrequency. These loan droughts occurred as both company competition and lender demand increased. When more peer to peer companies are fighting over loans, borrowers have increased power to negotiate lower interest rates for their loans. Some peer to peer companies offer borrowers lower interest rates to generate new business while other companies pass on lower rate loans as they know their lenders won’t be receptive to the lower returns.
Sporadic loan droughts were especially apparent towards the end of 2017 as many lenders reported holding higher than normal cash balances in their peer to peer accounts. Personally, I wasn’t willing to accept lower quality loans and preferred to be patient, even if that meant funds were idle.
Falling Lender Interest Returns
2017 saw many peer to peer companies cutting their lender return rates. This was due to increased company competition and lender demand. Companies such as Growth Street, Ratesetter and Funding Circle all reduced their rates by significant amounts. Even my favourite Assetz Capital dropped their rates.
Lendy continued to offer their standard 12% loans but also introduced a mix of began offering of mix of 8-10% property loans. This lowering of rates didn’t hamper lender demand as loans were snapped up quickly. Funding Secure maintained their higher rate property loans, as did Collateral and Moneything.
The most significant rate drop was on Zopa’s Plus account which plummeted from an expected 6%+ to 4.5%.
What Was Disappointing
The two biggest company changes for me were Bondmason and Zopa.
Bondmason raised its minimum investment to £5,000 and it also raised its management fee to a maximum of 1.5%. In my 2016 Annual Review, I wrote about my high hopes for Bondmason but ultimately, I decided to exit from the company as I chose not to meet their minimum investment requirement and I thought the fees were somewhat lofty. Despite my exit, I still like Bondmason’s business model and I love the people behind the company.
As for Zopa, I was using their Plus account when the announcement was made that Zopa would be removing the provision fund and reducing the return rates. This meant a large increase in risk for lower rewards and for me, exiting was a no-brainer as there are too many other peer to peer lending options. I decided to let my loans mature rather than to pay the sell out fees.
What Was Pleasing
This may sound fundamental but the most pleasing aspect of 2017 was getting paid on time. I can’t think of many instances of late monthly payments (other than borrowers paying late) so this is a good sign of things to come. After all, if lenders aren’t paid, the purpose of investing is defeated.
Secondly, Funding Circle’s changes were pleasing to me but not all lenders shared this view. Lenders who enjoyed manually being able to pick and choose loans at various interest rates were annoyed when Funding Circle discontinued manual lending in favour of an automated lending model. Here were some of the changes
- No more manual investing in loans
- Two auto-bid products, Balanced and Conservative, auto-reinvest
- No more than 0.5% of your portfolio will be lent to one business (£20 per loan min)
- Loan parts will be no larger than £100 making them easy to resell
- No more secondary market fees for reselling loan parts
I was happy to take a lower rate in return for hassle-free lending and I also liked the fact that selling out became easier and fee-free.
Rising Defaults / Default Handling
Defaults are part of peer to lending and if you haven’t experienced a few, you haven’t been investing long enough. Here are some of my notable default situations and findings.
My peer to peer darling Moneything, which had managed to remain spotless in 2016, experienced its first loan defaults in 2017, three of which I’m invested in. Since these are property defaults, it will take time to see how this process is handled although I have high hopes Moneything will be able to recover.
Lendy experienced a large increase in defaults and as of January 1st, 2018, 21 loans are in default. This has some lenders worried but to Lendy’s credit, they have recovered several other defaulted loans in 2017. Lendy has also had 70+ loans repaid in 2017 so I have high hopes that Lendy can carry out successful default recoveries and manage future risks. Time will tell.
Funding Secure has a number of property related defaults that it is pursuing and out of their past 100+ recovered defaults, only a handful have been property. As of January 1st, 2018, 24 out of 45 defaulted loans and tranches are property related so it will be interesting to monitor this going into 2018. On a positive note, Funding Secure has successfully completed a vast number of loans in 2017, (too many for me to bother counting). There have been a couple of concerning Funding Secure loans where loss of capital looks probable. I maintain that property valuations across all peer to peer companies are extremely subjective, especially land valuations. Don’t be surprised if recovered property sales fall short of valuations. I always try to do my own valuation estimates on property loans. Also, I steer clear of anything other than first charge loans; I don’t care if a second charge loan pays 5% more than a first charge loans as I know in the event of a default, second or third charge recovery is troublesome.
Of all the companies I invest through, Unbolted’s default handling has impressed me the most. This is mainly due to the fact that Unbolted lends money on items such as gold coins and jewellery. These items are far easier to recover than property as they can be quickly auctioned without all the legal red tape. Occasionally I receive a successful default recovery email from Unbolted so I rarely ever worry about Unbolted defaults. Keep up the good work!
As peer to peer lending companies and their loans mature, I fully expect to see more defaults. The manner and efficiency in which they handle these defaults will be crucial to maintaining lenders’ confidence and trust.
More New Peer To Peer Companies
While not quite as active as 2016, 2017 saw the introduction of several new peer to peer lending companies. I’m not usually an early adopter but I will take a gamble on a new company if it looks interesting. None of the companies launched in 2017 have peaked my interest as of yet.
Peer To Peer Lending Still Remains A Blacksheep Investment Vehicle
When I mentioned I invest in peer to peer loans, financial advisers reactions range from soured to scoffing.
One experienced IFA named Norman stated, “I would certainly never invest my clients’ money in peer to peer lending, it’s just too risky”.
This unsurprising comment continues to be the sentiment of most financial advisers I have met. FA’s don’t make commissions by recommending peer to peer lending companies to their clients. Keep in mind FA’s rarely recommend passive index trackers even though they are one of the best choices for investors, so the value I place on financial advisers comments regarding tracker funds and peer to peer lending is minimal. Most would rather sell you a fee-heavy managed unit trust or mutual fund as the commissions are bigger. These funds rarely outperform the indexes over long periods as the expenses are so high.
Brexit Still Looms
With the UK Brexit still on the horizon, no one really knows how this will affect peer to peer lending. It could take years before Brexit is complete, so I don’t see much of a short-term effect on peer to peer lending.
What Changes Did I Make in 2017?
I continued to invest 11-15% of my liquid net worth in peer to peer lending throughout 2017. I moved money between platforms when the loans or rates looked unfavourable, or when I noticed company changes I disliked.
I reduced my holding in Lendy slightly as I want to see how they handle their defaulted loans. I reduced my Ratesetter balance as their interest rates fell below my acceptable levels and I increased my investment in Ablrate and Unbolted as their new loan flows increased.
What Can We Expect in 2018?
I expect the Bank of England to raise interest rates slightly in 2018 but I don’t think this will have a significant impact on peer to peer lending rates. If anything I would expect peer to peer lending rates to remain steady or even fall as more lenders test out the peer to peer waters. It’s uncertain how much of an impact IFISA’s will have on rates. In theory, more money should be flowing into peer to peer lending because of the IFISA introduction but the ISA rules can be somewhat confusing and off-putting. Financial advisers are still wary of peer to peer lending as they continue to steer their clients towards perceived “safer” investment vehicles like managed unit trusts.
If peer to peer lending rates fall, there could be a growth slowdown as savvy lenders evaluate risk versus return. For me, Zopa was a perfect example of knowing when to exit as the returns weren’t in line with the risk. I would expect some peer to peer companies to drive lending rates lower to attract more borrowers and also to test lender appetite for lower paying products.
I continue to optimistically hope all platforms can be run profitably and honestly. A Trustbuddy type failure in the UK could be disastrous to both consumer confidence and the peer to peer lending sector as a whole.
What’s My 2018 Strategy?
My 2018 strategy remains simple. Choose the best quality loans and keep a close eye on the companies offering them ready to make changes as needed. If return rates fall too low, I will move money between platforms. Companies such as Mintos are looking more attractive due to higher paying returns, but the risk is higher being they are European based and unregulated in the UK. I don’t feel particularly loyal to any peer to peer company at this stage, especially if they make changes I disagree with (I’m talking to you Zopa!). I do however support the companies I invest through and plan to remain invested with most the companies I write about on this website, especially those in my Top 5 Peer Peer Lending List.
My Top 3 platforms:
Moneything, Assetz Capital and Ratesetter are currently my top three investments allocation wise. If any interesting new platforms appear, I will consider investing for a probationary period.
If you want to view all the companies I invest through, visit my Where I Invest page.
Outside of peer to peer I continue to stay the course and invest in low-cost index tracker funds. I have also dabbled in a little cryptocurrency although I’m depressed I didn’t buy Bitcoin when I first looked into cryto in 2013 (the price was $2!). I do think Blockchain technology has huge potential but I still view cryptocurrency as a shot in the dark gamble and would only recommend investing money you can afford to lose. Cryptocurrency volatility means your account could be worth millions or pennies. The coins I currently own are Bitcoin, Ethereum, Litecoin, Tron, Ripple and IOTA although if I could redo, I would have purchased more Ethereum as I’m not sure the other coins are better investments.
I still haven’t found that elusive investment crystal ball that will tell me the exact date of the next stock market crash, but when I find it, I shall certainly share all the information with my beloved Financial Thing readers before disappearing off into the sunset.
I believe 2018 will be a wonderful and prosperous year for all Financial Thing readers and I look forward to us all winning the investing game together. Remember if you haven’t started investing yet, it’s never too late to start.
Happy New Year!
