Crowdsourced loans and peer-to-peer lending are cutting banks out of the mortgage market – and this is just the start

Want a piece of me?

NEED a mortgage? In the near future you may find yourself canvassing strangers online for a loan instead of your bank. The rise of a new kind of crowdfunding website is opening up the potential for everyone to take part in – and profit from – financial services, without a bank in sight.

Peer-to-peer (P2P) lending, which connects those who need money with those looking to grow their own, has enjoyed a dramatic rise in popularity in recent years, fuelled by a shortage of credit at one end and lacklustre interest rates at the other.

The trend began in earnest when sites like Zopa began helping people secure personal loans through crowdsourced funding. But now an increasing number of peer-to-peer investors are looking to get a slice of the property market.

The system works by allowing people from all walks of life to pool their money and act as a lender to a home buyer. Investors sign up through a website where loan requests are published alongside details about the applicant. Once you have decided who to lend money to, you can invest as little as £100 in the mortgage. In the UK, there are rarely limits on the maximum investment you can make, and interest is typically paid back to you monthly. Regulatory oversight for the area is growing too, with bodies such as the P2P Finance Association now enforcing rules on its members.


Growing enthusiasm for the model is giving the companies who manage peer-to-peer lending arrangements big ideas. “P2P is a large part of the current strategy, but it’s really about opening up the mortgage market to be accessible purely online for people,” says Ian Thomas, co-founder of LendInvest.com, which offers P2P mortgages. “That’s the real power of what we’ve created.”

LendInvest users can choose from a range of high interest, short-term loans requested by residential and commercial mortgage seekers. Loan repayments net those investors a monthly fee, which the company says sits at an average of around 6.5 per cent.

I’m getting a 6 per cent return. If you go to the bank you’ll end up with 0.5 per cent

Danny Cox, a spokesman for financial services company Hargreaves and Lansdown, says that the UK’s rock-bottom interest rates since 2009 have encouraged the rise of such “alternative finance”. This is now leading some to question the need for banks for certain financial transactions. “The amount of money spent on P2P is still small, a little over a billion pounds in the UK, though the market is growing very rapidly,” Cox says.

There are risks, however. Cox points out that commercial properties generally carry a higher risk of buyers defaulting on their payments. “The key to the continued success of P2P is the correct assessment of risk,” he says.

If P2P firms aren’t transparent about the risks facing investors, that could create a situation in which expected returns fail to materialise. Some also worry that the credit score demands on P2P borrowers might be relaxed to encourage market growth.

Crowdfunding is also making it easier for investors to enter the buy-to-let market (BTL) without needing to buy a property outright (see “Buying houses by the brick“).

Last year, the Royal Institution of Chartered Surveyors (RICS) expressed concern about the “liquidity shock” that BTL crowdfunding posed to the housing market by making the purchase of a share in a house “as easy as ordering a book on Amazon”.

An internal paper shared with New Scientist estimates that if 5 per cent of household savings in the UK were invested in these schemes, it would add an extra £50 billion to the country’s housing market over three years, probably exacerbating house price volatility. As well as the danger that greater access to property investment collectives will drive houses prices even higher, the RICS report notes that the schemes will require policymakers to rethink how they manage the property market.

But buying property through crowdfunding could also limit the dominance of big-time investors. Aifuwa Ehigiator is the founder of a start-up called Our Street, which hopes to allow the people of Brooklyn in New York a chance to invest in local properties. They will jointly provide the money to buy the houses, which will then be refurbished and made more eco-friendly before being rented out for profit.

Ehigiator says he has nearly 200 locals who are interested in investing and, provided additional commitments can be secured, he hopes to launch the venture in the coming months.

Thomas believes crowdfunding initiatives could change the face of the housing market. LendInvest looks set to focus on financing mortgages, but with over £200 million invested through loans listed on the site so far, the race to upset the banks has only just begun.

“Everyone is picking a different segment of the market, whether it’s business loans or mortgages,” he says. “Banks will eventually become more like transactional providers, and specific products will be done more and more by P2P.”

However, traditional banks aren’t on the ropes yet. It’s possible that as confidence in the economy grows, they will begin retaking their lost share of the market. This would leave P2P lenders with the less desirable assets, and their risk spread thinly across a pool of borrowers with an uncomfortably high default rate.

Buying houses by the brick Retiree Roger Hockin discovered crowdfunded property investment site The House Crowd while casually browsing the web. The company owns almost 100 properties and has raised over £7 million to date. Hockin says that after two years, he’s very happy with the investment he made on a single property, especially when compared to the rates attached to traditional retail savings accounts. “Overall, providing you’re prepared to invest pretty long-term, the return you’re getting in comparison to the banks is very good,” he says. “I’m getting 6 per cent. If you go to the bank you’ll end up with 0.5 per cent or something silly.”

This article appeared in print under the headline “Shared housing”