Fintech 2016: Landbay brings P2P to buy-to-let

Peter Lee
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Having attracted investment from Zoopla and with an Isa offering in the works, Landbay sees a big opportunity in marketplace lending for landlords.

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Peer-to-peer lenders have grown fast in the US and UK in recent years, thanks to low interest rates, dissatisfaction with meagre returns on bank savings and disaffection with banks generally.

Leading marketplace lenders such as Zopa, Funding Circle, RateSetter and Lending Club are now inspiring a second generation, seeking to fine-tune the business model of lending outside the traditional banking system.

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John Goodall

One such is Landbay a UK-based peer-to-peer lender founded in 2013 by economist John Goodall and property finance analyst Gray Stern that focuses on loans secured against rental property.

"At the time we founded Landbay peer-to-peer lending in the UK had mostly channelled investors to unsecured consumer or SME loans," says Goodall. "While those forms of credit have performed well since the financial crisis, at some point there will come a change in the economic environment and they will perform much less well. Our idea was to offer our investors access to an asset class with proven performance through the cycles, one that is both scalable and resilient."

The £30 billion a year buy-to-let mortgage market was that starting point. Though a big market, it is still not a core one for the big UK banks. "Residential mortgage lending is both heavily regulated and low margin, and it would be hard to build a peer-to-peer lending platform and achieve scale in it," says Goodall. 

"By contrast, pricing is relatively attractive in buy-to-let mortgages, especially in the market for loans to professional or semi-professional landlords rather than to owner-occupiers buying a second home to provide rental income, which banks underwrite almost like a second home loan. That fits through their residential-mortgage processing machine, and Lloyds in particular has a very high market share."

While Landbay is a disintermediation play against banks, it is competing more against wholesale-funded challenger banks, such as OneSavingsBank, Aldermore and Paragon, than against the big five UK high-street banks.

Bridging interruptions

Landbay, which is regulated by the FCA but where investments are not protected by the UK’s deposit insurance scheme, promises investors compound fixed returns of 4.5% on a three-year deal or 3.35% above Libor on a floating-rate product. Those returns look lower than the headline rates on peer-to-peer platforms that match investors to consumer credit, but Goodall argues they are still good rates for much lower risk.

Landbay benefits from funding lines provided by founding shareholders that allow it to bridge interruptions between loan approvals and cash coming in from investors to match against approved loans.

"We don’t want to become a lender ourselves and we don’t have bank lines, but it is important for any platform to match that gap," Goodall says. "For example, if we have 50 people applying for a mortgage, we might end up approving half of them. Then we can see that in eight weeks from today we are likely to have 25 mortgages of £200,000 each that meet our underwriting standards, and have to be sure we can fund them. We have less certainty as to investors’ cash coming in two months forward, so we have to ensure there’s backstop liquidity to fund our pipeline at all times."

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Fourteen fintech firms in focus

Capital markets

Peer-to-peer, marketplace lending

Blockchain and cryptocurrencies
Applied Blockchain

Financial inclusion
Global Invest Her


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The platform works closely with a number of specialist buy-to-let mortgage brokers intermediating for professional and semi-professional landlords seeking bridging loans, development loans and mortgages.

At Landbay, as at other peer-to-peer lending platforms, underwriting skills are key. Goodall says that Landbay will lend up to 80% of the value of a property only very rarely.

"The vast majority of loans are below 75% loan-to-vale with the average at around 60%, which is in line with most lenders that work at around 65% to 70% LTV. We also work on a fairly standard 125% rental income-to-debt service coverage ratio, and we’re quite focused on that income piece. Your loss-given-default isn’t going to be that much different if you are lending at 70% loan to value or at 75% loan to value. The key thing in our mind is to minimize the risk of borrowers defaulting at all, which is likely to increase if people can’t service debts out of rent. So our credit underwriting tends to focus on cash flow."

Goodall says that the publicly available information on property values is now so comprehensive that Landbay is able to make loan decisions in principle very quickly – in as little as 48 hours, compared to three weeks at many bank lenders – though still subject to ability to claim legal title if a lender defaults and subject to surveyor’s valuation of the state of a property.