Everything you need to know about property-backed IFISAs
Property-backed investments are extremely popular for a number of reasons.
Many investors appreciate the security of property-backed loans, as it means that there is an asset which can be sold off if the borrower defaults.
Furthermore, the ongoing housing crisis means that there is a surplus of demand for properties in the UK, and a dire need for more funding. It is no secret that banks have been pulling back on property lending in recent years, which has created an opportunity for alternative lenders to take a larger slice of the property lending market.
Read more: How will the property downturn impact P2P lending?
This extends to peer-to-peer lending platforms, which are overwhelmingly property focused, with tens of thousands of individual investors involved. It is no accident that the five largest P2P lending platforms in the UK right now (CrowdProperty, Folk2Folk, Kuflink, Invest & Fund and Proplend) are property-focused. All five of these platforms allow investors to earn tax-free returns from their P2P property investments via an Innovative Finance ISA (IFISA).
Read more: Property IFISAs: Backing bricks and mortar
But before investing in a property-backed IFISA, investors should be aware of the differences between certain types of P2P property investments, and the risks and returns that come with them.
- Property development
Property development loans tend to offer the highest target returns, as the profit margins are higher here than in other parts of the property market. Of course, the risks can also be higher. During Covid, building sites shut down and many development projects stalled, with unexpected charges eating into the potential profits. This is an extreme example of what can go wrong with a property development loan. If there are any delays during the construction stage, this can have a knock on effect which could lead to a higher risk of default. This is why it is particularly important to invest in a P2P property development platform which has an experienced team who can conduct thorough due diligence and offer borrower assistance where need be.
- Buy-to-let properties
Buy-to-let loans help individuals and companies to buy properties with the intention of making them suitable for renting. The amount of money that they borrow will be calculated based on the total expected value of the rental yield. This means that as long as the property has a good chance of being successfully rented out, then investors can expect a fixed monthly return.
- Bridging loans
A bridging loan is a short-term loan which is typically used to ‘bridge’ the gap between the purchase of one property and the sale of another. According to P2P analysis site 4th Way, around half of all P2P lending companies in the UK offer bridging lending, and they are most often used to buy sites or properties at auction which can be renovated and converted into buy-to-lets. Again, expertise is essential here so make sure you choose a P2P lender with a long track record in bridging loans.
Read more: IFISA special report: Hidden treasures
- Property secured loans
Finally, there are property-secured loans. These are loans of any description where the P2P platform takes a first charge against a property as security in case of a default. The borrower could be a business owner seeking to raise money for an expansion; or a consumer looking to fund a wedding or holiday. In order to hedge against the risk of a default, a commercial or residential property may be offered as collateral.
Generally speaking, P2P property platforms will cap property-secured loans at 65-70 per cent of the overall value of the asset. This means that in case of a default, there is a high chance of being able to recoup the total value of the capital investment through a resale of the property. If property security is important to you, be sure to check whether your P2P platform has a first or second charge in place, as this will determine your place in the queue should the loan fail.
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