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Is peer-to-peer lending the future of bridging with buy-to-let?

Published: 19 December 2016

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Author: Carl Shave - CEO and co-founder
Last updated: 21Jun2024

Peer-to-peer (P2P) lending aims to connect lenders and borrowers online via specialist websites, rather than via the traditional route of a financial institution. Lenders can choose to put in varying amounts, meaning loans are effectively crowdfunded. Both parties stand to benefit from such an arrangement – lenders, because they get a better return on their money than if it were to sit in a savings account, and borrowers, because they can make sometimes considerable savings in terms of both time and money when it comes to raising finance. P2P websites have operated for about a decade in the UK, during which time the sector has grown rapidly: in 2015 alone, UK P2P lenders collectively loaned over £3 billion to consumers and businesses. P2P lending may be either secured or unsecured. Unsecured lending is authorised depending upon a borrower’s creditworthiness, whereas secured lending is also backed by collateral – that is, a tangible asset such as property, which would be forfeit should payments not be kept up. However, while it is regulated by the Financial Conduct Authority (FCA), P2P lending is not covered by the government-backed Financial Services Compensation Scheme (FSCS), so lenders could potentially lose their investment if a borrower defaults on an unsecured loan.

An Opportunity for Landlords?

P2P lending offers an interesting opportunity for buy-to-let landlords. For those wanting to access finance quickly in order to avoid missing out on an opportunity, P2P bridging finance could be the perfect solution. It promises to be cheaper than traditional bridging finance, allowing decisions and transactions to be conducted more nimbly. While to date in the UK unsecured P2P lending has been most common, a shift to secured lending is considered likely. That has potentially a great benefit for property buyers, and established buy-to-let landlords should be in a prime position to benefit. In the case of a prospective buy-to-let landlord, with the basis for a decision on finance resting on the value of the property and the rental income it provides – rather than their current income or assets, as is the case with some mainstream buy-to-let lenders – the market could be opened up to those who might currently struggle to obtain affordable finance via traditional channels.

Risks of Peer-to-Peer

Having said that, P2P lending – in common with all business dealings – is not risk-free. If a borrower defaults on a secured loan, they may lose their collateral. If prevailing interest rates soar, lenders might lose out on the return on their investment. If the UK property market suffers a downturn, both ability to repay and the value of collateral could be affected. Earlier this year the former chairman of the Financial Services Authority, Lord Turner, expressed concern about the risks people were taking by lending via P2P websites, saying: “The losses which will emerge from peer-to-peer lending over the next five to ten years will make the bankers look like lending geniuses.” Conversely, MoneySavingExpert founder Martin Lewis is in favour of P2P lending. He wrote in The Telegraph: “As someone who has personally been using peer-to-peer sites for a good few years, it has always been strong and consistent in terms of returns … it’s somewhere in between saving and investing.” Risks to lenders notwithstanding, it would seem that P2P lending offers some interesting opportunities for the buy-to-let market, particularly for bridging finance. In fact, industry experts assert that P2P lending for the buy-to-let market is the least risky. And with initial stakes for investors starting as low as £50 on some P2P sites, opportunities and benefits would seem to exist for both lenders and borrowers.