When it comes to investing in or developing property in the UK, do you know what peer-to-peer lending and crowdfunding are to help finance your ambitions?
If not, then this article is for you. Here we explain the benefits for those who are looking to lend money and for those wanting to buy property – and also for anyone wanting to borrow cash in this way.
If you are confused, then this is understandable since both routes deliver the same principle in offering money to investors who are looking for capital.
There’s no doubt that as a type of alternative finance, these funding routes are growing quickly in popularity – and they have done since high street banks tightened their lending criteria after the financial crash of 2007.
Crowdfunding or peer-to-peer lending might be suitable
So, for those who want to access money quickly and who may not meet the lending criteria of a bank or building society to buy a property, then crowdfunding or peer-to-peer (also known as P2P) lending might be a suitable choice.
Also, just about anyone can become a lender and you will need:
- To be at least 18 years old;
- Have your own bank account;
- Decide how much, or how little, you want to invest.
It’s not unusual for borrowers to go through a number of credit checks and the lender may have other due diligence verification processes – which should bring some peace of mind when you are offering to buy a stake in a property.
In the UK, property crowdfunding and P2P lenders and investors are guided by the regulations laid down by the Financial Conduct Authority (FCA).
This is a framework offering guidance for regulated firms to help provide their investors with enough information so they can make an informed decision about whether they should enter into a potential investment opportunity.
Lenders, or crowdfunders, can then decide whether they want to use this information to participate or not, depending on the opportunity.
So, how are P2P lending and crowdfunding different?
What is peer-to-peer lending?
Peer-to-peer lending, in some circumstances, may involve holding a high-value property as an asset should the borrower default on their loan. For example, the borrower may also pledge luxury items or land as well as property.
This asset will then be sold at auction should they default and investors will receive a proportion of the money raised – though this depends on the loan-to-value ratio, but they will be able to recover as much of the investment as is possible.
This is the point to highlight that not all of the initial capital that has been invested may be recovered and this is a risk for those who follow the P2P lending route.
Potential lenders will need to appreciate that as a peer-to-peer lender, they will be lending directly to the borrower so you have a share of the borrower’s debt.
What is property crowdfunding?
With property crowdfunding, all of the investors involved will be lending to a special purpose vehicle (SPV), which will then lend the money to the borrower.
This means a property crowdfunding site will enable an investor to benefit from any capital growth that is generated from property investment.
That’s because investors will collectively share their funding to help buy a property they like the look of and then receive returns that are based on any increase in the value of their investment.
Also, as a lender, you may find crowdfunding sites offering the chance to invest in a property for letting and you will get a slice of the rental income in addition to the capital growth – when the property is sold. The attractions for doing so include:
- You will not be involved in the day-to-day running of the rental property;
- Professionals will do this on your behalf – though they will take between 10% and 15% of the rental income for this.
For those who want to invest in property letting then this route offers a way to do so at a fraction of the cost – and to share the risks and rewards with others.
Since the UK has been stuck in a low-interest-rate environment for several years, it’s easy to see why such lending has grown in popularity with some crowdfunding sites offering returns of 2% – 8.5%.
Again, lenders need to appreciate that the value of their investment may decrease so they may not see a return – which means they could lose all or some of the capital they have invested.
Property crowdfunding is also a collective investment opportunity with lenders offering to lend money to those parties who are wanting to buy or develop a property – which is why it is also known as equity crowdfunding.
This type of property crowdfunding is often more attractive to sophisticated investors – that is those investors with a great deal of financial investment experience – and they will have access to more investment capital for a project.
Essentially, that’s the difference between property crowdfunding and P2P lending, so they both have the ability to deliver high returns but they also offer noticeably higher risks than simply placing your money in a savings account, for example.
Access a crowdfunding loan to buy a property
As a borrower looking to access either a crowdfunding loan to buy a property or simply use a crowdfunding platform for donors to simply give you cash for the deposit or actual home purchase, then there are risks and benefits that you will need to be aware of.
But why should borrowers be interested in P2P crowdfunding?
The simple answer is that they don’t have to wait months to complete a bank’s formal application process, which means signing lots of forms to access a substantial loan.
It’s also worthwhile considering crowdfunding as a borrower to buy a house and this is possible.
However, it’s a route that has a number of issues including:
- Firstly, if you are crowdfunding it probably means you don’t have the cash for a deposit, so you are essentially asking family and strangers for donations;
- The platform will take up to 5% of the donation for admin purposes;
- There should not be an issue with obtaining a mortgage from a bank but be prepared for some questions as to where the cash has come from;
- For most lenders, the money will be considered to be a ‘gifted deposit’ and the lender will need proof of where the money came from – and that you don’t have to pay it back.
If you do go down this route, be prepared for some negative reaction from potential donors.
You will also need to agree to terms to buy a property with the fundraising site. Plus, the site will carry out due diligence to ensure you are not committing fraud.
The Financial Services Compensation Scheme
Along with greater rewards and risks, potential property investors wanting to become involved in a P2P lending or property crowdfunding scheme should opt for one that is protected by the Financial Services Compensation Scheme (FSCS).
If you find a scheme offering lucrative returns but they are not part of the FSCS, then your money will not be protected and you risk losing it all.
There’s no doubt that in a world of low-interest rates and poor returns on investment accounts, that the higher return potential for property crowdfunding is making this a popular route for investors wanting a share in a property – with very much reduced risk.
The benefit is that for both borrowers and lenders, the onset of online platforms means lenders and borrowers can put finance together in just days, though usually, this process will take weeks depending on how many others are attracted to the investment potential.
Peer-to-peer loans and property crowdfunding
When it comes to understanding the difference between peer-to-peer loans and property crowdfunding, investors should appreciate:
- You should seek independent financial advice before making any kind of investment;
- Property crowdfunding sees a group of investors join together to buy a property as an asset, so they own a proportion of it. This is also known as equity crowdfunding;
- You get paid with rental income or when the property is sold and the capital gains are realised;
- Peer-to-peer lending puts the investor in the position of the mortgage lender, so the borrower can buy a property or develop one they already own. This means that peer-to-peer borrowing is really a short-term loan that will be secured against a property, but you do not own that property;
- You get paid when they refinance or sell the property with the mainstream lender, usually obtaining a mortgage.
And while peer-to-peer lending and property crowdfunding are alternative forms of finance, their growing popularity will help ensure that they remain an important part of the potential finance sources for property buyers and developers in the UK for years to come.