Six points to consider before investing:
1. Understand the risks of what you’re investing in. P2P lenders with significant track records have got processes and history, and understand what has to happen in times of crisis.
2. Beware of the difference between pooled and contributory funds. There are advantages to each, but there are also risks.
3. If you don’t understand the P2P arrangement you’re investing in – that is, who’s holding the security, what happens if something goes wrong – then you wouldn’t put your money there.
4. Low loan-to-value ratios provide protection. If you’ve got the choice between two different mortgages, and on the face of it they look about the same except one’s got a lower LVR, choose that one because it reduces risk.
5. High interest rates normally mean high risk. If you’ve got a secured first mortgage providing you a return of 13%, you’re probably taking a fair bit of risk. This is not always true, IPO Wealth wasn’t necessarily offering high returns, but $80 million of investors’ money is now at risk. [The fund is in the hands of administrators.]
6. Time is of the essence. Secured first mortgages are a debt facility, so the borrower has to pay interest on the debt they owe. If they don’t, they end up in default and there’ll be fees and costs associated with this. If you’ve got a higher LVR, those costs can add up quickly and effectively increase the LVR to a point where, if the underlying property doesn’t sell to its original valuation, then sometimes you can risk losing access to some of the penalty interest. You’ve got to understand the process a P2P lender has when someone defaults.