Landbay, the peer-to-peer buy-to-let mortgage lender, has today published the results of stress tests that were conducted to Bank of England criteria and modelled how Landbay mortgages would perform in both a base and stressed economic environment.
Landbay says that it is the first peer-to-peer lender to put itself through Bank of England stress tests and publish the results, and asserts that it is very low risk, if not the lowest risk of all UK P2P lenders.
Given that P2P lending is a relatively new concept and one that inherently involves risk, having deliberately designed itself as a low risk P2P lending offer, Landbay thought it appropriate to put its business model through the same rigorous stress testing that UK Banks are required to go through by the Bank of England. To ensure total validity and credibility, it has employed an independent analyst - MIAC - to carry out the stress testing.
The results showed that:
- BoE base case scenario – assuming the economic conditions expected by the BoE = average expected loss rate of 0.03%, before interest payments
- BoE stress test – assuming GDP down by 3.5%, unemployment rising to 9% and UK house prices falling by 20% = average expected loss rate of 0.48% before interest payments
Landbay’s contingency fund is currently maintained at 0.60% of loan book, and so would absorb all of these losses.
Even if the stress test was made worse to include a 25% drop in house prices, the Landbay expected loss rate, before interest payments, would only increase to 0.52%.
Landbay says that the results provide hard and detailed evidence of just how secure lending at Landbay is for their customers.
John Goodall, cofounder and CEO of Landbay, said:
"These impressive results provide a firm vindication of our work to make lending at Landbay a low risk proposition –arguably the lowest risk of any P2P lending in the UK. For investors seeking better returns than those from bank savings accounts (3.5% and 4.4% currently) but without the radically higher risk of say funds investing in stock markets, Landbay is an ideal solution worthy of serious consideration."
Joe Macklin, Director of MIAC, added:
"MIAC believes the approach to generating key assumptions in this exercise has been prudent and has therefore resulted in conservative estimates of future portfolio performance. Despite this caution, given the adverse nature of the stresses and sensitivities we have applied in line with the BoE scenarios, Landbay’s existing portfolio, and its anticipated future portfolio, performed with impressive resilience."
Landbay added that one of the key reasons for the its model proving so resilient is the fact that it depends far more on the wider demand for housing – including rental – than just on house prices themselves. For lenders, security comes primarily from the cash flow enjoyed by BTL landlords from rental income from tenants, not the movement in the underlying value of the property should it be sold.
This means that even should economic conditions bring about big falls in property values, given the demand for rented accommodation will be unaffected in the short or even medium term, Landbay’s lenders remain shielded.
John Goodall explains:
"The great strength of BTL lending is that your return is secured primarily by the rent received by BTL landlords, rather than the underlying property value. So you are really investing in the health of the private rental market rather than the UK property market. Currently for Landbay’s mortgages average rents are 68% higher than the average interest payments required to service the mortgage. This is a key element of Landbay’s lending policy of focussing on the serviceability of the mortgages (and thus risk of default). The results of this stress test vindicates this approach, over and above those that purely focus on the asset value.
"With UK property prices well out of the reach of so many people, and little likely to change that in even the medium term, investing in the private rental sector is both remarkably secure and of social value as so many people are reliant on being able to rent."