Investors who include peer-to-peer (P2P) investment in their otherwise all-cash portfolios can substantially increase overall returns, with only limited downside.

Research by Lendy, which is one of the largest P2P property platforms, has compared the projected returns of two portfolios:

• 90% of the first is in a cash ISA earning a generous 2% per annum*, with the remaining 10% invested in a typical Lendy P2P loan paying 12% per annum
• 100% of the second portfolio is invested in just the cash ISA earning 2% p.a.

The first portfolio can see returns as high as 6.2% after two years, compared with just 4% for the cash-only portfolio – see table and graph below.

Even when investors take into account that some loans may become non-performing, P2P investors still come out significantly ahead of the returns of the cash-only portfolio.

For example, in a situation where an investor with a diversified Lendy portfolio has 10% of their loans become non-performing after one year, with no recovery of capital, their portfolio would still return 5% after two years, compared with 4% for the cash only portfolio.

In fact, it would take a 20% default rate after one year on the Lendy loans, with no recovery of capital, for the cash investor to come out even marginally ahead. The Lendy investor’s overall return falls to 3.9%, compared with 4% for cash only in this scenario.

JUST A SMALL SLICE OF P2P LENDING IN AN INVESTMENT PORTFOLIO CAN PUSH RETURNS SUBSTANTIALLY HIGHER THAN A CASH-ONLY PORTFOLIO – PROJECTED RETURNS AFTER TWO YEARS

While adding a slice of P2P to a cash-only portfolio may add small amount of investment risk, all of Lendy’s loans are secured against property, which can be repossessed and sold in the event of a default. That means the chance of an unrecoverable loss is greatly reduced in comparison with unsecured lending.

For investors who are comfortable with taking just a limited amount of risk, adding a small, diversified P2P portfolio to their cash savings can be a great way to boost returns substantially. The more diversified the P2P portfolio, the lower the risk of defaults impacting returns.

HOW A HIGH-YIELDING P2P ‘KICKER’ CAN BOOST RETURNS SUBSTANTIALLY FOR INVESTORS OF ANY SIZE

At Lendy, we take managing investor risk very seriously. This is why we have one of the most experienced and specialist credit assessment teams in the industry, who ensure each investment loan has met our rigorous and robust lending criteria.

We only offer investors loans that have been through our rigorous and streamlined due diligence, credit and legal checking. We lend at a strict maximum of 70% loan-to-value, which insulates investors from potential falls in the value of a property.

Our specialist team of lending professionals has over 100 years of mortgage underwriting experience between them. They are experts in the property market and understand how to assess and manage the risks involved.

 

* 2% interest on a cash ISA would be viewed as a generous rate of return at the current time. The best easy-access ISA at present offers 1.16% interest, while 1.45% is available on a one-year fix, and 1.65% on a two-year fix.