A new peer-to-peer company aims to unite savers on the hunt for a better return and homebuyers struggling to put together a deposit. We take a look at how the platform works, the risks and whether it's worth going for.
Property Pact is a new peer-to-peer platform that wants to help investors connect with homebuyers struggling to gather a deposit to buy a home.
The idea is that people with savings to invest will get a far better rate of return than they would find in a traditional savings account, while first-time buyers will get a helping hand to get on or move up the property ladder.
Here’s what you need to know.
Investors could earn over 5% interest
If you’re prepared to lend your cash to first or second-time buyers then Property Pact will offer you a return of 5% on top of the Bank of England base rate – a total 5.25% at present. You’ll be paid interest every three months.
You will also potentially get capital gains too if the value of the property increases over the term of the loan.
Sign up as a lender and pay £50 and Property Pact will give you information on people looking to borrow. This will include their occupation, location and income.
If you find someone you like you can lend them between £5,000 and £25,000 and you agree on the length of the loan between you – it can be between one and 10 years.
If you’ve got more than £25,000 that you want to lend then you can lend to numerous potential homeowners.
How safe is my money?
Property Pact is not covered by the Financial Services Compensation Scheme (FSCS), so your capital is at risk.
Bigger potential returns mean bigger risks. In this case, you are taking the chance that your borrower could fall behind with their payments.
It's hard to say how well the model of peer-to-peer mortgage deposit loans works at this stage. Property Pact is a new company so there is no information on defaults and matched borrowers.
Property Pact has attempted to mitigate the risk by taking out income protection insurance on behalf of borrowers so your repayments would continue if your borrower couldn’t pay due to illness or an accident.
Details of the loan are also put on the property’s title deeds, so it can’t be sold without Property Pact being informed. However, this does not mean the loan is secured against the property.
You will also have a copy of the loan agreement so you can take legal action against the borrower if they fail to repay you.
What if I need my money back?
Tough luck. Because you are lending to an individual you can’t simply change your mind and ask for your money back.
You have to either wait for the loan to be repaid as per the terms you agreed with the borrower or you could try to sell the loan to someone else via the secondary market on the Property Pact website.
I want to buy a home, can I borrow the money?
To apply for a loan through Property Pact you need to be a first- or second-time buyer with a good credit rating, no County Court Judgments (CCJs) and an annual income of at least £30,000.
You must also have been employed with the same employer for at least a year. You also have to be in a profession or managerial role or a key job leading to a professional qualification or managerial role.
To be eligible you also need to be able to provide at least 5% of the deposit on the home you want to buy.
How do I apply?
You also need to pay £150 to list your profile on the website for potential lenders to see. Paying that money is no guarantee that you’ll find a willing lender.
If you do secure a loan then you will have to pay a 5% upfront arrangement fee – on a loan of £30,000 that would be £1,500 which you would need to pay via your solicitor before completion.
What interest rate will I pay?
Borrowers pay 5.5% over the base rate – so 5.75% at present. When you repay the loan in full you will also have to pay a percentage of the increase in the value of your property too.
Property Pact's model is a nice idea, but we’re not too sure how well it will work in practice, especially for borrowers.
The admin fees for both sides to access the marketplace are pretty steep and the extra charges placed on borrowers seem high – especially considering that they will likely have to pay a raft of fees on their actual mortgage deal.
We also think it’s unlikely that a traditional bank would be comfortable with a mortgage deposit being raised like this and, given it’s a loan, the borrower may not get as a large a mortgage as they want either.
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