Landbay is a peer-to-peer lender where investors buy small chunks of buy-to-let mortgages.
This makes it different to other peer-to-peer platforms, where your loans are typically unsecured; Landbay loans are secured by property.
This specialist market has some advantages over typical peer-to-peer lending, but also a number of risks.
And like all investments, your capital is at risk when investing in Landbay.
This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.
How does Landbay work?
Landbay is a relative newcomer – founded in 2013. It is a buy-to-let mortgage company, and because the average loan is for £235,640 it cannot simply match investors with borrowers.
When landlords get the initial loan, the money comes from either retail investors or institutional investors (like insurance companies and pension funds) and stays this way for throughout the term of the mortgage.
When individuals invest, their cash is spread across a number of mortgages, and they are gradually repaid.
When the tenant makes a monthly rental payment, the buy-to-let landlord makes a monthly mortgage interest payment – which is split between every lender invested in the loan.
Who do they lend to?
Buy-to-let investors. They have so far lent £244 million, through 1083 mortgages – backed by property worth £348 million.
Read more on loveMONEY: challenges and opportunities facing landlords in 2018.
What products are available to peer-to-peer investors?
You can pick between a classic account and a new Innovative Finance ISA (IFISA).
Both options allow you to pick between a fixed-rate deal of up to five years, with an expected return of 3.54%, and a tracker product, with an expected return of 3.15%.
The products pay interest every month, which can be withdrawn or reinvested.
Landlords also make capital repayments each year, and investors have their share put into their Landbay account. This can either be withdrawn or reinvested.
If investors want to withdraw their cash before the end of the term of the mortgage, Landbay will sell the loan on – provided there is an available buyer.
There are no fees for investors, other than a £50 ISA transfer-out fee; however, you must invest at least £5,000.
What are the rates on offer?
The projected return for investors in fixed-rate loans is 3.54% and 3.25% for tracker rate loans.
What protection is in place?
As we always warn when discussing peer-to-peer lending, protection from a Government perspective is pretty much non-existent, so it's vital you pay attention to each individual company's protection policies.
In the case of Landbay, it says the initial underwriting of each loan is the first step, as it is designed to identify landlords who pose the least risk.
As with all P2P firms, investors' cash is spread over a number of loans, so if one borrower does default, they will not lose everything.
Loans are backed by property, so if the borrower defaults, this should mean Landbay can sell the property to get at least some of their investment back.
The company is also keen to ensure it is not over-exposed on any loan. The average loan-to-value is currently 71.99%, and the average rental-income-to-debt-service coverage is averaging 190.26%.
This helps ensure the landlords can handle some changes in their circumstances without defaulting, and that if the worst came to the worst, and Landbay was forced to repossess a property during a downturn, they have some protection against house price drops.
The company also operates a small Reserve Fund – which is funded by a percentage of the fees and margin.
If a borrower defaults or falls into arrears, the Reserve Fund – equivalent to 0.6% of outstanding loans – will be used to make up the shortfall for lenders.
Similarly, if the company repossesses a property and there’s any shortfall, the difference can be made up by the fund.
So far there have been no defaults, which is you could say is a testament to the underwriting, but also means the protection levels have not been tested.
It is worth bearing in mind that there are no guarantees, and if the market suffered serious price drops and defaults, there’s always the risk that the fund would run out.
Finally, Landbay is not covered by the Financial Services Compensation Scheme in the same way as a savings account, so if the firm went bust, there wouldn’t be the same protections in place.