Peer to Peer Jargon Buster

If you’re new to the industry, we’re aware that peer to peer investing can be a baffling subject, and we understand that the cluster of jargon that comes along with peer to peer can be quite daunting. Therefore, in today’s blog we thought we’d break down a lot of the specific terms you’ll come across when delving into peer to peer investing to ensure you’re all clued up.

Peer to Peer: Known to many as P2P, peer to peer lending is a method of investing in which individuals or businesses lend money to another. Normally, this is done via an online platform such as Sourced Capital. The benefit of this form of lending is that it matches borrowers and lenders more efficiently (than a lot of high street banks), provides faster access to finance and higher returns on investment (Up to 12%), however it can also come with risk and investors should always do their due diligence on their investments, checking what security measures are in place.

Bridging Loans: Effectively bridging loans do what they say on the tin, they bridge the gap between a debt becoming owed (such as purchasing a property) and credit becoming obtainable (such as the selling of a property). Another way to look at bridging loans is simply as a short-term loan in problematic scenarios. Naturally, bridging loans therefore come with higher rates of interest then your standard loan.

Loan to Value: The Loan to Value (LTV) calculation is used to assess the coverage of security on a loan. The calculation demonstrates the value of a loan, compared to value of the property it is being lent against. This is often displayed as a percentage. For example, a £50,000 loan being raised against a property valued at £100,000 would provide a 50% Loan to Value.

Loan to Gross Development Value: The Loan to Gross Development Value (LTGDV) is another method used to assess the coverage of security on a loan. This calculation takes into account the end value (the gross development value) of the project. For example, if a borrower is raising £200,000 and the project has a Gross Development Value of £1,000,000 the Loan to Gross Development Value would be 20%.

Forecasted Valuation: The forecast valuation of a property is the value of a property after factors effecting price have been taken into place. These factors could be refurbishment/ development of the property or the construction of nearby infrastructure which impacts the final price of the property.

Anti-Money Laundering Check: Anti-money laundering, often referred to as AML, is a term used in the financial and legal industries, to describe the legal controls that require financial institutions and other regulated entities to prevent, detect, and report money laundering activities. This is often in the form of identify checks of borrowers and investors.

First Legal Charge: A first charge is a form of legal charge used to provide security to a borrower. This is the standard method of security for mortgage and peer to peer lending companies when lending against property assets. If money needs to be recovered from a borrower, the legal charge allows the lenders or those they assigned to do so, take control of the property, and sell the asset to recover capital. A first legal charge allows lenders to recover their money before any other creditors have access to recover money.

Second Legal Charge: Similar to a first charge, a second charge can be placed to allow the recovery of capital in the event of default from the borrower or similar situations in which a lender may wish to recover capital. In order for a second charge to be executed, all first charge recoveries must be settled.

Innovative Finance ISA: IFISA investments allow you to invest your tax-free ISA allowance, while investing in peer to peer (P2P) lending. In the 2021/22 tax year the ISA allowance is £20,000, you can only open and pay into one IFISA each tax year.

SIPP/SSAS: Both SIPP and SSAS are forms of HMRC approved regulated pensions which allow greater control of how an individual’s pension is invested. This can often yield a greater return than traditional pension funds. Both forms of pension investment had tax benefits compared to a regular peer to peer investment.

Draw Down: The Draw Down is often used to describe the process of a borrower receiving money from the raised funds of their project. This is often staged over the duration of the investment term to provide additional security to the lender. Typically, with a peer-to-peer lending loan used for property, the release of funds is staged after the completion of a satisfactory independent report on the progress of works.

Liquidity: Liquidity is a term used to describe how accessible money is to be taken out of a specific asset. This would include factors such as the speed, cost and process which must be taken in order to retrieve funds from the asset.

Special Purpose Vehicle: A Special Purpose Vehicle often referred to as a SPV, is a type of legal company that can be setup to hold property. A SPV is normally used in P2P Lending as a company should be used for one project only and therefore represents fewer risks and liabilities for the lenders.

Term: The Term of a project is used to describe the expected duration of a loan. The term of a loan is used as a consideration when assessing the liquidity of an investment and also when calculating the expected return over the cover of the investment lifecycle.

We hope that after reading these definitions you now understand P2P lending a little more than when you started. For more information on P2P and all things property, feel free to browse the rest of our site or get in touch, using the details below.

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