P2P mortgages, an attractive alternative to traditional banks

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So, you’ve found you’re dream house! But will owning it still remain just a dream?

With the difficulties house buyers have in obtaining a mortgage loan from traditional banks, which have become more exacting following the subprime crisis in the United States, and with the falling return from investments and savings accounts due to the recession, borrowers and lenders are turning to an alternative in the mortgage loan market. Known as P2P, peer-to-peer or crowd lending, the concept has made its appearance in Great Britain and the United States and, indeed, throughout the world. Here’s what you might like to know.

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The principle of crowdlending

Through the intermediary of an on-line financial platform, lenders and borrowers come together at interest rates that are more attractive for both parties. For the borrower, this means lower rates then banks are willing to offer. For the lenders, the same rates are higher than what they can expect from traditional bank investments. All this without the associated banking fees and obligations.

Who to turn to for a mortgage?

In crowdlending, mortgages still represent a very small percentage of the loans market. However, house-hunters are already arranging more mortgages through online peer-to-peer platforms as this new breed of marketplace lender branches out from unsecured consumer credit into home loans. Lending Club, the “Uber for Loans”, has begun expansion into mortgages. In the UK, mortgages can be obtained through BridgeCrowd. Since over a year ago, SoFi, a leading online student lender, offers prime US residential mortgages.

The advantages of crowdlening

The advantages for the borrowers and lenders are clear.

For the borrowers, P2P is an alternative to banks and credit institutions, which are very demanding in terms of guarantees, long in giving a response and quite costly with their banking fees alone.

For lenders, the interest rates are higher than what they would earn from classic savings accounts offered by banks (up to 6.5% per year). And it’s certainly a surer investment than the volatile stock market. Consumer rationality steps in, with all parties reaping monetary benefits.

For the moment, even with P2P, a good credit score may be needed. But don’t dismay if you’re not earning well into the six figures: with some platforms you can get approved even if you have been refused by a bank.

And as the trend increases, there is a strong possibility that credit score demands on P2P borrowers might be relaxed to encourage the market’s growth.

The risks

Of course crowdlending for mortgages does include some potential risks to all parties involved. Unlike traditional mortgages, these loans are often short-term and have less payment flexibility; should something unexpected occur, borrowers may have problems making their payments. It goes without saying that lenders need to safeguard their investment and the best way to do that is by using a crowdlending platform that is registered with the SEC or covered by the FDIC in the US, authorized and regulated by the Financial Conduct Authority in Great Britain. The platform should verify that the borrower is not over-indebted and offer a risk-pooling system as well as a minimum return on the investment. Lenders can reduce the risks associated with borrowers defaulting by making smaller investments on more mortgages.To reduce their cost of funding so they can offer lower-risk mortgages, P2P lenders are now counting on securitisation of their loans to bring in cheaper sources of money, such as insurers and pension funds.

As with any purchase or investment, shop around first. Sites such as www.comparelend.com will help you compare and eventually hook up with an investment partner.

Whom might this interest in the mortgage loan market?

The trend in P2P lending emerges from the conjunction of major societal tendencies observed in the last few years, amplified by the housing and the financial crisis. House hunters and potential investors need no longer despair. If you want to segue from generation rent to generation buy but have trouble obtaining a mortgage from your bank, or as an investor you who have lost confidence in banks and the financial system, P2P lets you take advantage of alternative solutions, participate in the real economy, in the projects of “folks like you”, all while enjoying financial advantages.

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Sandra Bieniek is a professional journalist and translator working for international and on-line publications as well as for businesses and cultural institutions. With Master's degrees in both Journalism and International Affairs from Columbia University, she covers topics ranging from the environment to the economy, societal issues to human interest stories. She has also compiled reports submitted to the United States Congress on behalf of the International League for Human Rights and contributed to the annual publication “Issues Before the United Nations”.

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