Brexit, it’s going to be a hot topic for some time. For you, the reader, possibly a peer-to-peer investor, it’s important we keep you abreast of potential ramifications now that the UK is leaving the European Union. Many Orca Money users have come to us and asked: ‘what will the effects of Brexit be on lending?’ ‘what will leaving Europe do to investors and borrowers in P2P?’ and so on. We will discuss these important queries here.
Firstly, financial markets were hit hard, but they are steadying. Yes, savings rates will go down, but don’t be too disheartened. This may now be the right time for you to consider an alternative investment, such as peer-to-peer lending, where you can earn 3–19% per annum and beat those record-low bank savings rates.
(*Conduct a peer-to-peer lending comparison, assessing rates and security measures to gain confidence in the platform and product(s) you wish to invest in.)
Brexit effect on economy
Immediate impact on the economy is one of negativity. Savings interest rates will likely drop to zero, lending will decrease and trade will be hit. All areas of finance will impact upon one another. The uncertainty that will now unravel will harm household spending and corporate investing, in-turn harming growth, according to the Economist Intelligence Unit (EIU). The pound will slide — it fell to $1.3236 just after the result was announced.
Pound drops to 31-year low
To further emphasise the trepidation felt by markets, this is what happened to the pound 5/382 Local Authorities into the vote results in early hours Friday:
(Sterling drops from 1.48 to 1.45 after 5 Local Authority vote results)
In short, growth will slow, borrowing costs increase, profit margins will be squeezed, and investment and hiring decisions will likely be postponed. This will see unemployment rates rise and possibly recession…not too positive, agreed!
Positive Brexit rebound
It’s not all bleak, in fact there have been improvements since Brexit. Pressure has eased with the FTSE 100 share index opening higher — the index was up 2.2% at 6,113.01, while the FTSE 250 had gained 3.1%. In the previous two trading sessions the UK-focused FTSE 250 had slumped 13.7%, so drastic improvements are required.
If you’re searching for alternatives, which you should seeing as the best savings rates on the market will be non-existent in the UK shortly, then marketplace lending could be a viable option offering the best interest rates in the alternative investment market. With the pound reaching a 31-year low — climbing 0.7% on the dollar to $1.33 currently — it’s time you looked seriously at alternative places to earn money.
Brexit effect on peer-to-peer lending
Here are a couple of key factors you should consider if you are an existing, or soon-to-be, peer-to-peer investor:
1. Default rates
Economic downturn will likely affect all asset classes lent to in peer-to-peer lending UK. Fortunately, the impact on consumer, businesses and property markets shouldn’t be marked in the short-to-medium term. In saying that, the impressive sub 2% default rate (avg) historically experienced by P2P lending since its birth in 2005 will now likely rise.
Consumers (individuals)
As uncertainty grows, the likelihood of job losses will also grow. If borrowers seeking consumer loans — credit consolidation, buying a house, cars etc — through platforms like Zopa and RateSetter start to lose their jobs they will be unable to repay their debt (loans), resulting in increased defaults.
SME businesses
40% of businesses had admitted ‘Brexit has already impacted their business decisions’ according to a report by Capitalise. In light of this, and the inevitable impact of Brexit on SMEs in the UK now, the demand (borrowing) on P2P lending platforms will surely be hit.
While the salient points of the online lending business model won’t be overly criticized, demand will probably slow — RateSetter loan origination has already suffered a decline in 2016 leading up to the EU referendum.
Property
Real estate lending platforms, like Landbay, Proplend, LendInvest, Saving Stream, Assetz Capital and others will expectedly be affected by Brexit. In saying that, because of the robust borrower vetting, underwriting and security processes employed by peer-to-peer lending platforms the industry reassures P2P investors that the impact won’t be drastic, and rather this will present an opportunity for agile property lenders to capitalise.
Landbay’s CEO, John Goodall, comments:
Buy-to-let mortgages were one of the best performing types of loans throughout the credit crisis, and we believe demand for rental property will continue to outstrip supply, while average rents will continue to increase above the rate of inflation. We will no doubt see significant change over the coming months, but agile peer-to-peer platforms are in prime position to capitalise on this opportunity.
Need more info on risk in P2P lending?
2. P2P platform performance
Critics of peer-to-peer lending will be rubbing their hands together, anxious to witness UK marketplace lending try and weather the storm of economic instability — this has been a key risk when discussing P2P lending, that it hasn’t had to “properly” withstand an economic downturn. Well, Zopa did well in 2008 and proved to operate a transparent and profitable business model for investors and borrowers when banks were hit hardest.
Jaidev Janardana, CEO of Zopa, reassures us:
Zopa focuses on lending to customers with stable income and very high propensity to repay. This is reflected in our credit risk performance through the past 11 years, and in particular through the 2008 downturn. Our underwriting and pricing policies aim for a positive lender return through similar economic turbulence.
Now that the banks are going to be hit the worst, again, people will look to P2P and this is its chance to prove the critics wrong and demonstrate that the security measures in place and the talent that works within marketplace lending can ride the Brexit wave.
3. Regulation and passporting
London’s financial services businesses will suffer navigating new regulatory frameworks, now that ‘passporting’ — foreign firms able to operate under same terms as local businesses in any of the 27 EU countries, assuming they comply with local regs within the country — will be, well, scrapped, essentially. For UK marketplace lending platforms this doesn’t prevent them expanding into Europe, Funding Circle has been the first “giant” to commence expansion, and it won’t be the last. But for the other big guys, they will likely hold off whilst Brexit negotiations develop over the next 2 years — expected timeframe it’ll take for Britain to divorce the EU.
Conclusion
We’re in a precarious time in the UK just now, but it’s not all doom and gloom. Brexit will undoubtedly have a significant and resounding impact on the UK economy and society more generally. How Brexit will affect peer-to-peer lending UK will remain to be seen, but be positive, see this as an opportunity to capitalize on an innovative asset class that has, and will continue to, offer the best interest rates on the market. Especially when 0% savings rates are upon us.
