But Goodall does not make light of the risks associated with the investment. As with most types of investment, there is generally a correlation between return and risk. With any loan, there is a chance of not getting your money back. Therefore, individuals must consider how much risk they want to take. Generally, the higher the returns, the higher the risk.

While lending into more volatile markets, or unsecured lending, tends to attract higher returns, the risk of not receiving expected returns is higher, Goodall says, adding that default rates vary from platform to platform. In the UK, major [alternative investment] platforms offer returns of 3% to 10%.

Landbay’s investments, he says, tend to be more secure than other P2P business models as lenders are not relying solely on individual borrowers to repay their loans. The value of the asset also comes into play.

“We offer investments into the residential buy-to-let mortgage market, which is historically more stable than other mortgage markets, such as bridging and development. Because all our lending is secured on income-producing assets, we are able to check that our borrowers’ rental income covers at least 125% of their mortgage interest payment,” says Goodall.

“Furthermore, on behalf of our investors, our Security Trustee takes a first ranking mortgage over the properties we lend on. These risk mitigation features are exclusive to the market in which we operate and support our core business proposition of offering the lowest-risk retail products within P2P.”

Landbay projects a default rate of 0.02% in a base scenario and 0.3% in a stress scenario, based on independent, rigorous Bank of England standard tests. Other platforms expected default rates go up to about 5%, Goodall says, adding that the platforms derive their profits from the fees paid by lenders and borrowers as well as early withdrawal or early repayment charges. Using Landbay as an example, Goodall says if individual borrowers default, the company will cover the losses using its Rainy Day Fund.

“As this is a finite fund, our business model does not rely on this, unlike some other platforms. Our Security Trustee takes a first charge over all properties we lend to. Therefore, we do indeed reserve the right to auction the property and we repay lenders on a pro rata basis.”

Platforms such as Landbay secure their loans against residential property, which is considered lower risk than other investments such as property development or unsecured consumer or business loans. Given that investments or lending on most platforms can be illiquid, Goodall says it should be viewed as a longer-term investment.

For those thinking about doing something similar in another market, Goodall recommends a thorough understanding of the regulatory environment and investing in technology that can help scale the business.

“I can’t see any reason P2P lending within mortgages wouldn’t work in another country ... the only thing is whether it can be done from a regulatory point of view. The key challenge in any product is making sure people understand what we do, and also that we get noticed. It is important for people to actually understand what you are doing and the risk they are taking,” he says.

Greenhorn investors, says Goodall, typically park around £500 to £5,000 on P2P platforms. But as the market has grown tremendously in the UK, there are investors who are “very comfortable” investing in the platform.

These, he says, put in a large percentage of their investments on a few P2P platforms. But for the newcomer trying to understand how it works, he advises putting just a small amount of money to begin with. And once they are comfortable, they can take it from there.

Borrowing or lending on a P2P platform

Landbay recommends that borrowers have an understanding of their credit history and why they are borrowing on the platform. A major component is an assessment of the borrower’s ability to repay the loan.

“You need to understand how the peer-to-peer (P2P) platform validates this so you can verify capacity accordingly. At Landbay, borrowers need a minimum income of £30,000 alongside 125% rental coverage. These criteria are externally checked using surveyors, market analytics and bank statements,” says Landbay Partners Ltd COO Julian Cork in a blog post on the platform’s website.

Secondly, lenders should take note of the underlying assets whether they are secured or unsecured before lending on P2P platforms.

“Someone borrowing against a car or new kitchen may have that asset against the loan, but recovery is going to be through standard personal loan channels as it may not have been formally or contractually secured,” Cork says.

He also recommends that investors scrutinise the intermediary or lending platform whether it carries out a thorough due diligence on its borrowers and assets, whether it is transparent about the risks involved and whether the platform is appropriately regulated.

The background and history of the team running the P2P platform are equally important in knowing whether the team understands the market and the alternative investment.

Cork advises investors to look at the platform’s performance as well as how it deals with defaults. One way to do this is by considering how the default rates are modelled.

“Stress tests help us understand a portfolio’s behaviour as, say, unemployment rates rise or house prices fall. Established markets, such as housing, have many solid data sources to help, for example, Council of Mortgage Lenders data. Make sure you check the legitimacy of any cited sources,” he says.

This story first appeared in our new digital publication Wealth, a section within the new digitaledge Weekly. Click here to subscribe to our digital products for the next three months.