We want to provide our members with the tools they need to build well-balanced, diversified portfolios. That’s why we have created the Property Moose Mortgage; a lower risk product which has been designed to offer market-leading returns.
What is secured lending?
Secured lending essentially involves borrowing against an asset. With mortgages, this tends to be a property. The term ‘secured’ refers to the fact that if the borrower cannot pay back the loan, the lender is entitled to take possession of the asset. In the case of mortgages, as the loan provider can repossess your home, secured lending can be risky for borrowers. For lenders on the other hand, especially first charge mortgage lenders, the risk is a lot lower. That’s why secured loans are cheaper for the borrower to take out, because the asset that the loan is secured against acts as a safety net for an inability to pay back the loan. For the lender, as the risk is lower, however, the returns are accordingly lower too. (1)
Loan to Value (LTV)
The Property Moose Mortgage’s maximum LTV is 55%. This means that, for any loss to be sustained by the lender, the price of the property would need to fall by 45%.
The higher the LTV, the higher the risk. For example, with an LTV of 95%, the property’s value would only need to fall by 5% for the lender’s capital to be at risk. If this occurred, the safety net of security, i.e. the property, would no longer be worth the value of the loan.
First charge vs. second charge
A second charge mortgage is when a borrower takes out a loan secured against a property which already has an existing mortgage. First charge mortgages always hold precedence over the second charge mortgage, which means that the second charge lender will only receive their repayments after the first charge mortgage lender has received theirs. As a result, the risk is a lot higher for second charge mortgages, but the returns are higher too. (2) Mortgaging a property does increase the risk for equity investors, however, it also greatly increases the potential returns as the interest payable on the loan is less than the gross rent, and any capital growth can be magnified.
In terms of risk, this is determined by the order in which investors are repaid when the asset is sold. This is as follows:
- First charge holder – capital, interest and fees repaid first
- Second charge holder – capital, interest and fees repaid after first charge holder but before equity holders
- Equity holder – repaid after the first and second charge holder are repaid
The benefit of being an equity holder is that you get to share in any increase in the value of the asset but the risk is that, if the value of the asset falls, or the costs associated with the charge holders (interest and fees) rises over a certain amount, you could lose all or part of your initial investment. As a result, the returns associated with holding equity are normally higher than those associated with being a first charge holder as a result of the increased risk of capital loss.
How safe is the Property Moose Mortgage?
- Secured first charge
Our new Property Moose Mortgage is secured first charge against equity. Any losses will be carried by the equity investors first, and then by the lenders only if the property is subsequently sold for less than their loan. In regards to our maximum LTV of 55%, the property would need to fall by 45% for the lender’s capital to be at risk.
- Provision fund
In addition, we aim to ensure that there is always at least 6 months of interest cover held on account by the property SPV (paid for by the equity investors) to cover the interest payments during any void periods. This should help to ensure that there are very minimal risks of monthly payments not being made to the lenders.
What about the equity investors?
Mortgaging a property does increase the risk for equity investors. However, it can also greatly increase the potential returns, as the interest payable on the loan is less than the gross rent and any capital growth can be magnified.
Property is traditionally a leveraged investment and many of the risks associated relate to the behaviour of the lender. By using the Crowd to provide the loan, Property Moose investors have the added potential benefit of controlling the entire investment process.
Written by Jenna Kamal
Disclaimer and Legal
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).