Banking on Growth

At the time of this writing, we are on the cusp of the final interest rate decision for 2024, and as the reader, you should be aware of the Bank of England's decision by now. The central bank’s easing of rates has notable implications for capital flows, investment appetites, and housing market dynamics, so in this week's blog, we are looking inward at what the changing market means specifically for the peer-to-peer (P2P) lending industry in the UK.

One primary effect of falling central rates is the compression of yields across traditional fixed-income products, which are the bedrock of many institutional and retail portfolios. Bonds, savings accounts, and other low-risk assets yield lessen as base rates decrease, driving investors to seek higher returns elsewhere. In this context, P2P lending platforms, particularly those focused on property-backed loans in our corner of the market, become attractive for several reasons.

Firstly, real estate-linked P2P lending offers generally more competitive yields than government bonds or savings accounts. Even though these loans involve additional risk, the asset-backed nature of residential property provides a level of security that enhances investor confidence. For instance, property-backed loans include legal mechanisms for lenders to recover capital in cases of borrower default, giving these products a risk structure distinct from unsecured consumer loans. In an environment where the rate trend is down, this balance of yield and security attracts an ever-broadening investor base seeking alternatives to traditional fixed-income products.

Moreover, institutional investors—who traditionally rely on government or corporate bonds for steady returns—will, we believe, begin allocating more capital to P2P platforms to compensate for diminished yields in bond markets. With the onset of increased institutional participation, P2P lending platforms that make up our industry will benefit from enhanced liquidity, improved credibility, and operational scalability. This convergence of retail and institutional interest sets a foundation for growth.

On the consumer side, falling interest rates can stimulate housing market activity by making borrowing more affordable. Lower mortgage costs drive this affordability, increasing demand for residential real estate across the owner-occupier and buy-to-let segments. With cheaper borrowing, residential property investment becomes more attractive, especially for buy-to-let investors who calculate returns based on net rental yield relative to financing costs. These investors are typically the end consumers for our borrower's projects, and lower borrowing costs improve these ventures' profitability, increasing demand for short-term, project-based financing that P2P platforms can provide.

Additionally, as house prices in the UK continue to appreciate in response to low borrowing costs, the equity cushion for real estate-backed P2P loans improves, further reducing downside risk. Rising property values lessen the likelihood of our lender clients suffering losses on their principal, as assets can be sold to recoup funds in case of default. Thus, lower central rates not only increase borrower demand but also improve collateral value, enhancing risk-adjusted returns for lenders in our sector.

From a portfolio management perspective, P2P lending in residential real estate offers a diversified and uncorrelated return profile compared to traditional asset classes. Lower central bank rates typically result in tighter spreads in traditional credit markets, compressing corporate debt and investment-grade securities yield. In contrast, P2P lending to residential real estate retains a risk premium due to the underlying nature of these loans and borrower profiles, providing higher yields than similarly rated assets.

Furthermore, P2P lending to real estate benefits from being relatively shielded from interest rate volatility compared to bond markets. While traditional bond investments are sensitive to rate movements and may see price depreciation when rates rise, P2P property loans—being shorter in duration and asset-backed—have limited sensitivity to interest rate cycles. This advantage is pronounced in a low-rate environment, as investors face fewer viable options that match P2P property lending’s yield and risk structure. Thus, the risk-return calculus for P2P lending in real estate improves markedly when central rates are low, and capital allocations reflect this shift.

The UK government has consistently emphasised the need for alternative financing solutions to complement traditional banking, especially for small businesses and individuals. P2P platforms have emerged as essential players within this landscape, providing essential liquidity where traditional banks may fall short. In a lower-rate environment we could be heading into in 2025/2026, this constructive policy emphasis on alternative finance will likely continue.

Low-rate policies increase liquidity in the financial system. When coupled with suppressed returns on traditional assets, surplus liquidity is channelled toward high-yield alternatives, including P2P lending platforms. Therefore, our sector benefits significantly from political goodwill and the macroeconomic liquidity that lower rates foster.

In summary, the UK’s P2P lending industry in our space is well-positioned to benefit from a downward shift in central bank rates. As traditional yields compress, investors’ need for alternatives drives capital into P2P platforms, where real estate-backed loans offer attractive yields. Concurrently, lower borrowing costs stimulate residential property demand, increasing borrower engagement with P2P platforms. With favourable macroeconomic and regulatory conditions, enhanced risk-adjusted returns, and technological innovation spurred by this environment, the P2P property lending sector stands to grow in both scale and market influence, and Invest&Fund remains front and central in that growth.

Invest & Fund has returned over £200 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.

To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com

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