At Octopus, we take a robust approach to lending. Sometimes, though, you might find loans in your portfolio have been put on hold. If this happens – don’t panic, it’s a normal part of the lending experience and shouldn’t necessarily be a cause for concern.
As of 18th July 2018, 38 out of the 410 loans we’ve ever made have been put on hold. 26 of these have since caught up with payments, and in most cases have taken just a matter of weeks to do so. Currently, 12 out of a total 307 live loans are on hold (or 3.9% of the loan book). Of course, past performance is no guarantee of future results.
This might be a few more than some of our earlier investors are used to, but it shouldn’t ring alarm bells. It’s simply a function of a maturing loanbook.
Octopus Choice is only just nearing two years old, and it’s only recently that many of the loans will have started to come to the end of their term. As a result, some investors – particularly those who joined us early on the journey – may find themselves with more loans on hold than they’ve become accustomed to.
But what do we mean when we say a loan has been put on hold? And, more importantly, what does it mean for you?
A matter of liquidity
First off, remember that all loans on the Octopus Choice platform are made at conservative loan-to-values (LTVs) – meaning there’s a substantial cushion against a fall in the value of the property. Our maximum LTV for residential property is 76%, while for commercial it’s 65% – and the current average across the loanbook is 59%.
The headroom is such that, even if we had to sell the property to recover funds, we anticipate being able to reclaim not only the investment amount, but the interest payable, too (remember, you’d receive all of your interest before we’d receive ours).
In other words, even though you might not be earning interest on the loan today, we’d hope that you’d get them later – more a case of deferred interest than a permanent drag on your overall return.
We think it’s more a matter of liquidity, as you won’t be able to withdraw the money that’s invested in any loans that are on hold until they subsequently recover. It’s important you’re comfortable that a portion of your portfolio may be unavailable to withdraw at any one time – even if the vast majority of it may be accessible within a few working days.
What does it mean if a loan is on hold?
There are a number of different reasons a loan may be placed on hold– we thought it would be useful to explain them and give a sense of likely recovery timeframes for each (though of course we can’t make any guarantees as to exactly how long it will take):
1. Late-paying loans
A loan is deemed late-paying when a borrower misses two interest payments. Our first action would be to notify the borrower and their solicitor of our intention to instruct lawyers. In our experience, the borrower will usually get back on track within a month or two, without having to escalate the issue beyond the threat of taking legal action. But, of course, past performance is no guarantee of future results.
You won’t be paid interest on these loans during this time, however you will be the first to be repaid if and when they do.
There could be various reasons a loan might become late-paying. Octopus Property’s rigorous lending criteria will often stipulate that the property is generating an income before the loan is made, but unforeseen circumstances will sometimes arise. For example, if a tenant of a property suddenly becomes unable to pay their rent, the borrower may not have the cash flow available to make their repayments.
We’ll work closely with any borrower in trouble to help them get back on track. However, in the minority of cases when a borrower fails to repay what is owed, it is then that we will initiate legal proceedings. If necessary, we’ll repossess the property to recover what’s owed to you. In this instance, the loan status will change to ‘in collection’ (see below).
2. Over-term loans
A loan becomes ‘over-term’ when a borrower reaches the end of the loan period, without having paid back the money that is owed (this includes capital, any interest still due, and fees).
As above, we’ll do what we can to make sure you get the interest you’re owed, but while a loan is over-term you won’t receive interest payments or be able to access any money invested in it.
The Octopus Property team will work closely with any borrower that’s worried about going over-term, but it can still happen. And, in the worst-case scenario, if the borrower is unable to make arrangements to settle the outstanding amount, we will take legal proceedings and repossess the property to recover what’s owed to you.
But it often won’t have to get to this point. In our experience, it usually takes around three months for a borrower to arrange repayment – although, again, this can’t be guaranteed.
It’s often the result of an unforeseen event that can easily be rectified. For example, a property developer that was expecting to sell the property might have seen the sale fall through. Instead, they may decide to refinance, which can take some time but will mean there won’t have to be a lengthy legal process to recover the property.
3. Loans in collection
If a loan has gone into collection, it means we have taken charge of the property in order to sell it and recover what is owed.
As anyone who has sold a property will tell you, this can take some time to complete – and is therefore always a last resort. However, if we do, we hope that the conservative LTV will act as an effective cushion to mean there is no loss of capital.
We also invest 5% alongside investors in every loan we make, and investors would be the first to be repaid their interest.
Despite this, there is of course no guarantee that you’d get back what’s owed to you, and as ever it is possible you could get back less than you initially put in.
So, what’s next?
Of the 12 loans currently on hold in the Octopus Choice loan book, two of these are late-paying; seven are over-term; and three are in collection.
We know this sort of clarity is useful for investors, so we’re working on a number of improvements to the dashboard to have this information instantly available. Of course, though, we’re always here to help if you had any other questions, too. Just drop us an email, and we’ll do what we can.