Guest post: Using peer-to-peer investments to grow a house deposit

Financial Planning Written by Sam Harith, Feb 8 2022
Guest post from Sam Harith - The Comic Accountant

Guest post from Sam Harith - The Comic Accountant

Let’s talk about a topic close to my heart. That is, the topic of first home ownership. I know that many young Kiwis are working hard and saving money to put down that first home deposit. I’m not going to talk too much about the housing crisis affecting most of the world. Too much has been said on the topic with too little being done about it.

Instead I’m going to focus on what you, as an individual, can do to build up that egg nest for your first home.

In this article I am going to talk about my personal experience using Squirrel’s P2P lending investments as a reasonably secure short-term investment vehicle to grow my family’s first home deposit.

What is P2P lending

P2P (Peer to Peer) lending is investing your funds with a P2P lending provider (like Squirrel) who then disburse the funds in the form of loans to other individuals. It’s not different from a regular banking arrangement where you deposit money with a bank, and then that money gets loaned out. You, as the investor get paid the return on the interest that the lending platform charges to the borrower.

What sets it apart from banking deposits are the length of the investments and the interest return on the investment.

Squirrel’s P2P investing platform has historical returns of between 4% and 7.5% per annum. The typical length of their investment is about 2 years.

Term deposits typically give a return of between 0.3% to 3.00% per annum. The typical length of their investment is from 30 days all the way to 5 years.

From a glance, P2P lending offers better returns over a shorter period of time. Of course this means that the risk associated with P2P lending is higher, but as we’ll discuss, there are ways to mitigate that risk.

Using P2P lending investment to save up a nest egg

To begin with, you need to work out your financial goals and the timeline you have to achieve those goals.

If you are looking at getting your first home in 10 to 15 years, you may want to consider putting money in high growth index funds as they offer a better return over a longer period of time.

If you plan on getting a first home within the next 1 to 5 years, P2P investing may work for you because:

  1. The investment term is relatively short (2 to 5 years) and the opportunity to get your money out early by selling on the Secondary Market.
  2. Better return than term deposits over a similar investment term
  3. Relatively stable and secure (compared to high growth stocks, forex and *shudder* crypto)
  4. Lower barrier to entry than property… but wait, if you can already invest in property WHY ARE YOU STILL READING THIS???

Of course P2P lending is still riskier than a term deposit with a Bank, however there are ways to mitigate that risk.

Risk mitigation in P2P lending investment

As with any investment, you need to do your homework. When selecting a P2P lending platform you need to consider the following:

  1. Does the Financial Markets Authority recognise them?
  2. Whom do they lend money to? What is the risk profile of their borrowers?
  3. Do they have a reserve fund with which to protect their investor’s investments?

Squirrel is the only P2P lender in Aotearoa NZ to have a reserve fund which helps protect your investment. The way this works is that a portion of the interest income that Squirrel receives from their borrowers is ‘squirrelled’ away into a reserve fund. This reserve fund functions as an ‘insurance’ against their borrowers defaulting. It is tapped on to ensure that investors get their money back.

For more information on how the Squirrel Reserve Fund works, click here.

Squirrel offers a range of investment products for investors, from low risk Home loan investments to higher risk personal loan investments. It is up to you to work out what your risk appetite is.

My personal journey with P2P lending investment

Like many of you, I too am working hard to save up for my first home deposit. But this is a process that takes time. Our family had to go through some financial hardships between 2017 and 2019 as I bounced from job to job. We still managed to put a small amount away for the home deposit but it didn’t feel like we were making much progress. Interestingly enough, 2020 was the financial turning point for us.

I lost my job at the start of 2020, only to have multiple other opportunities open up (like a teaching stint at the University of Waikato). In 2020 I also made myself commit to my accounting business and my own blog which has greatly helped our family financially.

Finally we were in a position where we could start chucking money at that first home deposit.

What to do with so much money?

Living on a budget was the only way we knew how to live. Also, as an accountant I have always kept a very strict eye on the family finances. Once the business took off, we found that we had more money than we could spend (within budget). Naturally, we saved towards our first home deposit.

But look, putting money in a savings account does nothing. In fact, money loses value over time if you have it sitting in your bank!

So the practical thing for any financially confident family would be to invest it for a decent return.

How would we invest our first home deposit?

This was a challenging question. We had to consider the following when choosing a suitable investment:

  1. It should be short-term (2 to 3 years).
  2. Has to give a decent return
  3. Should be low risk

We first looked at term deposits. Term deposits are the most secure short term investments you could make. But because they are such low risk, the return on them is dismal. A 2 year term deposit with ANZ currently sits at 2.3% per annum at the time this article was written. That’s even lower than annual inflation which has recently ballooned higher than predicted.

In effect this means that I’d be losing almost half my investment each year to inflation creep! Yikes!

We also looked at stocks. In fact I spent many days poring over value investing to see if stocks would be a good investment vehicle for the short-term. I eventually came to the conclusion that value stocks, while beneficial in the long run, were too volatile in the short run.

And so we came across Squirrel through our investment research and decided to give it a go because:

  1. It allowed us to invest for the short term (2 to 3 years)
  2. Has a decent return of 4% to 7.5%
  3. It has a reserve fund which helps mitigate the risk of default

Saving our deposit with Squirrel

We opted to put our investment with Construction Loans with Squirrel as they offered a decent 5% per annum return (which puts us just above inflation) and had a larger pool of borrowers we could invest in.

We started off with $15,000 invested in 2019 and slowly over the years we’ve managed to add to that amount by aggressively saving. As of right now, we’re saving almost 50% of our income. With some help from my in-laws (Thanks mum and dad!) we’ve managed to grow that deposit to close to $100,000.

Over that one and a half year period, we’ve earned interest income from Squirrel of close to $1,500. We’ve had no rude shocks from the volatility associated with stocks. We’ve never had to hold our breath whenever Elon Musk tweets about cryptocurrencies. In all our time with Squirrel we’ve felt that our investment was well taken care of.

If all goes well, we should be on track to get pre-approval for our first home loan sometime next year. 

Is P2P lending right for you?

I’d like to make it clear that just because it worked for our family doesn’t necessarily mean that it will work for yours. You still need to consider your financial situation and goals before making any investment decision.

There are some caveats too. P2P lending investment is still higher risk than term deposits. Over a longer period of time, it may even be a better idea to invest in index funds or value stocks. Also, we’re currently invested in construction loans at a time when the local construction industry is booming. Should this industry bottom out, we could still potentially lose our investments. Which is why Squirrel’s reserve fund factored into our decision making.

We’ve made our decision to invest to the best of our ability with the tools and resources available to us. As such, we are well aware of the risks that we are taking on with our investments. 

P2P investing also isn’t a silver bullet for the escalating house prices in Aotearoa. The best thing that any individual/family looking to jump onto the property ladder is to save aggressively. However, having that money invested in an inflation beating investment will help you maintain the value of your savings while you put away enough money for that first home deposit. 

This article was originally published on 29 November 2021 at samharith.com.

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