Investing in mortgages - Construction Loan No.1: a case study

As mentioned in our first case study, we’re providing some analyses of our borrowers, so that you can find out more about the type of lending we are doing in our P2P mortgage space, which in turn gets passed on to you as an investment opportunity.

This time we’ll look at one of our Construction Loans, the second new investing class on the Squirrel platform returning 5% p.a. variable, launched in March. These are typically short-term loans (averaging 12 months), secured by first residential mortgages and for business purposes.

Case study 2

Investing class: Construction Loans

A pre-development hold for a small-scale property developer 
The first Construction Loan on our peer-to-peer lending platform is for $535,000 and is secured over a residential house purchased for $860,000 with a rating value of $980,000.

Excluding GST it has a 70% loan to value ratio based on purchase price. The loan was drawn down in August 2019 and is expected to mature in August 2020. There is a risk that the pre-development activities could be delayed by the Covid-19 related lockdown, thereby extending the term of the loan by a short period.

Our credit policy:
• Maximum loan to value ratio of 70%
• Maximum loan of $1m per property and a total limit of $2m
• Maximum loan term 2 years

With our first Construction Loan, our loan funded the upfront purchase of a property upon which the borrower aims to build several units. The borrower will hold the property until he obtains the appropriate resource and building consents for the development project. Once he has those consents, our mortgage brokers will help the borrower source full funding for the development project from another lender, including the refinancing of our initial loan. In the meantime, the borrower is earning rental income on the property whilst progressing the consents through council.

This borrower has also provided a personal guarantee on the loan. This means the lending is in the name of an entity (business or trust), however there is someone standing behind the loan (typically a director/trustee) who has guaranteed that the loan will be paid back at a personal level. Pretty much in the same way that a parent might provide their kids with a guarantee of support.

We felt confident approving this mortgage because:

1. Knowledgeable buyers
2. Residential house in Glenfield Auckland on 850sqm
3. 30% deposit and personal guarantee
4. Holding income

You can invest into this mortgage now. You can find out the current rate of return and lots more about this investment class here: investing in Construction loans.

This loan has the protection offered by our Construction Loan Reserve Fund which helps to protect investors from loan arrears and loan defaults.

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The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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