Octopus Choice lost interest
We funded a bridge to let loan in February 2017 in Weston Super Mare at a 55% LTV. The property had 19 flats, some with council tenants and others with private tenants. The initial interest rate for lenders was 4.73%.
Unfortunately, in April 2018 the borrower stopped paying interest on the loan. We worked to get them back on track and they paid one more months interest before it became clear that they wouldn't be able to catch up. We placed this loan into collection in August 2018 and appointed receivers to recover as much value as possible.
The receivers were unable to sell the property due to the poor condition the borrower and tenants let the property get into. As such, they decided the best course of action for all parties was to allow the borrower to refinance with another credit provider. This option allowed us to recover all the capital and much of the outstanding interest, without incurring more expenses.
We were able to recover the entire value of the initial loan, but some of the interest accrued in the interim was not recoverable. We received these funds on 5th March 2019.
How did this happen?
This loan, as with every other loan on the Octopus Choice platform, was subject to strict underwriting and affordability criteria. The mortgage was lent at a conservative loan to value of 55% on an interest only basis. Despite the borrower meeting the original borrowing requirements, after 19 months they stopped paying interest on the loan.
The properties had deteriorated substantially since our valuation in January 2017 and recent tenants hadn’t taken care of them. Nor had the borrower maintained or repaired the properties, included not fixing heating systems, resulting in several issues between the tenants and the landlord (borrower).
We still believe the original valuation was accurate, as the new credit provider has lent at this level. We were surprised that the borrower has not maintained the properties, nor made any improvements as originally planned.
Why didn’t we hold out to recover the full funds?
The receivers advised that it would take at least 6 months on the open market to obtain a sale, but of course with no guarantees. As such, 6 months of further interest would be accrued, along with legal fees which would ultimately increase the size of the loan.
As such, we made a call not to take the additional risk and to provide as much liquidity as possible to investors.
What is the impact?
Choice investors haven’t lost any of the capital they invested in the platform. This is because when the loan was refinanced, we were able to recover the total initial loan amount provided to the borrower.
While the loan was performing all investors received all their interest monthly. However, once the loan became non-performing in August 2018 the interest was accruing without being paid out. Unfortunately, the recovery from the refinance was not able to cover all the accrued interest & investors lost 18% of this unpaid amount. This reduced the effective rate of this loan to 4.1%, rather than the initial 4.73%.
What is the impact to Octopus Choice?
Octopus Choice invests 5% alongside the investor in every loan, and investors are always the first to be repaid their interest. We put this measure in place in case there was ever an instance such as this, where some or all the interest on a loan was lost.
In this case, Octopus Choice lost 100% of the interest due on this loan. No capital has been lost.
How does this model work?
Assuming funds are recovered, we’ll first pay the administrator and security trustees their reasonable recovery costs, and our borrower fee. This fee covers the ongoing management of the platform and will amount to either the actual borrower fee or 1% – whatever’s smaller. It will only ever cover costs. In this instance, however, we chose to waive borrower fee.
We pay our investors’ accrued interest ahead of retrieving our own. We pay out the proceeds of the portion of the loan that you hold in the following order:
1. First, investors get as much initial capital investment back as possible – in this instance, all of it.
2. Octopus Choice then get as much initial capital investment back as we can – in this instance all of it.
3. Investors then get as much of their outstanding interest as possible – in this instance 82% of the interest they accrued while the loan was non-performing.
4. Then, provided there’s still money left over, Octopus Choice get any interest we’re still owed – we received none of the interest we were owed.
5. Finally, we’ll pay ourselves any outstanding fees that we’re owed – these were waived.
How much was lost?
Investors lost £6,902.61 in total interest. On average investors earned 4.1% in this loan.
Was I affected?
We let every affected investor know through a pop-up on their online Choice portal.
We think it’s a great example of why we invest alongside you - to align our interests with yours, put our money where our mouth is, and create as positive an outcome as possible for our investors. Clearly we don’t like losing our own money, and for that reason put huge emphasis on the quality of our underwriting – so that this happens as rarely as possible!
If you have any concerns at all, or would like to know your exact amount of lost interest, please don’t hesitate to drop us a line at firstname.lastname@example.org. We’re here to help.