The investment opportunities at Squirrel are expanding in the Home Loans and Construction Loans Investment Classes.
Due to recent Reserve Bank LVR restrictions coupled with tightened credit criteria from banks in response to the CCCFA regulations, we’re seeing more loans that would have previously been gobbled up by a bank, heading towards non-bank lenders like Squirrel.
That means we have more loans available for Kiwis to invest in at the lower risk end of the spectrum with fair returns for investors.
What are the risks with investing in loans?
The primary risk is that the borrower either misses payments, or heads into a default position. At Squirrel, we have Reserve Funds in place to help protect investors should a loan go into arrears or into default.
Since January this year, we’ve had a handful of Home Loans and Construction loans that have had a missed a payment. These were all covered by their respective Reserve Funds, while the borrower made up for it within seven days of the failed repayment.
What’s important to know here is that all missed repayments were admin errors on the borrowers' behalf rather than a sign of underlying trouble.
While the year’s not quite done, it would appear we’ll have a ‘clean sheet’ as far as arrears, which are normally only counted once a payment is 31 days behind, and no defaults for Home Loans and Construction Loans.
This means there have been no losses for investors or the respective Reserve Funds since we first offered these investment classes in March 2020.
For personal loans, we’ve seen the Reserve Fund grow from $602,000 to $680,000 from 1 January to 13 December this year. It’s absorbed net write-offs of $5,700 and received and recovered more from borrowers with active loans than it has paid out (hence the growth).
I’ve discussed previously that we’ve reduced the amount of risk in this portfolio over the last few years, and we’re seeing that paying off. The part of the personal loan portfolio with the higher risk characteristics, unsecured personal lending, is down to under 25% of active loans.
Let’s be clear, there is still more risk in the personal loan investment class than either the construction loan or home loan investment classes, however returns are also higher.
Not sure what Investment Class is right for you? Get in touch. We’d be happy to chat.
While no investor has had a missed payment, past performance cannot guarantee the future.