How do peer-to-peer home loans work?
If you're looking for an alternative to the Big Four banks, peer-to-peer lending might be an option for you.
Financial innovation abounds in Australia and in particular, there is a growing peer-to-peer lending market for small personal loans. It seems that peer-to-peer lending may soon start to permeate the home loan market, with some peer-to-peer lenders marketing themselves as a mortgage finance option.
How to use peer-to-peer lending for your home loan
Using a peer-to-peer loan for the full amount of your mortgage is not possible in Australia in the same way it is in the US and the UK. In Australia, the most you can borrow from a peer-to-peer lender is $35,000. However, just because you can’t utilise a peer-to-peer lender for the whole amount of your home loan doesn’t mean you can’t use one at all.
Although most peer-to-peer lenders only offer a maximum amount of $35,000, this could be put towards your deposit to help you avoid paying the high cost of lenders mortgage insurance (LMI). For instance, if you are looking to borrow $500,000 you will need a deposit of $100,000 to avoid LMI. You could aim to save $65,000 and then take out a peer-to-peer loan of $35,000 to cover the remainder.
There are some peer-to-peer lenders that will lend larger sums, but these are typically only available for business or commercial purchases. Prudential Custodians is a peer-to-peer lender that has a minimum borrowing amount of $500,000, but they only offer loans for construction, development and commercial business purposes.
What to consider when looking for a peer-to-peer home loan
Peer-to-peer lending is an emerging market in Australia and there are a lot of factors you should consider before you apply for a peer-to-peer loan to help fund your home purchase.
- Short loan terms. The vast majority of peer-to-peer loans only have a maximum loan term of five years, with some lenders not lending for longer than two years. Make sure that you have factored this into your budget along with your mortgage repayments and other costs related to home ownership.
- Higher interest rates. Due to the shorter loan terms and the need to entice investors with high returns, peer-to-peer loans have higher interest rates than your standard mortgage.
- Lower loan amounts. Can you borrow enough? Due to how new peer-to-peer lending is in Australia, lenders cannot offer full mortgages or larger loan amounts.
- Can you include it in your home loan application? Not all mortgage lenders allow for other loan types to be included in your deposit when assessing your borrowing ability. Do your research and make sure that the lender you are applying for a home loan with will accept a peer-to-peer loan as part of your deposit.
Is peer-to-peer lending safe?
Peer-to-peer lenders are not authorised under the Australian Prudential Regulation Authority (APRA) and therefore, despite the low loan amounts, are not covered under the Government Backed Guarantee on Deposits. The Government Backed Guarantee on Deposits covers investments of up to $250,000 if there are any issues.
The best way to protect yourself is to do thorough research on the lender and make sure that there is a valid Australian credit license listed on the website. You can find out more about the risks of peer-to-peer lending by visiting ASIC’s MoneySmart website and reading APRA’s guidelines.
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