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Post by westonkevRS on Jan 20, 2015 20:07:12 GMT
"My gut feeling is that RateSetter are just divvying up 5 year loans in monthly tranches to make extra profits" 3-year money is matched to 3-year loans. 5-year money is matched to 4 and 5-year loans. This is a direct match, 100% of RateSetter loans ever written are on these terms include no shorter term money, i.e. there is no monthly or 1-year money in any loan over 2 years. So if you are in the monthly money, in the extreme circumstances mentioned the maximum time your money could be "locked" is 2 years. Although we do not believe this to ever be required it is clearly correct from a legal and compliance perspective we document the potential outcomes, i.e. the need to lock-in the money to prevent a "bank run". However the conversation is correct to discuss, but with £11m in the Provision Fund (and growing monthly) please rest assured the scenarios outlined on this thread are extreme and unlikely to occur within a short to medium term horizon (unless kicked started by some other black swan event not linked to the sufficiency of the Provision Fund). So I only ask for perspective, and not scare mongering. Kevin.
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jlend
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Post by jlend on Jan 20, 2015 21:40:43 GMT
"My gut feeling is that RateSetter are just divvying up 5 year loans in monthly tranches to make extra profits" 3-year money is matched to 3-year loans. 5-year money is matched to 4 and 5-year loans. This is a direct match, 100% of RateSetter loans ever written are on these terms include no shorter term money, i.e. there is no monthly or 1-year money in any loan over 2 years. So if you are in the monthly money, in the extreme circumstances mentioned the maximum time your money could be "locked" is 2 years. Although we do not believe this to ever be required it is clearly correct from a legal and compliance perspective we document the potential outcomes, i.e. the need to lock-in the money to prevent a "bank run". However the conversation is correct to discuss, but with £11m in the Provision Fund (and growing monthly) please rest assured the scenarios outlined on this thread are extreme and unlikely to occur within a short to medium term horizon (unless kicked started by some other black swan event not linked to the sufficiency of the Provision Fund). So I only ask for perspective, and not scare mongering. Kevin. ....bringing a sense of perspective back :-)
- The provision fund has been great since I opened my account in December 2010 - a real game changer. I'm not sure I would ever have got into P2P without it
- Liquidity on the rolling market has always been good for me. I've had what I consider quite large sums of money in that market at times and never had a problem getting it out
- I like the fact that ratesetter have thought about what they would do if there was a liquidity challenge or the provision fund looked like it might have an issue.
- I like the fact that my money gets lent out quickly. I like the fact that I seem to get a good return with the "Market Rate" and if I have time I can sometimes get a little higher rate manually
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SteveT
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Post by SteveT on Jan 21, 2015 8:51:11 GMT
I'm probably being slow, but do the loans (up to 2 years term) that the monthly money is used to fund carry a Fixed or a Variable rate? Or are there elements of both?
The scenario I'm trying to get my head around is a sudden, unexpected increase in the BoE Base Rate. Variable rate 1 - 2 year loans would naturally see their ongoing rates rise as a result, so maturing 1 month money would get matched against incoming 1 month lenders (who would inevitably be expecting a higher rate than previously).
However any 1 month money that's actually funding a 2 year Fixed rate loan is highly unlikely to be matched against new 1 month money at the same rate as before. So who absorbs the margin hit of repaying the maturing 1 month lenders in full when the new "market rate" for 1 month money is now significantly higher but the underlying loan rate hasn't changed? Does this come from the Provision Fund (in which case, I wonder what level of Base Rate "spike" it has been stress-tested to)? Or is there a risk that 1 month lenders could find themselves unexpectedly tied into an uncompetitive 2 year Fixed Rate loan by default (unless they're prepared to take a hit themselves in order to sell it on)?
As I say, I may simply have missed something obvious ...!
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Post by accumul8 on Jan 21, 2015 9:12:59 GMT
Kev Thank you for a straight answer on the maturity question - that now makes sense. The worst case scenario is that your money is tied up for 2 years but the law of averages says that it is likely to be somewhat less than this. Now on to Stevet's question or a variation on it. Are any borrowers on a variable interest rate linked to the monthly market rates or do Ratesetter simply pocket the difference between the variable rate and the fixed 2 year rate? If the monthly market dries up, are lenders locked into the original monthly rate that they lent at or does this get reset at a market monthly rate - presumably some much higher figure? Looking forward to finally understanding the monthly market... :-)
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Post by pepperpot on Jan 21, 2015 12:28:23 GMT
I can't see borrowers getting better rates for a two year loan than for a five year loan, so I feel there is a considerable spread to soak up any potential rise in rates, I guess it would just hit the RS margin. The benefit to lenders is the short duration and quick return of capital, the benefit to RS is cheap money to fund (relatively) high rate loans. As the lender turn over is higher, it requires more work from RS to keep it rolling therefore I am comfortable with RS getting a larger slice of the action.
There was mention recently of odd durations in monthly contracts, this I think is due to being matched to the tail end of a one or two year loan that may have just 36 days (or whatever) left to run and is silly to split into two matches. There will always be an odd duration at the end of a loan = to the delay set by the borrower until the first payment. (apologies if that has come up before and I missed it)
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shimself
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Post by shimself on Jan 21, 2015 13:14:38 GMT
- The provision fund has been great since I opened my account in December 2010 - a real game changer. I'm not sure I would ever have got into P2P without it
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sl75
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Post by sl75 on Jan 21, 2015 14:53:05 GMT
I'm probably being slow, but do the loans (up to 2 years term) that the monthly money is used to fund carry a Fixed or a Variable rate? Or are there elements of both? The scenario I'm trying to get my head around is a sudden, unexpected increase in the BoE Base Rate. Variable rate 1 - 2 year loans would naturally see their ongoing rates rise as a result, so maturing 1 month money would get matched against incoming 1 month lenders (who would inevitably be expecting a higher rate than previously). However any 1 month money that's actually funding a 2 year Fixed rate loan is highly unlikely to be matched against new 1 month money at the same rate as before. So who absorbs the margin hit of repaying the maturing 1 month lenders in full when the new "market rate" for 1 month money is now significantly higher but the underlying loan rate hasn't changed? Does this come from the Provision Fund (in which case, I wonder what level of Base Rate "spike" it has been stress-tested to)? Or is there a risk that 1 month lenders could find themselves unexpectedly tied into an uncompetitive 2 year Fixed Rate loan by default (unless they're prepared to take a hit themselves in order to sell it on)? As I say, I may simply have missed something obvious ...! It certainly used to be the case that loans of up to 2 years were described as "variable rate" to borrowers, with the final monthly payment adjusted to take into account any differences from the original rate(s) that had been used to calculate the monthly payments. Some rate stability is provided to borrowers with 18 or 24 month loans, as these are partly matched to the 1 year market (for the portion that is not due for at least 1 year). I've no idea about the exact detail of how this was previously, or is now presented to borrowers.
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bigfoot12
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Post by bigfoot12 on Jan 21, 2015 19:55:01 GMT
... in the extreme circumstances mentioned the maximum time your money could be "locked" is 2 years. Although we do not believe this to ever be required it is clearly correct from a legal and compliance perspective we document the potential outcomes, i.e. the need to lock-in the money to prevent a "bank run". However the conversation is correct to discuss, but with £11m in the Provision Fund (and growing monthly) please rest assured the scenarios outlined on this thread are extreme and unlikely to occur within a short to medium term horizon ... westonkevRS are you saying that, if there were no lenders available when my 1 month lending was due to be repaid, the provision fund would step in at the first instance?
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Post by westonkevRS on Jan 21, 2015 21:03:51 GMT
... in the extreme circumstances mentioned the maximum time your money could be "locked" is 2 years. Although we do not believe this to ever be required it is clearly correct from a legal and compliance perspective we document the potential outcomes, i.e. the need to lock-in the money to prevent a "bank run". However the conversation is correct to discuss, but with £11m in the Provision Fund (and growing monthly) please rest assured the scenarios outlined on this thread are extreme and unlikely to occur within a short to medium term horizon ... westonkevRS are you saying that, if there were no lenders available when my 1 month lending was due to be repaid, the provision fund would step in at the first instance? Sorry. no. I meant that the Provision Fund depletion might be the trigger that caused a "bank run". In this instance the T&C's allow us to keep your money locked until the stampede has passed and replacement money was available from new or existing lenders (or perhaps even RateSetter money). The Provision Fund is purely for bad debt. However with the size of the PF I doubt this would be the trigger (not that I ever think this would happen), it would more likely be some other unforeseen event linked to the platform or the macro-economic environment.
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Post by westonkevRS on Jan 21, 2015 21:07:05 GMT
It certainly used to be the case that loans of up to 2 years were described as "variable rate" to borrowers, with the final monthly payment adjusted to take into account any differences from the original rate(s) that had been used to calculate the monthly payments. Loans are now "fixed rate" with any variance risk/downside/upside that was previously passed to the customer now borne or enjoyed by RateSetter (or to be precise, Retail Money Market Ltd).
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bigfoot12
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Post by bigfoot12 on Jan 22, 2015 8:57:45 GMT
westonkevRS are you saying that, if there were no lenders available when my 1 month lending was due to be repaid, the provision fund would step in at the first instance? Sorry. no. I meant that the Provision Fund depletion might be the trigger that caused a "bank run". In this instance the T&C's allow us to keep your money locked until the stampede has passed and replacement money was available from new or existing lenders (or perhaps even RateSetter money). The Provision Fund is purely for bad debt. However with the size of the PF I doubt this would be the trigger (not that I ever think this would happen), it would more likely be some other unforeseen event linked to the platform or the macro-economic environment. I am particularly concerned about the failure of a rival. So many have started up recently, not all will succeed, and my guess is one or two will be messy. With P2P much more in the spotlight than in the past I would expect liquidity to be difficult on many platforms for a while. Since I learned how your monthly lending works I have stopped using it. I am still very happy to getting 6.1% and 6.2% in the five year (this week). If it isn't possible to exit a one month loan, what rate is applied?
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spiral
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Post by spiral on Feb 3, 2015 14:20:18 GMT
Loans are now "fixed rate" with any variance risk/downside/upside that was previously passed to the customer now borne or enjoyed by RateSetter (or to be precise, Retail Money Market Ltd). I originally started this response in the cashback thread but felt it was more appropriate here so here goes. In order to try and acheive the cashback, I (unsuccessfully as 4.0% was not even close ) used the 1 yr market for the first time. Previously I'd only ever used the 5yr market so understand in detail the workings of that. The 1 yr market had me stumped (as with the 1 month market). I think I am understanding that the 1yr/mth markets are used in longer term loans. I think westonkev said previously that 1mth money never goes into a contract of >2yrs. What I was failing to see in my brief dip into this market was any real movement during the day so I have 2 questions. 1. Are most of the matches timed to coincide with the repayment run in order that contracts can roll over. Which would be why I saw little movement during the day. I believe this is the case for 1 month market. 2. At what point does a newly formed loan take money from the 1yr or 1 month market as opposed to a loan that is rolling over. Previosly I understood it to be variable rate loans but westonkev has pointed out that now all loans are fixed rate so who takes the new money?
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pikestaff
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Post by pikestaff on Feb 3, 2015 15:46:21 GMT
..if you are in the monthly money, in the extreme circumstances mentioned the maximum time your money could be "locked" is 2 years. But that's not quite true, is it? If the Provision Fund were ever to go bust, RS would declare a Resolution Event whereupon: "...all monies owing under the Loan Contracts (the "Assigned Funds") will be collected and pooled into the Provision Fund for the Provision Fund Trustee to hold on trust for the lenders. Following the assignment of loans to the Provision Fund, the Provision Fund Trustee will wait for all the loans to fully run down in order that it can collect all monies owing under the outstanding loan contracts, after which it shall distribute the Assigned Funds to lenders on a pro rata basis..." There would be only one pool, so the money would be locked in for 5 years. I'm not expecting that ever to happen, but it could.
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sl75
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Post by sl75 on Feb 3, 2015 17:12:08 GMT
2. At what point does a newly formed loan take money from the 1yr or 1 month market as opposed to a loan that is rolling over. Previosly I understood it to be variable rate loans but westonkev has pointed out that now all loans are fixed rate so who takes the new money? westonkev's comment has no impact on your previous understanding of the matching process. It just means that RateSetter have to top up the borrower repayments (from their own pocket) if rates have risen, or get to keep the excess borrower repayments if rates have fallen. As before, the money on the 1 year market would be used to provide the part of a new loan advance that is not due within the first year (for a borrower loan of up to 2 years duration). The portion due within the first year would be matched to the 1 month market (and re-matched every month as the borrower repayment falls due). The repayment after 1 year would then be partly sourced from the borrower repayment due on that date, with the rest re-matched to the monthly market. With the current structure, as I understand it, there would never be any direct "rolling" within the 1 year market... except possibly for the very last payment on a loan of 24 months duration (when the 12 month repayment occurs, the amounts due for payments 13-23 would be matched to the 1-month market, with the possibility to re-match the amount due for payment 24 to the 1 year market). Such activity, if it occurs, would be very minor in the 1 year market - in contrast to the 1 month market, where we expect almost all the activity to be re-matching of existing loans.
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spiral
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Post by spiral on Feb 3, 2015 18:46:07 GMT
As before, the money on the 1 year market would be used to provide the part of a new loan advance that is not due within the first year (for a borrower loan of up to 2 years duration). This is the final piece of the jigsaw that for months has not fitted in place. I never actually realised that RS do loans for less than 3 years. I had always tried to fit the 1yr and 1 month market into 3-5 yr loans. It made sense when I thought they were for variable rate loans because there was a fundamental difference between a say 5yr fixed rate or 5 yr variable rate. When westonkev said they were all now fixed rate, I couldn't get my head round where the new loans came from. Having just looked at the loan application process, I see they do loans for 6,9,12,18 and 24 months and can now see how the 1 month and 1 yr market fit into that process. Thanks for enlightening me.
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