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Post by ablrateandy on Jun 10, 2015 19:55:51 GMT
Hello chaps, I was just after a bit of cheeky feedback but it may be useful generally to see the opinions of others so I thought that I would park it here  . What do people think about structures that aren't plain vanilla, ie. payments are irregular? Imagine something like a car bought on lease purchase where you receive a balloon payment at the end. Is it something that you would consider or do you prefer plain vanilla structures because it is easier. To elucidate, I am looking at a 7 year loan structure where interest (or more likely amortisation payments) to lenders would be X per month but the balloon payment at the end would lift the YTM significantly over X. If you look at the whole loan's yield it is ace. If you look at the income stream (excluding the balloon) then it is merely good. |
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james
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Post by james on Jun 10, 2015 20:40:05 GMT
Nothing in principle wrong with partial precipice structures. I assume that the maturity value would be packaged as a capital gain rather than a final large interest payment, just for unwrapped tax efficiency.
I suppose that there might also be some market for strips, at least when there's no tax wrapper around the lending.
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Post by ablrateandy on Jun 10, 2015 20:52:48 GMT
You share my mind.  . I can strip it as a separate loan and discount it or just keep it as a single loan with a capital uplift but then need tax advice as I think HMRC may not like it. Fortunately our new system should cope well with it in secondary too. The difference in headline isn't too dramatic (say 9pc headline with an actual AER of 11pc) and I guess some platforms already do interest at maturity.... Just not for seven years! |
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Post by ablrateandy on Jun 10, 2015 21:31:37 GMT
We can happily offer that structure..... but HMRC is going to be your/our issue samford71 . It's a great SIPP proposition if the tax can be sorted. A quick check of the interweb reveals that HMRC may be tough on it (or I'd be offering discounted loans/strips all day every day!). I'll do some digging around. |
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james
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Post by james on Jun 11, 2015 4:00:46 GMT
The difference in headline isn't too dramatic (say 9pc headline with an actual AER of 11pc) and I guess some platforms already do interest at maturity.... Just not for seven years! That's not a small difference, it's a huge difference. Expect much less interest in anything offering less than 10%. That's due in part to the competition for money that's around. Expect quite extreme price sensitivity in the 9-12% range particularly outside a tax wrapper. Remember here that 10% and 11.2% are available tax free from a couple of VCTs, with high secured components, 100% for one, around 50% for the other. 7-8% is routine. All after allowing for the effect of the initial 30% discount - and that 30% of the money up front is also more attractive than anything you are likely to be able to structure. Back to the topic at hand, I can see final or final few years of higher payment as being of interest to borrowers who are investing to buy plant or develop business opportunities, where their cash flow doesn't start for the first year or three or more. Higher payments when they have cash flow beats effectively having to set aside some of their loan to pay interest on it. But pure loans of that type would be much less attractive to consumer lenders, so a hybrid structure could work well.
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james
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Post by james on Jun 11, 2015 4:12:16 GMT
So far as SIPP goes, I agree that it'd be an interesting product for many because SIPPs are usually long term money. It's where I expect to see the greatest interest in long term projects.
For me seven years is getting to be a bit long now without a resale market. But that's just because some of my potential retirement plans anticipate becoming a millionaire in 7-12 years, using the Portugese tax free pension withdrawal facility then an investor visa to migrate elsewhere.
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adrianc
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Post by adrianc on Jun 11, 2015 7:32:12 GMT
What do people think about structures that aren't plain vanilla, ie. payments are irregular? Imagine something like a car bought on lease purchase where you receive a balloon payment at the end. Is it something that you would consider or do you prefer plain vanilla structures because it is easier. To elucidate, I am looking at a 7 year loan structure where interest (or more likely amortisation payments) to lenders would be X per month but the balloon payment at the end would lift the YTM significantly over X. If you look at the whole loan's yield it is ace. If you look at the income stream (excluding the balloon) then it is merely good. Unless I'm totally misunderstanding (eminently possible), this suggestion's not a million miles from TheHouseCrowd et al, is it? Income payouts annually. Sale and distribution of asset value growth at some point in the future to uplift the total return on investment.
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Post by ablrateandy on Jun 11, 2015 7:48:57 GMT
No, not really except ours is a guaranteed final amount rather than necessitating an appreciation of the asset itself (which I assume is how property guys work). It's a final payment due on aircraft handover following what is to all intents and purposes an amortising loan, so no final payment = no asset for the purchaser. It is good from a risk profile as it amortises and we can probably buffer the LTV a little to start with. As an idea on cashflows on one model that I am looking at, if you invested say £10k you would receive back £161pcm for 7 years and a final payment of £761 on maturity date which gets you to an AER of 10.44% vs a "headline" rate of 8.75% on that structure.
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bigfoot12
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Post by bigfoot12 on Jun 11, 2015 8:00:25 GMT
As an idea on cashflows on one model that I am looking at, if you invested say £10k you would receive back £161pcm for 7 years and a final payment of £761 on maturity date which gets you to an AER of 10.44% vs a "headline" rate of 8.75% on that structure. Is this just a 7 1/2 year amortising loan that happens to pay off six months early? If so these are quite common. Most wind turbine loans are between 2 and 5 years (some a little longer), but the amortisation is often 20 years (the length of the FIT).
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Post by ablrateandy on Jun 11, 2015 8:07:32 GMT
Not really, as the capital amortises over the 7 year period so it is de-risked by maturity (it's a lease purchase). (Thanks for the comparisons though bigfoot12 and adrianc - it's helping my train of thought ). |
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sqh
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Before P2P, savers put a guinea in a piggy bank, now they smash the banks to become guinea pigs.
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Post by sqh on Jun 11, 2015 8:19:15 GMT
No, not really except ours is a guaranteed final amount rather than necessitating an appreciation of the asset itself (which I assume is how property guys work). It's a final payment due on aircraft handover following what is to all intents and purposes an amortising loan, so no final payment = no asset for the purchaser. It is good from a risk profile as it amortises and we can probably buffer the LTV a little to start with. As an idea on cashflows on one model that I am looking at, if you invested say £10k you would receive back £161pcm for 7 years and a final payment of £761 on maturity date which gets you to an AER of 10.44% vs a "headline" rate of 8.75% on that structure. It's all very interesting (excuse the pun), but I think a simple to understand P2P platform with a standard 1% interest per month and a commission free SM is the way to go. That model has worked really well at Savingstream, and you started along the same lines.
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Post by ablrateandy on Jun 11, 2015 9:18:00 GMT
No, not really except ours is a guaranteed final amount rather than necessitating an appreciation of the asset itself (which I assume is how property guys work). It's a final payment due on aircraft handover following what is to all intents and purposes an amortising loan, so no final payment = no asset for the purchaser. It is good from a risk profile as it amortises and we can probably buffer the LTV a little to start with. As an idea on cashflows on one model that I am looking at, if you invested say £10k you would receive back £161pcm for 7 years and a final payment of £761 on maturity date which gets you to an AER of 10.44% vs a "headline" rate of 8.75% on that structure. It's all very interesting (excuse the pun), but I think a simple to understand P2P platform with a standard 1% interest per month and a commission free SM is the way to go. That model has worked really well at Savingstream, and you started along the same lines. If only the originators brought me round pegs for my round holes that would be ace! Don't worry though - most things will continue to be traditional, but sometimes we get something where we need to be creative and we like the deal enough to think that we can hopefully find a solution. I'm sure that other platforms have the same thing (hence me spamming the General Board with this ).
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Post by meledor on Jun 11, 2015 9:50:09 GMT
No, not really except ours is a guaranteed final amount rather than necessitating an appreciation of the asset itself (which I assume is how property guys work). It's a final payment due on aircraft handover following what is to all intents and purposes an amortising loan, so no final payment = no asset for the purchaser. It is good from a risk profile as it amortises and we can probably buffer the LTV a little to start with. As an idea on cashflows on one model that I am looking at, if you invested say £10k you would receive back £161pcm for 7 years and a final payment of £761 on maturity date which gets you to an AER of 10.44% vs a "headline" rate of 8.75% on that structure.
This is more like it and certainly beats looking at that triplane which is all you've offered us this last month
Like others have said I have no issues in principle with the proposed partially amortising structure. Based on your figures the balloon is fairly small and there is reasonable amortisation. According to my calculations the principal amortises to about £6300 at mid term (with my simple spreadsheet I get close to your IRR of 10.4% but I'm not sure what the headline rate represents and I suggest would be liable to confuse).
Structure aside, the issue for me would be whether the rate was good enough for the credit risk on the longer duration - but that is another story.
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Post by ablrateandy on Jun 11, 2015 10:07:14 GMT
Sorry - I switched models halfway through and changed the rate and was rounding the pounds just to add to confusion. Exact flow would be :
£10,000 paid
Nominal (ie amortising) rate 9% per year paid monthly (so 0.75% per month) --> £160.89pcm
Final payment at month 84 (including last amortisation) --> £760.89 (ie. £600 "Brucey Bonus")
---> 10.439% AER
(Note that IRR will work here but XIRR will be a fraction out due to its calculation methodology (it gets 10.425% by my reckoning).
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bigfoot12
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Post by bigfoot12 on Jun 11, 2015 10:50:03 GMT
Would the borrower have the option of early redemption, and if so what would the repayment be?
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. I can strip it as a separate loan and discount it or just keep it as a single loan with a capital uplift but then need tax advice as I think HMRC may not like it. Fortunately our new system should cope well with it in secondary too. 
