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Post by bracknellboy on Jan 20, 2014 9:18:24 GMT
This thread is certainly very educational. I usually get the statement, look at the interest, remove the fee, put that figure on the return. Then snarl at the losses. That gives a figure of about 9.8% (before tax!) losses are at about 3.5% which makes a return of 4.3% (basic rate tax payer) or 2.4% for higher rate payer. Is that about right? I've never intentionally bought any C- loan parts. I'd agree with those numbers (though 2.38% for higher rate, but I'm a pedant. And 1.89% for 'additional rate'. And the 'equivalent' pre tax interest rate would be 3.97% and 5.43% (and 3.44%) to achieve the same effective return. You've "never intentionally" or "intentionally never" ? [Sorry to go all Eats, Shoots and Leaves on your post].
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pikestaff
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Post by pikestaff on Jan 20, 2014 12:28:59 GMT
I attach a spreadsheet with my calculations of expected returns for basic and higher rate taxpayers, including the impact of paying premiums.
Gross rates are assumed equal to FC minimum rates, even if a premium is paid. In reality lenders may do a bit better than this before premiums, and a bit worse after premiums. However, I think this is the right starting point because it enables one to compare the return on a "clean" loan (with no premium) with that on a loan with the same headline rate (after premium). Annualised loss rates are as per FC projections because reliable alternative figures are not yet available.
The spreadsheet shows that you should think twice before paying large premiums, especially if you are a higher rate taxpayer. All other things being equal (ie even if the headline rate is the same), I estimate that a paying a 3% premium on a 5 year loan will reduce the after-tax rate of return of a basic rate taxpayer by approximately 0.47%, and that of a higher rate taxpayer by approximately 0.73%, once prepayment losses are taken into account. I have assumed prepayments run at 10% pa which is a bit of a guess.
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Post by chielamangus on Jan 20, 2014 19:07:23 GMT
Thanks for the spreadsheet. Can you tell me what the annual prepayment rate represents?
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pikestaff
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Post by pikestaff on Jan 21, 2014 14:50:02 GMT
It is just a guesstimate as to what % of loans prepays each year. The spreadsheet assumes prepayments are spread evenly through the life of the loan, which I am sure is wrong.
I wrote it for myself a while ago, in the course of deciding that buy and hold investing on FC was a mug's game and I'd be better off as a slow flipper (4 month hold of C- mostly). I've since decided that slow flipping is too much like hard work, so I am in the process of selling out of FC.
It may well be possible to get better information from FC's loan book, so that you can do a better job.
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Post by GSV3MIaC on Jan 21, 2014 17:17:59 GMT
No, it isn't possible, unless you look at the repayments tab of each loan, which is not possible unless you held them. The 'repayment date' as shown in the loanbook is just the start date plus the term .. there are many loans which show as ''repaid" but which have a repayment date (still) in 2015 or 2016 or whatever. I have asked FC to fix it, but no progress yet. It does flatter the figures again .. having 1000 3-year loans successfully repaid in full is a whole lot less exciting if they were actually repaid in month 11.
If I had to guess I'd guess 10% per year might not be a bad number - I can/could identify 117 repaid early, when / since I started looking in Sept 2012 .. anything which was repaid early BEFORE then, but was due to have been repaid BY then, will get lost and show up as normal repayment.
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