Octopus Choice
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An update on pausing Octopus Choice

4:40pm 5 May 2020 - Written by Charlie Taylor, Head of Octopus Choice

Update posted on 5 May 2020:

We’ve reviewed our most recent update on Octopus Choice dated 24 March 2020. This information is still relevant and up to date. For latest commentary and performance check out our quarterly factsheet.

Update posted on 24 March 2020:

Following the decision to pause trading in Octopus Choice, we hope the following covers the important questions and goes some way to reassure you.  To keep you informed, this page will be updated as things develop. If you can’t find the answer to your question here, please contact us at [email protected].

The purpose of the below is to:

  • Explain why we have taken the steps we have.
  • Detail what this situation means for investors.
  • Reassure you of what Octopus is doing to help.
Octopus Choice is paused, what does this mean?

Octopus Choice is paused, what does this mean?

On March 18 at 1:50pm, due to the large volume of withdrawals being requested from Choice, we took the decision to suspend trading.

That means we’re no longer processing withdrawals. It also means we’re unable to accept any new investments, invest into existing loans, or fund new loans.

This decision does not impact the management and servicing of existing loans. They will continue to operate and updates on the individual loans in each investor’s portfolio are available in their accounts.

Why has this happened?

Why has this happened?

The decision to pause Octopus Choice is not due to any problems with the underlying loans in the product. It is because of a lack of liquidity (the ability to sell loans between investors).

Octopus Choice is a peer-to-peer product, so it relies on a marketplace where loans are traded between investors. In order for Choice to work as investors have come to expect, it relies on there being enough buyers (new investors) to balance sellers (withdrawing investors).

It is problematic if withdrawals significantly exceed the demand for new investment, as is the case we are experiencing right now.

In recent weeks, a large volume of withdrawal requests led us to take the decision to pause Octopus Choice in the best interests of investors.

Recent market volatility has caused this extreme situation and, unfortunately, it is unlikely to change in the short term.

Given that the Octopus Choice platform works by automatically investing money into loans for a variety of reasons, we believe it is in investors’ best interests to pause new investment as well as withdrawals. This is because we cannot reasonably predict how soon normal trading situations will resume.

Are you concerned about the performance of the Octopus Choice loan book?

Are you concerned about the performance of the Octopus Choice loan book?

Octopus Choice has been paused because of concerns about liquidity. This decision has no bearing on the performance of the loan book.

That said, we do expect the broader situation to have an impact on some of our borrowers. The lending team in Octopus Real Estate, who source the loans on the platform, is looking into the possible impact of recent government announcements relating to coronavirus. They are also reviewing all of our loans and working with borrowers to see where impacts are likely. From this they’ll be making judgements on any potential implications for performance and we’ll communicate any findings in due course. Where we need to defer interest payments from borrowers in the near term, we will add those payments to the overall balance of money outstanding and due for repayment to borrowers (see below).

For loans in the book that are currently in collection and in the process of sale, the current uncertainty makes it very difficult to provide timelines on when these sales will go through. Fortunately, this makes up a small percentage of the overall loan book.

We would like to reiterate that Choice is structured to build in a significant buffer. The average loan-to-value across the loan book is currently 64%. The first 5% of every loan funded is also covered by a First Loss investment that stands to lose money before any investor does. We hope this provides some reassurance while markets are volatile and unpredictable.

Finally, at all times Octopus will work transparently in the best interests of our customers regarding the management of investors’ capital. We will keep investors and advisers updated regarding developments in the loan book and what that means for investment performance.

What impact will payment holidays have?

What impact will payment holidays have?

In accordance with the Government’s recommendation, we are offering a three-month payment holiday to any landlords whose tenants cannot pay rent due to financial difficulty caused by Covid-19. We expect landlords to pass on the payment holiday to their tenants. 

As with any other late loan (see below), interest will not be collected from loans where we’ve offered a payment holiday during the payment holiday period. While this will result in a lower overall interest rate during that period, the impact will be mitigated by the fact that Octopus is no longer taking its management fee. Interest will still accrue during the payment holiday period, and we would expect borrowers to make up the difference in instalments following any payment holiday.

What are late loans?

What are late loans?

Loans that are late paying, past their maturity date or in collection are ‘late loans’. Interest accrues for these loans but is not paid until the loan has recovered.

If a borrower is unable to repay and selling the property does not recover all capital and interest, then there is a chance you could lose money.

There are three different types of late loan.

1. Late paying loans

A loan is late paying when a borrower misses two consecutive monthly interest payments. You won’t be paid interest on a loan while it is late paying. However, interest does accrue, and you are first in line to be paid when a loan is repaid. Octopus Real Estate works closely with every borrower to help them get back on track.

2. Over term loans

A loan becomes over term when a borrower reaches the end of the loan term and hasn’t paid back the full amount of money that is owed (this includes capital, any interest still due, and fees).

While a loan is over term you won’t receive interest payments, but interest does accrue. Octopus Real Estate will do what it can to make sure you get the interest you’re owed. The team works closely with any borrower worried about going over term.

3. Loans in collection

Should the borrower be unable to repay their late paying or over term loan, Octopus Real Estate will appoint a third party to take charge of the property. The team will look at the options available to recover everyone’s money in a timely manner, while also getting a fair outcome for the borrower. This can take some time to complete and is therefore a last resort.

The third party can sell the property or assist the borrower in refinancing. However, this is not always necessary as they can also act as landlord and collect rent directly from the tenants and pass it to Octopus Choice.

Selling the property is a last resort, and the amount investors in that loan get back depends on the resale value of the property and the initial loan to value ratio.

Will investors still receive interest?

Will investors still receive interest?

Yes, subject to borrowers making their loan repayments each month. Please note that we will no longer be taking our platform fee. This means investors will see their target interest rate increase from around 4% to around 5.5%, reflecting our waived fee. Monthly interest received by investors will depend on individual loan portfolios and the performance on loans within them. During interest holidays, interest earnings will go down, and then as borrowers resume payments, earnings will catch up (i.e. the target return of 5.5% will not be smooth).

Interest will continue to be accredited to investors’ accounts, where it will remain as cash until withdrawn, or automatically paid out to a nominated bank account. Investors can make a request to withdraw as usual, via their online account or by speaking to their financial adviser.

We will continue to honour the requests of individual investors’ accounts. If an investor has elected interest to be taken as monthly income, this will remain the case. If set to reinvest, interest will remain in their account as cash and be available to withdraw.

You can switch between these two options by logging into your account.

How can investors withdraw cash when it is available in their Choice account?

How can investors withdraw cash when it is available in their Choice account?

Any cash in a Choice account can be withdrawn. This can be done on request or can be set to happen automatically, once per month, in order to pay out cash that has been earned from interest payments or cash that has been repaid from loan capital.

To make the payment happen monthly, select for interest to be paid out automatically on the Choice platform. We will include repaid loan capital in this payment so that, once per month, all available cash in each Choice account is paid out to the corresponding investor’s verified bank account.

For ISA accounts, this means cash paid out will leave the ISA wrapper. To arrange an ISA transfer, please contact us on [email protected]

The base rate has been cut in response to coronavirus, will this affect the interest investors receive?

The base rate has been cut in response to coronavirus, will this affect the interest investors receive?

The rates our borrowers pay are fixed. The change to the base rate will not have an impact on the rates attached to loans in Octopus Choice.

How does this affect withdrawal requests?

How does this affect withdrawal requests?

We are not processing new withdrawal requests for Octopus Choice. This is because investors are unable to trade their loans in order to withdraw capital until the market normalises.

This limitation applies to withdrawals from capital currently invested into loans. Any money within Octopus Choice accounts that is held in cash can always be withdrawn on request.

Under current conditions, repaid loan capital and interest that is set to pay out will be returned to a nominated bank account, otherwise it will remain as cash in the account available to withdraw.

If a standing order to Octopus Choice has been set up, this must be cancelled.

Is there a queue for withdrawals?

Is there a queue for withdrawals?

No, there is no queue for processing withdrawals. Under current conditions, liquidity will be achieved upon the repayment of individual loans in an investor’s portfolio.

When a loan redeems, funds will be paid into an investor’s Choice account. We can make it automatic to have those payments sent to a designated bank account.

To have repaid loan capital automatically paid out, contact us at [email protected] and we can set this up.

When will I be able to access my money?

When will I be able to access my money?

At present, we have no estimate on when Octopus Choice will be able to process withdrawals or take new investment. This is something we are continuously reviewing.

Under current conditions, Octopus Choice investors will be able to withdraw money when the individual loans in their portfolio mature (i.e. are fully repaid).

When we paused trading in Choice, approximately 80% of the £264 million loan book was set to repay within two years.* Please note that the maturity of individual loans will vary from one to another, as will one investor’s portfolio to another.

*Data correct as of 18 March 2020.

Year to 31 December 201720182019
Average interest rate 14.30%4.13%4.08%
Number of loans on the platform 259460539
Number of loans on the platform in debt collection0518

Past performance is not a reliable indicator of future results.

1 The average interest rate is calculated as the average interest rate of all loans on the platform, during the period, weighted by the loan value. Octopus Choice launched in March 2016, so no further discrete 12-month performance data is available.

How are direct debits and regular investments affected?

How are direct debits and regular investments affected?

No Choice investments are made by direct debit, so you do not need to contact your bank to stop a mandate with us.

Any standing orders do need to be stopped so that we do not receive those funds.

We have blocked all regular debit card payments being taken by the platform. Anything taken after Octopus Choice was paused will be returned, unless the payment was made into an IFISA.

In the case of transfers and investments into the Innovative Finance ISA, we will continue to hold the investment in the wrapper, and we’ll be in touch to arrange an appropriate destination for the money.

How are Innovative Finance ISAs (IFISAs) affected?

How are Innovative Finance ISAs (IFISAs) affected?

Cash held in an IFISA account will be kept in the Octopus Choice IFISA wrapper. That includes repaid loan capital and interest paid.

We intend to work individually with each adviser or investor to decide what option works best for them and make an appropriate transfer.

If you would like to make a partial or full transfer of funds to another ISA, you can follow the regular steps via your provider, or contact us at [email protected] and we will take you through the process. While trading of investments is paused on the platform, however, only money held in cash can be transferred out.

As an adviser, can I change my fees?

As an adviser, can I change my fees?

If you would like to change your fees, please contact your business development manager.

What are you doing to help?

What are you doing to help?

We’ll be communicating with you transparently and regularly to keep you informed. Here on the website we will provide regular updates as they are available. We will send regular emails to our supporting advisers and our direct investors with more specific information on the platform and the loan book.

As mentioned above, Octopus Choice will no longer be taking its platform fee. This should increase investors returns while liquidity is unavailable

At this stage we do not have specific plans to refinance the loan book in order to provide liquidity sooner. However, we are considering all avenues and will keep you informed of any developments.

Commissioned by Octopus Co-Lend Limited, 33 Holborn, London EC1N 2HT, which is fully authorised and regulated by the Financial Conduct Authority (reference number 722801).