Loss loans FAQ’s

CR2

Which loan?

In July 2017, we lent out £182,000 at a Loan to Value (‘LTV’) of 70% towards a buy to let property in South Croydon. The property was a flat with private tenants. The initial interest rate earned by investors was 4%.

What happened?

Unfortunately, in August 2018 the borrower stopped paying interest on the loan. We worked with the borrower to help get them back on track, but it became clear that this would not be possible. As a result, we appointed receivers to manage the recovery of the loan.

The receivers were unable to sell the property due to the poor condition it had fallen into. The receivers decided the best course of action was to sell the property at auction in March 2019. Unfortunately, the sale price achieved was less than the amount lent out, leaving a capital shortfall of c.£19,522 to investors. Proceeds available from the sale were returned to investors immediately after the auction.

To repay the shortfall, the borrower proceeded with the sale of other properties in their portfolio. However, by April 2020, all these properties had been sold and the outstanding balance had not been reduced. Subsequently, we petitioned the court to make the borrower bankrupt. Following court delays due to COVID, the borrower was made bankrupt in December 2020 and an official receiver was appointed to assess their assets and liabilities.

This month, we received confirmation from the receiver that the borrower does not have sufficient assets to repay the outstanding amount as they have a large outstanding debt to HMRC that needs to be paid, after which there will be no assets remaining to distribute.

How did this happen?

This loan, as with every other loan on the Octopus Choice platform, was subject to strict underwriting and affordability criteria. The mortgage was lent at a conservative LTV of 70% on an interest only basis. Despite the borrower meeting the original borrowing requirements, after 13 months they stopped paying interest on the loan.

The properties had deteriorated substantially since our valuation in July 2017 and we were unable to sell the property on the open market.

What is the impact to investors?

By selling the property we returned 88% of invested capital to investors, meaning that investors lost 12% of the capital invested in the loan. Investors had already received c.£6,000 of interest from this loan, however none of the interest accrued since the borrower stopped making payments will now be paid.

What is the impact to Octopus Choice?

Octopus Choice invests 5% alongside the investor in every loan, and investors are always the first to be repaid their interest. We put this measure in place in case there was ever an instance such as this, where some or all the interest on a loan was lost.

In this case, Octopus Choice lost 100% of its invested capital and 100% of interest that it previously received when the borrower was paying their monthly payments.

How are recovered funds distributed?

When funds are recovered, we first pay the receiver or administrator their reasonable recovery costs, and our platform fee. This fee covers the ongoing management of the platform; however, we no longer charge our fee as announced in March 2020.

We pay our investors’ accrued interest ahead of retrieving our own. We pay out the proceeds of the portion of the loan that you hold in the following order:

  1. First, investors get as much initial capital investment back as possible – in this instance, 88% of it.
  2. Octopus Choice then get as much initial capital investment back as we can – in this instance, the full amount was lost.
  3. Investors then get as much of their outstanding interest as possible – in this instance 0% of the interest accrued while the loan was non-performing.
  4. Then, provided there’s still money left over, Octopus Choice get any interest we’re still owed – in this instance, we received none of the interest we were owed.
  5. Finally, we’ll pay ourselves any outstanding fees that we’re owed – these were waived.

How much was lost?

In total, investors lost £19,522 of capital. Please note that capital losses can be offset against the tax on any interest earned through Octopus Choice, though this would depend on each investor’s personal circumstances. For more information, please see here.

Was I affected?

To find out whether you were affected, and the exact amount lost, please see your monthly statement for December 2021.

CR0

Which loan?

In April 2017, we lent out £157,500 at a Loan to Value (‘LTV’) of 70% towards a buy to let property in Croydon. The initial interest rate earned by investors was 4.25%.

What happened?

In October 2020, the borrower began missing their monthly interest payments as they were in the process of selling the property. The sale subsequently fell through and in April 2021 we were advised that the block of flats the property is in failed its cladding inspection. This meant the property became unmortgagable and any buyer needing a mortgage could not progress a sale.

We immediately appointed receivers to manage the property and we were advised that the best course of action was to proceed with an auction sale as the work to fix the cladding was expected to take several years.

The property was sold in August 2021 resulting in a capital shortfall of c.£41,000. The sale proceeds were returned to investors immediately after the sale in August 2021.

We then contacted the borrower for the repayment of the shortfall and after discussions and advice from our receivers we agreed on a final payment of £20,000. As the borrower lives and works in Brazil, the threat of bankruptcy was not a realistic option.

How did this happen?

This loan, as with every other loan on the Octopus Choice platform, was subject to strict underwriting and affordability criteria. The mortgage was lent at a conservative loan to value of 70% on an interest only basis and the borrower has serviced the mortgage throughout the term of the loan.

Following the Grenfell Tower Fire in June 2017, the government has taken action to identify buildings affected by unsafe cladding. In doing so, multiple buildings have been identified where remedial work is required to remove and replace the cladding. Lenders have taken a cautious approach and are not lending against any properties affected by cladding until the remedial works are complete. This has affected multiple homeowners across the UK, just like our borrower, who are now stuck with properties that cannot be mortgaged and can only be sold at a much lower valuation.

What is the impact to investors?

By selling the property we were able to recover 85% of invested capital to investors, meaning investors lost 15% of the capital invested in this loan. Investors have also received c.£26,500 of interest from this loan, however none of the interest accrued since the borrower stopped making payments will now be paid.

What is the impact to Octopus Choice?

Octopus Choice invests 5% alongside the investor in every loan, and investors are always the first to be repaid their interest. We put this measure in place in case there was ever an instance such as this, where some or all the interest on a loan was lost.

In this case, Octopus Choice lost 100% of its invested capital and 100% of interest that it previously received when the borrower was paying their monthly payments. This balance of c.£12,000 has been added to the amount recovered for investors.

How are recovered funds distributed?

When funds are recovered, we’ll first pay the receiver or administrator their reasonable recovery costs, and our platform fee. This fee covers the ongoing management of the platform; however, we no longer charge our fee as announced in March 2020.

We pay our investors’ accrued interest ahead of retrieving our own. We pay out the proceeds of the portion of the loan that you hold in the following order:

  1. First, investors get as much initial capital investment back as possible – in this instance, 85% of it.
  2. Octopus Choice then get as much initial capital investment back as we can – in this instance, the full amount was lost.
  3.  Investors then get as much of their outstanding interest as possible – in this instance 0% of the interest accrued while the loan was non-performing.
  4. Then, provided there’s still money left over, Octopus Choice get any interest we’re still owed – in this instance we received none of the interest we were owed.
  5. Finally, we’ll pay ourselves any outstanding fees that we’re owed – these were waived.

How much was lost?

In total, investors lost £19,810 of capital. Please note that capital losses can be offset against the tax on any interest earned through Octopus Choice, though this would depend on each investor’s personal circumstances. For more information, please see here.

Was I affected?

To find out whether you were affected, and the exact amount lost, please see your monthly statement for December 2021.