Another way to beat bank savings' rates

John Bolton, managing director of Squirrel Mortgages, wants to give consumer finance borrowers and investors more choice.

Investors will soon have another option when it comes to beating the savings' rate on money in the bank.

Mortgage broker Squirrel is to enter the peer-to-peer lending market in a bid to offer cheaper consumer finance than banks and a better rate of return for investors.

The Auckland-based company, owned by former ANZ retail general manager John Bolton, has set up a separate arm under Squirrel Money and become the third business to gain a license from the Financial Markets Authority to offer the new service.

Peer to peer lending involves matching up people who want to borrow money with those who are prepared to lend it through an online platform cutting out the middle man - either the bank or a finance company.

Despite Bolton's existing business being involved in helping prospective property buyers get loans he says it's consumer lending he plans to target with both secured and unsecured loans available up to $70,000.

"The reality is the first mortgage market is very competitive - banks can source very cheap money. There's no market there for fringe players and the return is not there for investors."

Instead he believes the type of people who will want to borrow money via the platform will be home-owners who want to renovate their kitchen or consolidate some debt but may find it hard to do so through their normal bank because they have less than 20 per cent equity in their home.

People will be able to borrow up to $30,000 unsecured or between $30,000 and $70,000 with security over their purchase such as a car or through an unregistered second mortgage on their property for interest rates of typically between 8 to 12 per cent per annum.

Investors or people prepared to lend their money out will need a minimum of $500 but could expect a return of 7 per cent or above - nearly double what they could earn by leaving their money in the bank.

The new service differs from its rival Harmoney as investors don't choose who they lend to but there is some protection for when borrowers don't pay up through a reserve fund which would cover that payment to the investor.

Bolton said the reserve fund would be seeded with $100,000 from Squirrel with the company putting up 4 per cent of out-standing loan balances for the first year to build up the reserve.

Investors and borrowers are matched up through an auction-style process where investors put forward what kind of return they are looking for such as 7 per cent and that is matched with a loan depending on the risk profile of the borrower.

Bolton said those looking for higher returns may find it takes longer for their money to be lent out.

If a borrower misses a payment the reserve fund will cover it smoothing the returns of investors.

Bolton said if the reserve fund ran out of money then all investors could stop receiving interest payments for a period of time while the reserve fund was built up again.

But they would always be paid back their principal loan.

Read about the risks involved with peer-to-peer lending here.

Bolton said the consumer finance market was worth up to $15 billion with the high loan to value lending worth another $15 billion.

The plan was to target the middle to upper end of the consumer market where borrowers were having to pay 12 to 14 per cent at the bank.

We have no intention of playing at the lower end of the market.

John Bolton

While investors would not pay a fee to lend their money out Squirrel would take its cut through taking 2 per cent of the loan balance.

He said that meant investors would not get pinged if borrowers repaid the money early.

Bolton said he hoped to leverage of the company's existing brand and expected to begin to make a profit within three years of launching the business, expected to be early next month.

The company will also raise money through crowd-funding site Snowball Effect soon and plans to list on the NXT board of the share market in 18 months.