Uberization of mortgages seen within 5 years

Advisors may have the ability to offer clients direct online investing in mortgages within five years.

That’s the hope of Lending Loop chief executive Cato Pastoll, who expects peer-to-peer lending in Canada to expand quickly into consumer lending like mortgages after such an evolution of the sector in the U.K. and U.S.

“I’m hopeful it won’t be five years away. I’m hopeful it may be a shorter period than that, but I think we still have a ways to go,” he tells Advisor.ca, alluding to an expansion for peer-to-peer lending into mortgages.

“It’s going to require more people coming into the sector. It’s going to require more innovation to get to products like mortgages, because you need more scale and liquidity when you’re going to be doing larger investments like that,” he says.

Read: Feds want to shift more mortgage risk to lenders

In what’s been called the “Uberization” of lending, California’s Lending Club, the world’s biggest peer-to-peer lender, has plans to move into auto loans and mortgages after American online lender SoFi started offering residential mortgages about a year ago. U.K. peer-to-peer platform Landbay also allows retail and institutional investors to get into the country’s buy-to-let mortgage market.

Pastoll, co-founder of the marketplace lender, restarted operations this week after Lending Loop had halted the posting of new loan requests on its website due to compliance issues with regulators.

Following discussions with the OSC, Lending Loop received an exempt market dealer licence, but has kept the door open to retail investors. Retail investors can invest up to $10,000 per year; higher-income investors whose annual incomes are over $75,000 or hold more than $400,000 in assets can invest up to $100,000 per year; and accredited investors have no limits.

Read: Are client portfolios ready for P2P lending?

“We worked with the regulator to get our registration status that we have today, with the end-goal of relaunching as a regulated peer-to-peer lending platform,” Pastoll says. “We’re the first regulated, and I believe also the only, peer-to-peer lending platform in Canada.”

The OSC recently gave an exempt market dealer licence to Vault Circle, a division of online lender Lendified Holdings Inc., to offer debt securities to accredited investors in Ontario and provide financing for Lendified’s online small business loans. Its investors do not provide direct loans to businesses, making it a step or two removed from peer-to-peer, or marketplace lending.

Investors with as little as $200 can lend to small businesses through the Lending Loop website, and they can spread their money as thin as $25 per loan, creating diversification. Pastoll says investors can see detailed information about each business, including a rating and financial statements, before they decide to lend any money to the business.

“With just $2,500, you can lend to 100 different [companies],” Pastoll says. “That way you’re spreading your risk across 100 different businesses.”

Investors pay a 1.5% annual servicing fee, calculated monthly on the outstanding balance of the loan principal. Borrowers’ annual interest rates range from 5.9% to 26.5% depending on their credit rating.

Pastoll says Lending Loop uses a fixed spread of 1.5% in either a high or low interest rate environment. Low interest rates, he says, have brought the company more business as investors look for higher returns and banks tighten their lending.

Read: Don’t price in a rate cut just yet

The peer-to-peer lending model means more efficiencies and cost savings for financial institutions, investors and consumers, Pastoll says, and he’d like to see traditional financial institutions partner with the platforms.

“It’s just about efficient markets. It’s a more efficient and transparent way of doing things, but don’t think that means the end of the financial institution,” Pastoll says. “I think it benefits everyone. I don’t think it necessarily blows the whole market up.”