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What is Property-Backed Lending?

Written by
BigFundr Team
Published on
January 24, 2024

What is Property-Backed Lending?

Property-backed lending is a type of lending where the borrower uses property as collateral to secure the loan. This means that if the borrower defaults on the loan, the lender can seize the property and sell it to repay the debt.

In places such as Australia or the United Kingdom, there is a strong private debt market catering to small and medium-sized developers to fund property developments.

When you invest in property loans with BigFundr, you are effectively lending to these developers.

Property-backed lending is a popular option for investors who are looking to earn higher returns on their investments.

How Property-Backed Lending Works?

When you invest in property-backed loans, you are essentially lending your money to a property developer. The developer will use your money to develop a property. Once the development of the property is near completion or completed, the developer will either refinance it with the bank or sell it and use the proceeds to repay your loan.

The amount of interest you earn on your investment will depend on the terms of the loan. However, you can typically expect to earn a higher interest rate on your investments in property-backed lending than you would on bonds.

What are the Benefits and Risks of Property-Backed Lending?

The Benefits

1. Property as Collateral

The property that is being developed is used as collateral for the loan, so the lender can take possession of the property in the event of a delay or default.

2. Stable and Consistent Returns

Property prices may fluctuate depending on market conditions, but your property-backed loans generate fixed returns regardless of market volatility. This provides a steady income stream in the form of interest payments, which can be attractive to investors seeking regular passive income.

3. Flexibility

In property-backed lending, you can choose to invest in a variety of property-backed loans with different fixed tenures and interest rates to diversify your investment portfolio based on your investment goals and risk tolerance.

4. Inflation Hedge

The stable and consistent returns generated by your property-backed loans provide a hedge against inflation.

The Risks

1. Default by the Property Developer

The developer may default and not be able to repay the loan.

To mitigate this risk, BigFundr has the first legal charge on the real estate, which allows us to liquidate the property to recover the funds. Our strategic partner and shareholder, Maxi-Cash*, provides a guarantee for all of BigFundr’s Deals, which ensures the punctual repayment of funds to our investors.

2. Market Volatility

If property prices go down more than the value of the developer’s equity, then the project may become economically unviable. In such instances, the developer may default on their loan.

At BigFundr, we typically lend on a maximum of 70% on the value of the loan, and require a developer’s personal guarantee. This provides a buffer against such market volatility.

3. Lack of Liquidity

Property-backed lending can lack liquidity, so it may be difficult to sell your investments if you need to access your money quickly.

The loan notes issued by BigFundr only need to be held for a short period ranging from 6 to 18 months. With a minimum investment amount of only S$1,000, you can choose how much you want to invest and how long for.

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