An Update on Sellout
The new RateSetter Sellout feature launched three weeks ago today and we wanted to update you on how it has gone.
The feedback from Lenders has been encouraging, with many telling us that is has rounded out the RateSetter proposition for them – if you can get out, you are happier to get in.
Some Lenders have been wanting to exit for one reason or another and have welcomed the new functionality. Others have used it, only to reinvest in longer term markets – it’s gratifying to see that people are using Sellout to increase rather than reduce their commitment to RateSetter!
Over the past two weeks we have seen £174,868.54 of loans sold out across all the four markets.
Our objective was to create a simple system that lets Lenders access their funds quickly and easily and design a secondary market that allows reliable access without encouraging speculation – we want to create a situation where the rate matches your commitment, even if you exit early.
Like many things that appear simple, there is a much complexity under the bonnet and it has taken a surprising amount of time and resource to build. Firstly, we applied that the principle that you can always withdraw your funds from RateSetter – provided there is another lender(s) to take your place. There were then three key things to consider: how contracts would be refinanced, which individual contracts would be sold and the cost to the Lender for being able to access their funds early:
- Contracts are refinanced in their original market. This means that there will regularly be situations where assigned contracts are shorter than the full market term. This happens quite a lot in peer-to-peer lending anyway because the Borrower has the right to repay at any time which means contracts are frequently not of the originally intended duration.
- As for which contracts are sold, it starts with the most recent. In one sense, it’s arbitrary as to which order we choose contracts to sell on Lenders’ behalf – our rationale was that younger contracts should be more reflective of current rates and less likely to incur assignment fees (even though the duration on those contracts would be higher). So, it is a real-time calculation based on live rates and specific to you on any given day that you look to Sellout.
- Balancing a decent rate of return without creating perverse incentives guided how we approached the question of cost. We feel the principle of our offering – that Lenders receive the rate of return they would have achieved had they chosen to lend for the same length of time they end up lending for – is simple and fair. Yes, you give up some of the interest you have earnt but you are fully rewarded for your time in the market.
- So, a 5 Year Income contract sold out after 1 month receives the Monthly Access rate, after 12 months the 1 Year Bond rate, and after 36 months the 3 Year Income rate. These rates are based on a snapshot of the rates and markets that were available the day the contract was formed. As we add terms on RateSetter, the rates can become even more granular.
- We initially intended an additional 0.25% fee to discourage “abuse”. We have amended this fee to apply as a 0.25% minimum to your entire Sellout order.
- To smooth the sharpest drops, we have retrospectively applied the 1 Year Bond since its inception (Feb 2012) back to day zero. This has the effect of decreasing a sharp drop in return facing those Lenders who matched 3 Year Income rates before the 1 Year Bond existed.
- There is another potential cost as well. If rates rise, the contract must be refinanced at a higher rate. In this situation, the Lender will also incur an “Assignment Fee”. The assignment fee is used to compensate the new Lender (“the assignee”) for being matched with contracts with an interest rate that is less than his request. This ensures contracts can always be sold, though at potentially a higher cost if rates have moved against you – it also ensures there is no benefit to Sellout only to re-lend at better rates. If rates have fallen, the excess interest – rather than going to you or the new lender – goes to the Provision Fund.
- So, the overall cost of exit (the exit fee plus any assignment fee) can therefore vary depending on when the contract was originated and what the refinancing rate is. It is lower in the early stage of the contract (because the amount of interest foregone is so little) but can also be expensive because the assignment fee is most sensitive to interest rate increases when the remaining duration is highest.
- In total, the £174,868.54 that has been refinanced has cost 1.12%: 0.95% in exit fees and 0.16% of assignment fees.
Below we have set out a worked example, showing what happens when someone exits the 3 Year Income market at various stages during the 3 years and what the net return is.
Sellout is our latest step in creating a richer and more rounded offering that reflects how Lenders want to use RateSetter. It requires a lot of calculations (and processing power!) but we think it follows fair and simple principles and adds reliable liquidity to the list of advantages of lending on RateSetter. Thank you for all your comments so far, and please keep them coming – we will keep looking to innovate and respond.
The RateSetter Team
Sellout: A Worked Example.
£1,000 lent and reinvested for 3 Years at 7.8% (1st January 2011)