eugene
New Member
Posts: 3 
Likes: 1
|
Post by eugene on Feb 4, 2015 23:32:36 GMT
Have I got this right, if I look at a loan part on the secondary market I see the buyer rate before any account is taken of the premium/discount. If I'm right, surely that's rather unhelpful.
For example a buyer rate of 13.1% on a sale price of £36.24 and a 3% (£1.06) premium would not yield 13.1% but 12.7% (BuyerRate/100*(SalePrice-Premium)/SalePrice) as the premium is paid immediately. So the principal on which the interest is calculated would be £36.24 - £1.06.
This makes it hard to compare the interest on two loan parts as the true rate of return is not the buyer rate advertised but the one after account is taken of the premium/discount.
Or am I barking mad ?
|
|
blender
Member of DD Central
Posts: 5,719
Likes: 4,272
|
Post by blender on Feb 4, 2015 23:55:44 GMT
Hi Eugene. The buyer rate does take account of the premium or discount. It is the annualised return you will receive if you hold the loan part to term. Each loan part has an interest rate which is what the borrower pays, does not change, and is equal to the buyer rate when there is no premium or discount (except there is sometimes a 0.1% error). So when you purchase a loan part the buyer rate does predict your return, which the interest rate would not if you paid a premium.
You can see all this working if you go to 'sell individually', note that at par the buyer rate is the interest rate, and as you adjust the premium or discount the buyer rate changes.
Hope this helps.
|
|
sl75
Posts: 2,092
Likes: 1,245
|
Post by sl75 on Feb 5, 2015 0:02:49 GMT
First, your calculation is flawed - the premium is a percentage of the price, not a percentage of the yield...
Second, it works the opposite way round to what you seem to be assuming... the "buyer rate" is, in effect, the yield to maturity, taking into account the effect of any premium or discount. The interest rate on the loan differs to this, and is not made readily available to the buyer.
For example, if I were to sell a loan part with an underlying interest rate of 14.4% with 58 payments remaining, and demand a 3% premium, it might typically show a "buyer rate" of 13.0% - this takes into account the effect of the 3% premium spread across the remainder of the 5 year period, giving an annualised effect in the region of 1.3% to 1.4%.
|
|
|
|
Post by GSV3MIaC on Feb 5, 2015 12:04:34 GMT
Furthermore (SL75 is spot on) Funny Calculators continue to show the buyer rate to you just about every place you can look at the loan part, once you have bought it. The ONLY way to see the real interest rate the borrower is paying you on that part is to go into 'sell' and look at what the rate is with no markup. Anyplace else (in particular 'my loans, my parts, secondary market 'your exposure' etc) all mislead you by showing the buyer rate, accounting for the premium/discount. So if you bought some rubbish 6% part but got a 3% discount, and it only had 6 months to run, you might sit there thinking you had this tasty ~12% part in your portfolio, where actually it is a 6% part (and you already got 3% upfront) and you really ought to dump it.
I don't like it, (complained on the FC board 2 years ago when I first figured it out) but that's how it is, and likely to stay.
|
|
eugene
New Member
Posts: 3
Likes: 1
|
Post by eugene on Feb 5, 2015 13:52:48 GMT
Thanks to all, that is much clearer now. It does though make me think that the premium/discount has little influence on the total return and hence, the potential buyer's decision whether or not to purchase. As long as the loan is not repaid within the first month or two the rate you see is pretty much the rate you get (before 1% FF fees and bad debts).
|
|
blender
Member of DD Central
Posts: 5,719
Likes: 4,272
|
Post by blender on Feb 5, 2015 14:39:24 GMT
Yes, but after that, do you pay income tax? You will pay more tax if you have paid a cash premium for a higher taxable interest rate.
|
|
adrianc
Member of DD Central
Posts: 9,602
Likes: 5,020
|
Post by adrianc on Feb 5, 2015 22:58:27 GMT
So if you bought some rubbish 6% part but got a 3% discount, and it only had 6 months to run, you might sit there thinking you had this tasty ~12% part in your portfolio, where actually it is a 6% part (and you already got 3% upfront) and you really ought to dump it. Apart from the reality that nobody sane is likely to buy it without, oooh, about a 3% discount - wouldn't that "buyer rate" be the reality of the money that you'd receive back on your investment, unless the borrower repaid early - and, if that happened on a heavily discounted part, you'd be at an even higher real return...?
|
|
blender
Member of DD Central
Posts: 5,719
Likes: 4,272
|
Post by blender on Feb 5, 2015 23:58:19 GMT
So if you bought some rubbish 6% part but got a 3% discount, and it only had 6 months to run, you might sit there thinking you had this tasty ~12% part in your portfolio, where actually it is a 6% part (and you already got 3% upfront) and you really ought to dump it. Apart from the reality that nobody sane is likely to buy it without, oooh, about a 3% discount - wouldn't that "buyer rate" be the reality of the money that you'd receive back on your investment, unless the borrower repaid early - and, if that happened on a heavily discounted part, you'd be at an even higher real return...? This is tricky because we do not know what 'tasty' means. If for example it was a good A+ loan at a buyer rate of 12% then it would not matter that the interest rate was 6%. You could put it for sale at Par and hope, but it sounds like a good purchase even if you keep it. It cannot be C- because they do not go below 11.5%, but it could be an old C, before mid 2013, in which case you would still think not bad because the discount is free of income tax. On balance I think I agree with Adrianc - but you can see that I would never purchase such a loan part because someone else would have got it long before I had finished my analysis.
|
|
|
|
Post by GSV3MIaC on Feb 6, 2015 7:45:33 GMT
Apart from the reality that nobody sane is likely to buy it without, oooh, about a 3% discount - wouldn't that "buyer rate" be the reality of the money that you'd receive back on your investment, unless the borrower repaid early - and, if that happened on a heavily discounted part, you'd be at an even higher real return...? This is tricky because we do not know what 'tasty' means. If for example it was a good A+ loan at a buyer rate of 12% then it would not matter that the interest rate was 6%. You could put it for sale at Par and hope, but it sounds like a good purchase even if you keep it. It cannot be C- because they do not go below 11.5%, but it could be an old C, before mid 2013, in which case you would still think not bad because the discount is free of income tax. On balance I think I agree with Adrianc - but you can see that I would never purchase such a loan part because someone else would have got it long before I had finished my analysis. I was assuming it would be an A,B or C .. You can still shift those at par to autobid novices if you are lucky, and you wouldn't want to hold one at 6% .. Nor even an A+ really when you can get 8% on a property loan. Yes, the buyer rate is 12% (ish) but you had half of it upfront .. After that it is a cr&p investment.
|
|
blender
Member of DD Central
Posts: 5,719
Likes: 4,272
|
Post by blender on Feb 6, 2015 10:53:48 GMT
GSV: You are a  investment, loan part. I am ashamed to be holding you at 6%. I can do better and I will sell you to some mug Autobid punter. 6% Part: I'm so sorry that I am not giving much any more, but I always pay and in a few short months my life will be over and you will get your money back. Remember how I brought you a 3% discount, tax-free, and you spent that on other loan parts? GSV: Yes I remember the 3%, but that is all in the past and gone, spent. What have you done for me lately? (From someone else who sells property parts at par having stripped them of the 2% cash back) Edited as GSV reply below.
|
|
|
|
Post by GSV3MIaC on Feb 6, 2015 14:04:26 GMT
(From someone who sells property parts at par having taken the 2% cash back) ITYM "from someone ELSE ...." I just wish they'd shift a bit faster. Some of the damn things may even wind up getting repaid before I sell them..
|
|
investment, loan part. I am ashamed to be holding you at 6%. I can do better and I will sell you to some mug Autobid punter.