RateSetter increases provision and temporarily reduces interest rates

We are announcing a temporary reduction in interest as a result of an increased provision we are making for the impacts of the current economic climate.

The COVID-19 pandemic is having a major impact on the economy.  Central banks have cut interest rates, share prices have fallen and banks have cancelled their dividends for investors.  Economic activity has reduced and, while the government is providing unprecedented support, individuals and businesses are having to adjust. 

It is in this context that we are announcing a temporary 50% reduction in interest.  This interest will go to the Provision Fund.  This reduction is expected to last for the remainder of 2020. 

 

Effect on borrowers

Since the outbreak in the UK, there has been an increase in borrowers requesting a payment freeze.  This is something that all banks and non-bank lenders have experienced.  As of today, this amounts to 6% of the portfolio.  Whilst we are not obligated to provide a payment holiday (as is the case with mortgages), we are required to provide forbearance in the form of breathing space under existing FCA rules.  We are always committed to looking after all our customers, both borrowers and investors, and we have existing policies and procedures to manage forbearance.    

 

Effect on the Provision Fund

Most borrowers will resume paying and go on to repay their loan in full but some, unfortunately, will not.  It is difficult to forecast using previous forbearance trends because of the unique nature of the current environment.  It is also likely that the economic consequences of the lockdown and other restrictions will continue for some time. 

Therefore, as well as updating the Provision Fund for the movements in March as part of our usual monthly update, we are adding an extra forward-looking provision to account for the uncertainty in the impact of the forbearance and economic outlook. 

We use economic forecasts from specialists Oxford Economics and we have chosen to apply full weighting to their downside economic case.  The economic data points we look at with regards to the performance outlook for the RateSetter loan portfolio are unemployment, real earnings and house prices.  The downside case forecast is that in 2020: UK unemployment rises to 5.4%; real earnings fall 0.8%; and house prices fall 8%.

Below is the change in Expected Future Credit Losses and Provision Fund resources:

 

 

Loan Portfolio

Expected Future Credit Losses

Provision Fund Resources

Interest Coverage Ratio

Future Expected Interest

Capital Coverage Ratio

February 2020

£854m

£27.5m

£31.2m

113%

£37.6m

250%

Reduction from credit losses incurred in March

-

£(3.2m)

-

-

-

-

Expected Future Credit Losses on new loans

-

£0.9m

-

-

-

-

Change in Expected Future Credit Losses on existing loans

-

£5.3m

-

-

-

-

Extra provision for Expected Future Credit Losses based on economic forecast

-

£8.7m

-

-

-

-

March 2020

£831m

£39.2m

£28.8m

74%

£36.1m

166%

 

Effect on the Interest Coverage Ratio

The purpose of the Provision Fund is to protect all investors equally against credit losses and ensure a return based on the performance of the whole diversified loan portfolio.  The key metric for the Provision Fund is the Interest Coverage Ratio, with a Ratio above 100% meaning everyone’s future interest and capital is covered.  The Ratio at the beginning of March was 113%.  Following this month’s update, it is 74%.  This means that while everyone’s capital remains fully protected (the Capital Coverage Ratio is 166%), not all future interest is. 

 

Interest reduction

In the event of the Interest Coverage Ratio going below 100%, RateSetter implements a Stabilisation Period during which investor interest is temporarily reduced and diverted to the Provision Fund, for the protection of all investors.  This is not something we have had to do before but a Stabilisation Period has always been set out in our Investor Terms as the plan for what might happen in the event of an economic downturn beyond expectations – the Provision Fund surplus (Interest Coverage Ratio above 100%) is normally able to absorb increases in Expected Future Credit Losses, but this downturn has occurred with such speed and severity that a Stabilisation Period is now needed to return the Interest Coverage Ratio to 100%. 

The amount needed to return the Coverage Ratio to 100% is £10.4m.  This is 29% of the total future expected interest of £36.1m.  We also need to take into consideration the timing of payments the Provision Fund will need to make in light of the current climate.  We also want to ensure you keep earning a positive return every month during the period. 

We have therefore decided on an interest reduction of 50% for the remainder of 2020.  We will keep the interest reduction under review every 30 days and update you in your monthly investor statement.  If conditions improve, rates will rise as quickly as possible.

 

What this means for interest rates

 

Annual rate so far this year

Annual rate for the rest of the year*

Effective annual rate in 2020*

Access

3.00% p.a.

1.50%p.a.

2.00% p.a.

Plus

3.50% p.a.

1.75%p.a.

2.33% p.a.

Max

4.00% p.a.

2.00%p.a.

2.67% p.a.

*Assuming the interest reduction applies for eight months. 

The interest earned on each investor’s existing personal investments will depend on the original interest rate of those investments.

 

Thank you for being a RateSetter investor

We value you hugely as a RateSetter investor.  We wish we did not have to temporarily reduce interest rates, but our overriding objective is to protect your money and keep it earning a positive return through this environment.

 

Further information, including FAQs, is available here.