From landlord to lender: the due diligence behind my 10% loan note

Commercial disclosure: I have personally invested in the type of loan note described in this article. Property118 may receive a commercial introduction fee if a reader subsequently invests. Property118 does not provide regulated investment advice.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.

On 11 August, I published an article entitled From landlord to lender: why I invested at 10% instead of buying another rental property.

For readers arriving here first, the background is that I have begun releasing capital from rental property as part of a gradual move into retirement. Buying another rental property would have recreated the management work, regulation and concentration of risk I was trying to reduce. Leaving all the proceeds in cash was not attractive to me either, while conventional stock-market investment has never particularly appealed.

I therefore invested part of my capital into a 30-month company loan note paying a fixed annual coupon of 10%, with the interest paid quarterly. The company behind the loan note is a specialist mortgage lender serving older homeowners, including through Retirement Interest Only and lifetime mortgages.

I deliberately did not name either the lender or the specialist intermediary in the original article. My intention was to explain my decision and allow qualifying readers to request a private introduction, rather than to provide enough information for people to bypass that process.

The original article described the commercial reasons for my decision and the broad areas I had examined. It did not reproduce all the figures I had reviewed. That prompted some entirely reasonable questions in the comments.

Ryan Stevens referred to the failure of Lendy, which had offered investors a double-digit return and described its lending as asset-backed. He also referred to a friend who had been unable to recover a substantial investment despite the existence of personal guarantees.

Ryan then raised two questions that go to the heart of this investment. How can a business lending to mortgage borrowers at rates broadly between 6% and 9% afford to pay private investors 10%, together with its other operating and funding costs? And how will a 30-month loan note be repaid if the money ultimately supports mortgages with much longer remaining terms?

Those are not objections to be brushed aside. They are precisely the questions I wanted answered before investing.

“Asset-backed” was not enough for me

Lendy is a useful reminder that the words “asset-backed”, a personal guarantee and an attractive coupon do not establish that an investment is safe or that the capital will be recoverable.

I did not invest merely because the underlying homeowners had granted first legal charges over their properties.

The first legal charge belongs to the relevant mortgage lender or mortgage-owning entity. It does not follow that an investor in a corporate loan note holds that charge directly or ranks first against the mortgage assets.

Mortgage assets may be held in separate companies, financed through institutional warehouse facilities or transferred into securitisation vehicles. The banks and institutional funders supporting those structures may have priority over particular assets and cashflows.

I therefore needed to understand which legal entity owed me the money, the security supporting the loan note, whether any guarantees applied, where the mortgage assets were held and which creditors could rank ahead of me if the business failed.

A personal guarantee was not a substitute for that work. A guarantee is only as valuable as the guarantor’s ability to meet it after taking account of other liabilities and competing claims. Neither was I prepared to assume that references to first-charge mortgages somehow placed my loan note in the same legal position as the mortgage lender.

My investment remained a corporate credit risk. The relevant question was whether that risk was adequately understood and whether the proposed return compensated me for accepting it.

The mortgage books had already been tested in public markets

The lender had considerably more publicly verifiable history than I included in the first article.

In June 2024, it completed its first public residential mortgage-backed securitisation. The transaction involved a mortgage portfolio with a face value of £208.1 million and £210.253 million of note issuance.

A subsequent public investor report recorded 1,226 mortgages with £199.2 million still outstanding. The weighted-average loan-to-value was 45.35%, the weighted-average borrower interest rate was 5.51%, and all the mortgages were secured against owner-occupied residential property.

Those figures mattered to me. An average LTV of approximately 45% meant that, across that particular pool, the homeowners had a substantial amount of equity beneath the mortgage lending. It did not eliminate the risk of falling house prices, arrears or losses, but it provided a meaningful margin before ordinary movements in residential property values would threaten the mortgage capital.

The lender completed a second public securitisation in 2025. The provisional portfolio disclosed in its published prospectus contained 1,053 first-ranking residential mortgages with £188.8 million outstanding.

At the portfolio cut-off date, the weighted-average current indexed LTV was 47.94% and the weighted-average mortgage rate was 6.17%. Only 0.15% of the portfolio by value was more than one month in arrears. That consisted of one £290,000 mortgage between one and two months in arrears, with no mortgages more than two months in arrears.

I did not have to accept those figures from a private investment presentation. They appeared in documents produced for public capital-market transactions and were available for independent examination.

The second issuance totalled £221.45 million. Of that, £195.65 million, approximately 88%, formed the senior Class A tranche. The Class A notes were rated Aaa by Moody’s and AAA by S&P and were priced at SONIA plus 0.76%.

Citi arranged the transaction, Citi and Jefferies acted as joint lead managers, and the notes were admitted to trading on Euronext Dublin. The lender had also previously announced a £275 million facility with NatWest and a further £250 million facility with Citi, taking the funding it had announced by that stage to nearly £600 million.

It would be misleading to suggest that any of this made my own loan note Aaa or AAA-rated. It did not.

Those ratings applied only to the senior Class A tranche of the second securitisation. They did not rate the mortgage lender, did not attach to my private loan note and did not protect me against loss. The institutional notes and my investment also did not necessarily have the same security or creditor ranking.

Indeed, the senior institutional funders may be paid before private loan-note investors if the business encounters financial difficulty.

The relevance of the securitisations was narrower but still important. The lender had originated two substantial mortgage books which had been subjected to scrutiny by banks, lawyers, institutional investors and rating agencies. It had then refinanced those books through completed public capital-market transactions.

That was evidence of an operating mortgage business and an executed funding model, rather than merely a forecast of what the business hoped to do in the future.

How can the lender pay 10% when borrowers pay less?

The comparison between a borrower mortgage rate of approximately 6% and a loan-note coupon of 10% initially appears problematic.

It would be problematic if every pound of the mortgage book were funded by private investors receiving 10%. That is not how the funding structure operates.

The private loan note forms part of the more expensive junior capital supporting a substantially larger amount of senior institutional funding. The senior and junior funding perform different functions, carry different risks and consequently attract different returns.

By way of a deliberately simplified illustration, suppose £10 of junior capital paying 10% supports a mortgage book of £100. The annual cost of that junior capital is £1. Spread across the whole £100 mortgage book, that represents 1%, not 10%.

The remaining mortgage capital is funded through senior facilities or securitisation notes at a lower margin because those senior funders generally receive priority and benefit from greater credit protection.

That example is not intended to calculate the lender’s profit. The base SONIA rate must be added to the margin paid on floating-rate senior funding, and the lender must also meet hedging costs, servicing expenses, operating costs, transaction costs and expected credit losses.

The proper commercial calculation is therefore whether the income generated by the mortgage book is sufficient to cover the blended cost of senior and junior funding, together with all those other costs.

The public securitisations did not prove that calculation for my particular loan note. They did, however, demonstrate why comparing the borrower’s mortgage rate directly with the 10% coupon produces an incomplete picture.

They also showed that the lender had been able to obtain most of its mortgage funding from substantially senior institutional sources, with the higher-cost junior capital supporting a much larger mortgage book.

How can a 30-month note fund a much longer mortgage?

Ryan’s second question was equally important.

A specialist mortgage lender cannot wait for mortgages with perhaps 13 or 20 years remaining to reach their contractual maturity before repaying a loan note after two and a half years.

There must be another route by which the mortgage capital is recycled.

In practice, that can occur through ordinary borrower redemptions, refinancing of warehouse facilities, sales of mortgage portfolios and securitisation. The question for me was whether these were credible routes which the lender had actually used, or simply possibilities described in a forecast.

The two completed public securitisations were particularly relevant because they demonstrated an executed refinancing route. Mortgage portfolios had been assembled, scrutinised and refinanced through the public capital markets on two separate occasions.

The professional advisers to the second securitisation also publicly referred to the existing warehouse arrangements, the prepayment and repurchase terms, warehouse sub-loan funding and the funding of the lender’s risk-retention holding. Those are the mechanics through which mortgage assets and funding are managed rather than evidence of a business relying solely upon mortgages reaching their final maturity dates.

Again, none of this guarantees that the same funding markets will remain available when my own loan note reaches maturity.

Institutional appetite could reduce. Capital-market conditions could deteriorate. Replacement funding could become more expensive. A proposed securitisation could be delayed or abandoned. Borrower redemptions could occur more slowly than anticipated.

However, I wanted to see several credible routes to repayment and evidence that the business had previously executed them. I did not want to invest in a structure that appeared dependent upon a continuous supply of new private investors to repay earlier ones.

I also looked for evidence against the investment

Proper due diligence cannot consist entirely of collecting reassuring facts.

The latest filed accounts for the operating company showed that it remained loss-making in 2024 and had continued to depend upon funding support from within its wider group. This is not a mature deposit-taking bank with decades of accumulated profits. It remains a growth-stage mortgage lender.

That is a genuine risk.

A business can own good mortgage assets and still encounter difficulty if it cannot continue funding its operations, if the cost of finance rises too far or if short-term liabilities become disconnected from long-term mortgage assets.

I also remain exposed to the possibility that house prices fall, mortgage arrears increase, lifetime mortgage balances compound more quickly than anticipated or institutional funding becomes more difficult to obtain.

My loan note is not a bank deposit. It is not protected by the Financial Services Compensation Scheme. There is no readily available secondary market on which I can sell it, so I have committed the money for the 30-month term.

If the company fails, creditors ranking ahead of me may be paid first. I could lose some or all of the capital invested.

These are not boilerplate qualifications added after deciding to invest. They were part of the decision itself and help explain why the coupon is materially higher than the return available from cash.

What my due diligence did — and did not — establish

My due diligence did not establish that the investment was safe.

What it established, to my satisfaction, was that there was a functioning specialist mortgage business behind the loan note; that its mortgage pools had relatively conservative average LTVs; that published arrears were low at the relevant cut-off dates; that it had attracted substantial senior institutional funding; and that it had twice refinanced mortgage portfolios through public securitisations.

I also understood that the 10% coupon applied to junior capital rather than to the entire mortgage book, that my creditor ranking was different from that of senior institutional funders and that repayment after 30 months would depend upon refinancing and capital recycling rather than the final maturity of the underlying mortgages.

Against that, I had to accept illiquidity, corporate credit risk, junior ranking, reliance on continued institutional funding and the financial risk associated with investing in a growth-stage business that remained loss-making.

Having reviewed the mortgage assets, underwriting, arrears history, institutional funding, public securitisations, legal documentation, creditor ranking, management and expected route to repayment, I decided that the balance between risk and return justified investing a limited part of my capital.

I did not invest because somebody used the words “asset-backed”. I did not invest because a personal guarantee appeared in a document. I did not assume that the ratings attached to senior securitisation notes somehow transferred to my investment.

I invested because I believed I understood how the underlying business operated, where the return came from, how my capital was intended to be repaid and what could cause me to lose it.

That remains a personal decision, based upon my own experience of residential property and secured lending, my financial circumstances and my ability to commit the capital for the full term.

It should not be treated as a recommendation that anybody else should make the same decision.

Readers who have not yet seen it can find the commercial background, my comparison with buying another rental property and the private introduction request form in my original article: From landlord to lender: why I invested at 10% instead of buying another rental property.

Important information

This article explains the due diligence behind my personal investment decision. It is not independent financial advice or a recommendation based upon another person’s individual circumstances.

The 10% coupon and 30-month term relate to the investment I made. The terms of any opportunity available to another investor may differ.

Capital is at risk, returns are not guaranteed and the investment is not equivalent to a bank deposit. My investment was not protected by the Financial Services Compensation Scheme, and there may be no way to recover the capital before maturity.

Information drawn from mortgage portfolios, securitisation documents and company accounts describes the position reported at the relevant dates. It does not guarantee the present or future performance of the lender or the repayment of any loan note.