Get a great return on your cash, with the security of a 'bricks and mortar' asset.
UK savers’ pain, it would seem, is not yet at an end. On 4th February, the Bank of England’s Monetary Policy Committee voted yet again to maintain the bank base rate at 0.5%. Having first fallen to a historically low level in March 2009, this rate has now been in force for some seven years.
Adding to savers’ woes, leading economists have forecast that interest rates are set to remain at their record lows well into 2017, after the Bank of England lowered its growth forecasts and its lone policymaker backing a rate rise in recent months dropped his call.
Looking to alternatives
Poor central bank rates have, unsurprisingly, been reflected in poor deposit rates. A comprehensive study undertaken by the Financial Conduct Authority and published last year found that:
- over £160 billion of the £700 billion total savings market in deposits is languishing at or lower than the 0.5% base rate
- the six dominant cash savings account providers, which hold roughly two thirds of the market, offer particularly poor rates
- banks were making additional profits by exploiting a market in which only two in 10 people had switched their savings account in the preceding three years.
While enhanced savings rates are undoubtedly available from certain deposit-taking organisations, consumers are increasingly looking to the alternative finance industry to boost their returns, and one of the fastest growing markets is peer-to-peer lending. Peer-to-peer platforms essentially cut out the banks by creating a truly egalitarian funding network, connecting lenders directly with borrowers in a low-cost, efficient, online environment.
[SPOTLIGHT]Data from the industry shows new loans in Q4 of 2015 exceeding £650 million, while the cumulative total of loans is now almost £4.5 billion. By way of comparison, the peer-to-peer industry had lent just £75 million by early 2010.
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Be aware of the risks
With heightened rewards – of the order of 5% to 6% per annum – comes heightened risk however. This is not banking and these are not savings accounts. P2P lending platforms are typically providing unsecured credit for car loans, home improvements and to pay off other credit card debts. There is no guarantee that the money will be repaid and any funds lent are not covered by the Government-backed Financial Services Compensation Scheme, which protects those saving in ‘traditional’ accounts up to £75,000.
While the industry’s track record of safeguarding consumers’ funds in recent years has been excellent, those years have been anything but normal, with borrowers supported by record low rates. It remains to be seen how well certain platforms would cope if tested through the worst of a recession.
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Peer-to-peer lenders aren't all the same
Unhelpfully, the phrase ‘peer-to-peer lender’ has become something of a catch-all, and doesn’t fully reflect the fact that different platforms operate very different business models, thereby exposing their investors to very different levels of associated risk. Asset-backed loans for example – offered by the likes of Wellesley & Co – represent a more robust and sustainable approach.
Under the Wellesley model:
- all borrowers provide security for their loans in the form of a tangible asset such as property, which can be sold in the event of a borrower’s default
- the loan is never allowed to exceed a conservative percentage of the property’s underlying value
- a highly experienced Credit Committee rigorously assesses borrowers’ ability to repay prior to the loan being made
- the company invests its own capital into every loan – its own investment is therefore always the first to be drawn upon in the event of any loss
- every week, investors’ money is automatically redistributed across all the loans made, thereby spreading the risk as widely as possible.
The returns available from peer-to-peer lending are certainly attractive, and will become more so from 6th April, when the new Personal Savings Allowance comes into effect. Basic rate (20%) taxpayers will be able to earn £1,000 interest with no tax and higher rate (40%) taxpayers will be able to earn £500 interest with no tax.
Couple those returns with the relative security of a ‘bricks and mortar’ asset and you might just have the best of both worlds.
Open an account with Wellesley & Co today
What to read next:
Peer-to-peer: where to get the best return on your savings
"We put our money where our mouth is": how Wellesley & Co is doing things differently