Thursday 14 February 2019 9:16 am

Innovative Finance ISA: The New Kid On The Block

By:

The Traditional ISA Landscape

ISA’s have seen something of a resurgence in recent times. According to HMRC, we invested £69 billion in them during the 2017/18 tax-year.[1]

Last years’ growth in ISA subscriptions was driven by an increase in investment in Stocks and Shares ISA’s – which may have ultimately been painful for many investors given the FTSE 100 has fallen by 9.6% since April 2018.[2]

Meanwhile approx. £40 billion was invested in Cash ISA’s last year. A quick check on a leading price comparison site reveals that the top rate of interest you can expect to earn from one of these is a less than epic 1.38%[3]. With that in mind, perhaps it would be fair and reasonable if the FCA ensured that Cash ISAs also carried a ‘capital at risk’ notification for investors as at the current rates on offer it is a virtual certainty the value of your money will be eroded due to inflation.

So, what’s the alternative?

The Innovative Finance ISA

Introduced in 2016, the Innovative Finance ISA (IF ISA) offers investors a separate category of ISA to sit alongside the traditional Cash ISA and Stocks and Shares ISA.

The IF ISA allows savers to receive tax-free interest and tax-free capital gains from funds loaned through FCA regulated peer to peer lending platforms. IF ISAs offer significantly better rates than Cash ISAs (albeit with increased risk) whilst avoiding the volatility of the stock market.

This new kid on the block presently accounts for less than 1% of the UK ISA market, but with £270 million invested in only its second full tax year of existence (2017/18)[4] it is rapidly growing in popularity as savvy investors catch on.

Peer to peer lending platforms offer the potential for significantly higher interest returns. In the case of The House Crowd, the platform lends money to property owners (commonly known as bridging loans) and to property developers with investors capital secured over the property asset via a legal charge.

Introducing The House Crowd’s Innovative Finance ISA

The House Crowd is an FCA authorised peer to peer lending platform, established in 2012. To date it has raised c £100 million on its platform. Its ethos is to deliver consistent predictable returns and over the last few years has succeeded in doing that with an average net return of 9,.2% p.a. on its individually selected investments.

There are many different types of IF ISAs available each with their own rates, terms and conditions. Some allow you to choose a specific investment, automatically spread your investment over a large number of loans thus mitigating the risks involved others allow diversification.

At present (though an ISA select product is scheduled for 2019-20) The House Crowd offer one ISA which automatically diversifies your investment over carefully curated loans secured against UK based property. It offers investors a rate of 7% p.a., though as with all investments that is not guaranteed and you should be aware your capital is at risk.

Frazer Fearnhead, CEO of The House Crowd states: “Whilst investors’ money is not protected by the FSCS, it is secured by legal charges against properties that have been subject to RICS valuations and thorough due diligence and, in the case of development loans, very rigorous feasibility studies. Although there is always a risk that a borrower will not repay (however much due diligence you do) there is a physical piece of land and property that can be sold and this provides a very decent level of security should things not go as planned. This assurance has meant that despite making around 200 secured property loans, totalling over £75M, the company has to date incurred zero capital losses across its bridging and development loan book.”

You can invest anything from £1,000 up to the maximum tax-free allowance of £20,000 in any one tax year and choose to receive interest payments twice per year, or if you’d prefer, reinvest your interest and benefit from the power of compounding.

If you’re not happy with the rate of return that you’re getting from your current Cash ISA or Stocks and Shares ISA, you can transfer your existing ISA to The House Crowd (free for balances of £5,000 and over).

Maybe, it’s time for you to meet the new kid on the block: https://www.thehousecrowd.com/invest/innovative-finance-isa