Savers planning to lock in to another three-year Cash ISA face a 41% rate cut compared to their deal in 2011, new analysis by fast-growing peer-to-peer (P2P) firm, rebuildingsociety.com shows
They were able to get an average 3.54% rate for a three- year Cash ISA in 2011 but if they want the same again this year they will have to make do with just 2.08%. On a £5,000 deposit that means taking a drop of £73 in tax-free interest in the first year compared to 2011 from £177 to £104. Recently, research by the online investment manager, Nutmeg, found that cash ISAs opened in each of the last thirteen years have fallen in value in real terms.
rebuildingsociety.com’s analysis showed that Virgin Money offers the best three-year Cash ISA rate at 2.40% followed closely by the Post Office at 2.35%.
rebuildingsociety.com is offering an alternative to Cash ISAs. The P2P firm offers variable investments for lenders with an average 15.4% gross return. Lenders provide funding to UK small and medium-sized businesses (SMEs) on terms agreed beforehand by the lender and the business. Indeed as it has lower overheads than banks and building societies, borrowers can refinance expensive bank products like overdrafts, while lenders make a better gross annual return compared to traditional savings accounts.
Daniel Rajkumar, Managing Director of rebuildingsociety.com said:
“Customers tempted to go for the same again really need to think again if they are looking at three-year deals as rates have changed substantially. Our analysis shows the need for more flexibility in the savings market to provide savers with a variety of options when rates continue to stay low. As the economy continues to recover, more businesses will be searching for growth capital and through P2P people can invest money on their chosen terms at extremely attractive rates while becoming an interested stakeholder at the same time.
Being able to see the tangible benefits of your investments is a growing trend among investors.”
rebuildingsociety.com allows SMEs with at least two years of trading history to source growth capital at consistent interest rates with no early repayment charges from a crowd of individual lenders.
At present, the P2P market, which has pumped £236m2 into UK businesses has largely been funded by retail investors and high net worth individuals. Indeed the market more than doubled in 2013 and is expected to grow by the same again. The next wave of funding is expected to come from institutions, following the pattern in the US, where institutions are buying books of personal loans. There is also a desire to include P2P in Investment ISAs, which would dramatically increase the flow of funds to the market.
Daniel Rajkumar continues:
“Growth in the P2P sector is inevitable. The introduction of funds from the City, mirroring trends in the US where institutional funding has enabled dramatic growth, should ensure an even faster expansion. Furthermore the imminent inclusion of P2P in ISAs marks a seismic shift in the savings industry and would be an excellent move to encourage a new wave of P2P investors who can help create a thriving SME sector in the UK. As a result, both borrowers and investors benefit.”
Unlike mainstream lending, rebuildingsociety.com enables firms with at least two years of trading history to source growth capital at consistent interest rates and on their chosen terms from lenders looking for strong investment returns.
The main difference between ISAs and P2P lending is that the gross annual return is subject to income tax and defaults, while capital is at risk if a business defaults and fails to repay its loan. Currently the industry average default rate is c.1.38%.3 A gross annual return of 15.4% for a higher rate tax payer after defaults would work out at 9.03%.
rebuildingsociety.com currently has around 450 active online lenders who have offered a total of around £2 million to British businesses. Lenders provide funding to SMEs on their own terms and as rebuildingsociety.com has lower overheads than banks and building societies, borrowers can refinance expensive bank products like overdrafts, while lenders make a bigger return compared to traditional savings accounts.
