INNOVATIVE Finance ISA (IFISA) investors will earn up to four times more money during a financial crisis than people who put money in a savings account or cash ISA, claims new research.
In the case of another financial downturn akin to the 2008 crash, interest would amount to under 10 per cent over five years from the top cash ISA at current interest rates, according to peer-to-peer research firm 4th Way who conducted the study.
Currently the best cash ISA pays 1.75 per cent, which is the Paragon Bank five-year fixed rate cash ISA, according to Moneysupermarket on 3 March 2017. Atom Bank’s five-year fixed saver is the top-paying savings account. At 2.4 per cent, that is 1.92 per cent after basic-rate tax.
In contrast, interest would average between 20 per cent and 40 per cent over the five-year period after deducting bad debts, if the money were invested in 4th way’s top-rated IFISA providers Landbay, Lending Works and HNW Lending, the research said.
4th Way said it conducted stress tests on the three platforms based on an extreme version of international banking standard Basel tests. They assessed the intrinsic risks in the specific type of loans, the history and record of bad debts, interest rates and protections like security and reserve funds.
“Even the Bank of England recently admitted it can’t and won’t predict the next recession or crisis, but the cycle will come again,” said Neil Faulkner, co-founder and managing director of 4th Way.
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“The risk in investing is that you lose some of your money in downturns, but while your returns will fall, I still expect most people lending through P2P to keep positive returns and do markedly better than savings accounts and cash ISAs.”
However, Faulkner warned that risks vary considerably between the available IFISA securities and advised that investors diversify their money across lots of platforms.
Demand for IFISAs has already proven to be strong. Lending Works had to stop accepting new money transfers into its tax-free wrapper just 24 hours after launch due to an imbalance between investors and borrowers.
Read more: The great IFISA conundrum
Historically-low interest rates have sent many investors towards the P2P sector in search of yield, while the lure of tax-free earnings on their investments has created an extra spike of interest before the end of the tax year in April. This year the ISA allowance is £15,240, but this is set to go up to £20,000 the following tax year.
The eight IFISAs now open for lending
Source: 4th Way