Brian Bartaby, founder and chief executive of peer-to-peer property lending platform Proplend, explains how eroding savings in cash ISA accounts are boosting the case for Innovative Finance ISAs
THE FIRST Bank of England interest rate increase in more than a decade did little to help the millions of people with cash ISAs who are earning less than the rate of inflation. In fact, savers have suffered the worst year for cash ISA returns since the accounts first launched in 1999, a Money Mail investigation has found.
The average interest rate earned by new savers is now less than half the 0.59 per cent paid this time last year. With inflation around the three per cent mark, it’s unsurprising that savers withdrew £6.8bn from cash ISAs in the six months to November 2017.
“The whole point of putting money into an ISA is that there’s a tax advantage, but if you’re actually losing money because interest rates are not beating inflation then there really isn’t much financial benefit,” explains Brian Bartaby, founder and chief executive of peer-to-peer property lending platform Proplend.
As a result, an increasing number of investors are now considering Innovative Finance ISAs (IFISA) as a way to maximise returns. While IFISAs are not protected by the Financial Services Compensation Scheme like cash ISAs, they can still be suitable for the more cautious investor with alternative risk mitigation in place.
Proplend offers three separate risk tranches based on different property loan-to-value (LTV) levels, with a first legal charge of the property and the LTV ‘buffer’ acting as security.
The lowest risk is tranche A at zero to 50 per cent LTV, tranche B is 51 to 65 per cent LTV and tranche C is 66 to 75 per cent LTV.
Proplend launched its flexible IFISA in May, with investors now earning an average of 7.25 per cent on the least risky tranche of loans held in the wrapper.
Although loan investment has historically been on a manual selection basis and no investor has ever lost money on the platform, Proplend is keen to make investing simpler.
It is set to launch an Auto-Lend option for tranche A loans which will be available for both its Classic and IFISA accounts. This will offer investors greater diversification without the involvement of picking their portfolio themselves, and a target return of between 4.5 per cent and five per cent.
“All tranche A loans are backed by commercial property with LTVs of 50 per cent or less,” Bartaby says. “So, the value of the property would have to fall by more than 50 per cent for investor’s capital to be eroded. To put this in context, property prices fell by around 40 per cent during the 2008 financial crisis.”
Specialist P2P ratings agency 4thWay uses a similar ‘safeness in a very severe 1-in-100-year recession’ to assess platforms and has awarded Proplend’s tranche A investments their maximum five PLUSes rating.
“Proplend’s tranche A gives new investors a reassuring entry point into P2P lending,” explains Bartaby. “There’s significant security, there’s income derived from the property and there’s diversification.”
With IFISAs still making up a diminutive slice of the ISA pie, there is plenty of potential for the market to grow. Uptake has increased gradually so far, which Bartaby says is a good thing for the industry.
“I think it needs to be more of a slow burn so that the industry can provide investors with steady and ongoing returns,” he says. “This will help cement its place in the mainstream investment market.”
The launch of the new Auto-Lend option is expected to coincide with a re-launch of the website, providing investors with a more user-friendly interface.
Click here for more information on Proplend and its IFISA.