Rising interest rates tipped to boost P2P returns

PEER-TO-PEER investors are expected to see better returns once the Bank of England follows through with its long-awaited series of interest rate rises, according to Lending Works.

The P2P platform said in a blog post that when the Bank of England pulls the trigger on base rate increases, “the loan rates offered by P2P platforms will increase, while lenders will enjoy improved returns”.

The Bank of England is widely expected to raise the base rate from 0.5 per cent as soon as May, with two more increases expected by the end of 2018.

From such a low base, the City is expecting raises of 0.25 per cent each time, meaning the base rate could potentially be 1.25 per cent coming into 2019.

Read more: Interest rates could rise higher and earlier than expected

Tightening monetary policy means that lenders across the spectrum, from P2P platforms to traditional banks, will not have to offer such cheap funding to borrowers as a way to stay competitive.

This makes it “highly likely” that yields will increase for lenders, according to Lending Works.

However, it is not all sunlit uplands ahead. Rising base rates will give lenders a higher return but will also mean that borrowers have to pay more in interest charges.

This opens the door for higher default rates, particularly in variable rate debt such as mortgages.

Many P2P platforms, including Lending Works, offer fixed-rate borrowing, so the interest rate on existing loans will not ramp up with rising base rates.

However, P2P platforms’ due diligence will likely come under increased scrutiny once rates do rise, because if loans become more expensive, borrowers will need to have a decent enough credit quality to service them and avoid default – a challenge that is easily skirted in a time of low interest rates.

P2P lending in the UK has already weathered five rounds of rate rises between 2005 and 2007.

“In that two-year period, there was little in the way of increased defaults,” said Lending Works, “and even during the financial crisis that followed in 2008/09, defaults and losses were contained such that lenders still benefited from actual returns in excess of the rate of inflation.”

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