There are a diverse range of investments eligible to be held in the Innovative Finance ISA wrapper. Emily Perryman unpicks the market for investors…
The Innovative Finance ISA (IFISA) market has come on in leaps and bounds since its creation in 2016, giving investors even more choice over how they invest in peer-to-peer lending.
With more than 40 versions of the P2P tax-free wrapper currently in existence, there is no one-size-fits-all IFISA for investors. From different types of loans and risk-return levels through to a choice of manual or automated lending, the abundance of product options means investors need to think carefully about which IFISA is right for them.
“Although the IFISA may be seen as being the same product, each IFISA is wholly unique,” says Filip Karadaghi, managing director of LandlordInvest. “The IFISA is basically a microcosm of the wider investment universe, incorporating features of the major asset classes including equity, debt and real estate.”
The level of choice in the IFISA market can be bewildering at first. Providers such as Zopa and Lending Works offer consumer loans, whereas platforms like ArchOver, Funding Circle and Growth Street focus on business loans.
Relendex and Proplend are among the providers offering property loans, and there are also platforms that target niche sectors like litigation funding and green energy. Advertised returns range from around four per cent a year at Zopa right up to the low- to mid-teens at the likes of CapitalRise.
Minimum investment limits vary from £1 at Assetz Capital, to £10 at Loanpad, to the full annual ISA allowance of £20,000 at Folk2Folk, the local and rural business lender. Some providers require investors to manually pick individual loans themselves while others offer automated lending, whereby investors’ money is automatically invested across a range of different loans.
“Anyone considering investing in an IFISA should always do their due diligence and make sure they understand what they are actually investing in,” says Charlie Taylor, head of Octopus Choice. “There is huge variety among P2P providers, both in the type of underlying assets they lend against and the level of returns that are targeted.”
When comparing the different IFISAs on offer, investors need to keep in mind their individual circumstances – this includes their risk profile, financial goals, level of wealth and investment experience. “To start with they should be clear about what it is they’re looking for in terms of target return, balanced against their appetite for potential losses,” says Taylor.
“It’s also good to consider how involved you want to be in selecting your loans and managing your portfolio, or whether you’d prefer for that to be done for you by the platform. Once you’ve considered all those factors, it becomes much easier to take a look at the market and understand what matches your needs most closely.”
Typically, the IFISAs offering the highest returns have the highest level of risk and are likely suited to wealthy, experienced investors. LandlordInvest, for instance, which offers returns of up to 12 per cent on residential buy-tolet and bridging loans, targets high-net-worth individuals and sophisticated investors. “We also have restricted investors, but they form a small part of the total investor base, around 10 per cent,” says Karadaghi.
“Indeed, I believe that our IFISA product is better suited for investors that have substantial investing experience, understand the risks and the underlying asset class, and are able to exercise prudent diversification themselves.”
Karadaghi suggests investors who have little to no experience start on a limited scale with the ‘big-three’ P2P platforms – Zopa, RateSetter and Funding Circle – to learn how P2P investing works prior to considering more specialised platforms.
“These require considerably more experience and knowledge of investing, although potentially offering better risk-return characteristics,” he explains. Zopa says its two IFISA product options, which offer returns of between 3.4 and six per cent, are targeted at investors who want to make a reasonable return on their investments over a medium term of five years. “Our IFISA offers a viable alternative to stocks and shares, and is aimed at investors that want to diversify their portfolio and are happy to take capital risk,” says Zopa’s P2P chief executive Natasha Wear.
Investors shouldn’t automatically assume that IFISAs with low rates are lower risk. Sarah Coles, personal finance analyst at Hargreaves Lansdown, points out that investors could be giving up returns for something else – like easy access to their money – or the product might simply be less competitive. Coles says it’s important to get to grips with the risks posed by the borrowers themselves.
“If you’re investing in a single company, repayment depends on the success of the business model. This can be difficult for investors to accurately assess unless they’re an expert in the area,” she warns. Liquidity is another factor to think about as it varies significantly across the industry. Funding Circle and Zopa let investors access their funds early by selling loans on the secondary market; others automatically reallocate your loan to another lender. Relendex, on the other hand, says its commercial property lending IFISA is aimed at investors who are looking for a consistent income stream but are less concerned about illiquidity.
Loan repayments can be delayed, which means the product should be viewed as a longer-term investment. It’s also worth researching the IFISA provider itself – checking it is authorised and regulated by the Financial Conduct Authority (FCA) and looking at data on returns, fees and bad debt.
“We would suggest that people choose a well-established platform with a good track record of performance,” says Wear. “The FCA now requires all P2P providers to publish outcome statements on their websites, so investors should look at this information to assess the return performance for each provider they are considering.”
To reduce the risk of losses, experts say investors should spread their money across different types of P2P lending as well as other savings and investments. “Diversification is key to managing risk across an investment portfolio, so an IFISA could fit alongside cash savings and stocks and shares investments, for example,” says Stuart Lunn, founder and chief executive of LendingCrowd.
“This would give lenders access to an asset class that isn’t linked to the up and downs of global stock markets yet still provides the potential for inflation-beating returns.” Under marketing restrictions introduced in December 2019, individual investors who don’t qualify as sophisticated or high-net-worth can only put 10 per cent of their overall portfolio into P2P, which in itself ensures a level of diversification. It also means that platforms requiring high minimum investments are likely to be out of bounds for all but the wealthiest and most experienced of investors.
Read more: Special report: Advisers and ISAs
“One investor might be totally fine with lending just £10,000 in one loan in just one IFISA because that investor is investing half a million pounds in a variety of other types of investments – and the investor is only interested in the overall result of the entire investment portfolio,” says Neil Faulkner, managing director of comparison site 4th Way.
“Most investors will need to look to invest through IFISA platforms with minimum lending amounts of £1 to £100, or which automatically spread risk across a lot of loans.”
Since investors are only allowed to subscribe to one IFISA in any single tax year, the easiest way for new investors to achieve diversification in P2P lending is to opt for a platform offering automated lending. “If you’re lending to small businesses or individuals, you usually want to be able to spread your money across at least 180 borrowers to begin with to contain the risks well enough,” says Faulkner.
“If you’re doing property lending, typically a few dozen loans is sufficient. When lending against other assets, the number of loans you need can range from a few dozen to over 100.” Self-select IFISAs are generally suited to high-net-worth or sophisticated investors who are able to perform deeper due diligence on the platform and each loan, as well as manage their own portfolio diversification.
Uma Rajah, chief executive of property lender CapitalRise, which offers a self-select model, says investors need to understand the individual risks and nuances of the loans on its platform. “The key thing to look at in property lending is the loan-to-value (LTV) ratio,” she says. “Our average LTV is 63 per cent so there is quite a big headroom for investors.”
Ultimately, investors who are keen to invest in an IFISA should choose one that they understand, which matches their appetite for risk, offers the right level of access to their money and suits their overall financial goals.