Savers face more misery after the Bank of England (BoE) slashed interest rates to a record low of 0.1 per cent in response to the ongoing economic downturn caused by the coronavirus pandemic.
This means that banks and building societies are likely to cut their Cash ISA and instant-access savings rates to 0.1 per cent or less, while inflation remains close to two per cent. When interest rates cannot keep up with the rate of inflation, the real world value of cash savings is depleted.
Peer-to-peer lenders have said that while Cash ISAs may be attractive for protecting cash, they do not represent value from an investment point of view.
“They will return approximately zero rate of interest and taking inflation into account, whatever that falls to in the short-term, the real rate of return will be negative,” said Carl Davies, chief operating officer at The House Crowd.
“However, if you absolutely must have the potential to use the cash in the short-term it’s a sensible option.
“If you don’t need the money in the short-term then investors might consider an Innovative Finance ISA (IFISA), where returns on well-curated asset-backed property development loans could still achieve circa six to seven per cent per annum tax free.
“When we come out the other side of the coronavirus crisis there will still be a shortage of affordable housing, so buyers will be able to buy homes at low rates of interest which will pay back the investors in such loans.”
Stuart Law, chief executive at Assetz Capital, warned that there is a risk that the BoE could push the base rate into negative territory.
“Minus one per cent looks very possible in the next month, and frankly this has been on the cards since last year,” Law said.
“It was only a matter of time and the pandemic has meant that time is now. This will seriously impact savings and if rates go negative then businesses and higher net-worth individuals could be hit by what is effectively a tax on their bank balance.
“To avoid this many will seek to invest their money, accepting higher risk in return for yield.
“Our type of P2P lending is one option, which also has the benefit of supporting the country’s economy and smaller businesses.
“That’s the point of negative rates.
“Borrowers on variable rates will see lower borrowing costs and new loans have a chance of being cheaper, but in a heightened risk environment those borrowing costs would be lucky to stay where they are.”
Yann Murciano, chief executive at Blend Network, welcomed the Bank of England’s latest rate cut but predicted a recession will follow.
However, Brian Bartaby, co-founder and chief executive of Proplend, said that the move by the Bank of England is more of a headline and what businesses really need right now is cashflow.
“We have just sent out email to all our borrowers describing what government assistance/finance may be available to them and their tenants and suggested that borrowers take the first step and speak with their tenants,” he said.
“Proplend has from day one retained a minimum three-month interest reserve on all our loans, on a loan by loan basis.
“Over the past five years, this has hardly ever been used but it was put in place for times like this.”
Daniel Rajkumar, founder and managing director of P2P business lender Rebuildingsociety, said that the BoE’s rate cut is a bit of a blunt instrument after seven years of low interest rates, and that monetary policy won’t solve the problem.
However, he added that the P2P lending industry is well positioned to step in where many banks will fail.