Peer to Peer lending boosts returns
With interest rates still languishing at historic lows, savers are looking for alternatives to traditional bank accounts to increase the returns on their savings. One of these alternatives is investing in a portfolio of carefully selected short term loans. This is commonly known as peer to peer lending. These portfolios offer interest of somewhere between 4%-8% depending on the risk of the loans.
Providers such as Zopa, Landbay, Funding Circle and Octopus all offer slightly different products with different projected returns and different levels of risk. What these companies tend to have in common, is that there is no protection from the financial services compensation scheme in the event that the loans are not repaid.
Octopus, one of the more established companies in this area, have loaned over £2.2billion with loses of just 0.1%. Their peer to peer savings product currently pays 4.2% interest and in order to reduce risk to the saver, they take first charge security on property for their loans. On average they don’t lend more than 60% of the value of the property and in order to reduce risk further, Octopus invest their own capital in 5% of each loan which is at risk before investors capital.
For basic rate taxpayers, the first £1,000 of interest earned each tax year is tax free. Based on an interest rate of 4% it would only take £25,000 of savings to reach the tax free limit. Higher rate tax payers get the first £500 of interest tax free. From April 2016 the government has allowed these investments to be held within an ISA. This means that all of the interest in the ISA would be sheltered from income tax. These products will not be suitable for everyone, but provided the risks are understood, they can be a valuable part of a portfolio.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email firstname.lastname@example.org or see www.hillsfinancialplanning.co.uk