Record-low savings rates could boost P2P lending
Savings rates plumb new depths
According to financial researchers Moneyfacts, providers of savings accounts made just 14 rate rises in June. Sadly, rate reductions over the same period soared to 117, with some savings accounts cutting rates by as much as 1.30% a year.
In addition, Moneyfacts warned that rate reductions in the savings market have now outweighed rate rises for nine months in a row. As a result, all average savings rates monitored by Moneyfacts have recently fallen to their lowest levels on record.
For example, the rate paid by the average five-year fixed-rate bond has fallen sharply over the past year, plunging from 2.54% to 2.00% a year. Rates paid by ISAs -- tax-free Individual Savings Accounts -- have also been slashed, with the average ISA rate falling from 1.45% to 1.14% a year in the past 12 months.
Moneyfacts also revealed that when the Bank of England cut its base rate to 0.5% a year in March 2009, the top-paying easy-access account paid 3.94% a year (before tax). Today, no savings account offers anywhere close to this rate, with even the top seven-year fixed-rate savings bond paying just 2.35% a year.
Some savings accounts pay no interest
In mid-July, the Financial Conduct Authority (FCA) released its second review of the UK savings market (based on savings rates as at 1 April 2016).
Reviewing the lowest interest rates offered by 32 providers of easy-access cash savings accounts and easy-access cash ISAs, the FCA identified several accounts paying savers as little as 0.01% a year. Even worse, the watchdog discovered a number of accounts that pay no interest (0.00% a year) -- a situation that surely bars them from being described as savings accounts whatsoever.
Furthermore, according to financial firm Hargreaves Lansdown, the interest rate paid by a typical 90-day notice account has crashed by more than four-fifths over the past decade, falling a whopping 82% since 2006. No wonder savers struggle to generate meaningful, positive returns from cash deposits.
More pain to come for savers
To add to their pain, British savers haven't seen a base-rate rise for over nine years and since July 2007, when it was raised from 5.5% to 5.75% a year. Facing an uncertain post-Brexit economic outlook, it seems possible that savers will suffer an entire decade without base-rate rises.
Even worse, when members of the Bank of England's Monetary Policy Committee hold their next monthly meeting on Thursday, 4 August, they are expected to cut the Bank's base rate to 0.25% a year. This will be the first rate cut since March 2009 -- an unbroken period of 88 months.
Yet another blow for British savers is the possibility of higher inflation (the rising cost of living) during 2017. With the value of the pound down by roughly an eighth (12.3%) against the US dollar since the EU referendum, our currency is significantly weaker. Therefore, prices of imported items look set to rise in 2017, potentially making everyday life more expensive.
What options do savers have?
Savers looking for higher rates have a limited number of options. For example, they can pay down expensive debts or shop around for higher savings rates. Also, they can make full use of their yearly tax breaks, such as cash ISA allowances and the new Personal Savings Allowance introduced on 6 April 2016.
Another route for savers seeking higher returns is to consider switching some of their savings from cash deposits to equities (shares), bonds (government and corporate debt), property or other 'risk assets'. After all, holding too much cash in your portfolio might depress your returns and reduce your personal wealth in the long run.
Low rates are driving up P2P lending
Alternatively, one option for income-starved savers is to dip their toes into the world of peer-to-peer (P2P) lending.
This relatively new form of investing involves lending to businesses (via secured or unsecured loans) and/or individuals (via unsecured loans). Returns for P2P lenders typically range from 3.5% to 7.5% a year, before tax and any loan losses not covered by loss-provision funds. Generally speaking, the higher the lender interest rates on offer, the riskier P2P loans will be.
Of course, as P2P lending is not cash savings, your money is not 100% safe; it is not covered by the Financial Services Compensation Scheme (the government-backed safety-net that protects 100% of the first £75,000 of cash on deposit per person per UK institution) and your capital is at risk. Nevertheless, following the launch of the new Innovative Finance ISA (IF ISA) on 6 April, more and more investors are aiming to try P2P lending inside this ground-breaking tax-free wrapper.
In this drawn-out, low-rate environment, peer-to-peer lending is expanding rapidly. For example, cumulative P2P lending by mid-2016 exceeded £5.8 billion, versus just £3.1 billion a year earlier. In other words, more than £2.7 billion was lent by P2P lenders to borrowers in a mere 12 months.
What's more, the UK P2P industry is optimistic about its future, because the rates of loan interest that P2P can add to portfolios should remain appealing to investors while interest rates elsewhere languish at record lows. Hence, it seems probable that growing numbers of income-hungry investors may turn to P2P in order to compensate for the income shortfalls they are experiencing elsewhere.
At Assetz Capital, we list only secured business loans
To protect our lenders and their hard-earned funds, Assetz Capital lends only to solid, carefully vetted British enterprises. In addition, all of our P2P business loans are secured against tangible, realisable assets (such as property, land or other goods), with additional safety margins on top. This asset security helps to reduce the risk of loss for our growing band of P2P lenders.
Summing up the troubles British savers face, Stuart Law, co-founder and CEO of Assetz Capital, adds, "Over more than seven years, UK deposit accounts have proved to be a terrible disappointment. Thanks to ever-lower interest rates, the typical savings account has failed even to keep pace with inflation. In other words, savers have seen the real value of their cash deposits decline since 2009."
You can view all five of our P2P-lending accounts here
RISK WARNING: "As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if borrowers were unable to repay their loans. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan, with the added benefit of a discretionary Provision Fund for some of our investment accounts."
- August 5, 2016