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Interest rate rise won’t ease the pressure on savers


Autumn 2017 Cashback

Investors who create a LendingCrowd account and invest £5,000 before 19th November 2017 will receive a £200 bonus*. We’ve launched this promotion to help match demand from creditworthy British businesses who are seeking growth funding. Sign up with LendingCrowd now to start investing!

 

As had been widely expected, the Bank of England today raised interest rates for the first time in more than a decade, increasing its base rate by a quarter of a percentage point to 0.5%.

The Bank had cut its base rate to a record low of 0.25% in August 2016 following the UK’s vote to leave the European Union, and today’s decision by its Monetary Policy Committee (MPC) marks the first increase in borrowing costs since July 2007 – when rates rose to 5.75%.

The MPC’s move comes after inflation hit its highest level for five-and-a-half years, and many economists believe the cost of living is set to continue rising, putting more pressure on people’s spending power.

Latest figures from the Office for National Statistics show that the consumer prices index (CPI) measure of inflation rose to 3% in September, up from 2.9% in August. That’s higher than the Bank of England’s 2% CPI target and well above the average Cash ISA savings rate of just 1%.

Inflation is being driven higher due to the fall in the value of the pound since last year’s Brexit referendum, making imports more expensive for UK businesses and consumers. The National Institute of Economic and Social Research believes there is “every chance of inflation peaking at a level above 3%”.

However, a higher Bank of England base rate doesn’t necessarily mean that banks and building societies will pass on the full increase to their savers. So, with Cash ISAs paying such low rates, what are the options for those looking for a profitable home for their money?

Innovative Finance ISAs

Investing in shares has traditionally been seen as a way of taking additional risk for potentially higher returns, but peer-to-peer (P2P) lending is an increasingly popular alternative to the stock market, especially now that investments can be held within a tax-free** Innovative Finance ISA (IFISA).

In February, LendingCrowd was one of the first P2P platforms to launch an IFISA with our Growth ISA, which has a target return of 6%*** and allows customers to build a portfolio of loans quickly without having to spend time choosing their own investments.

Funds in the Growth ISA, which has a minimum investment of £1,000, will automatically be diversified as far as possible and there will always be at least 20 loans in a portfolio, so that no more than 5% of an investor’s funds are held in any one loan. We’ll also automatically reinvest monthly repayments of capital and interest, increasing investors’ diversification over time.

In May, we expanded our range with the LendingCrowd Self Select ISA, which can be opened with a minimum of £20 and lets customers hand-pick their own investments on our Loan Market. We encourage investors to spread their money across a range of businesses, as this is the safest way for them to protect their capital from bad debt, but they also need to take the time to review those companies thoroughly. They should understand the business profile, its financial needs and its management information, and only lend if the borrower matches their risk appetite.

We designed our Self Select ISA and Growth ISA to be flexible, so if investors decide to withdraw money from either account, they can replace the amount withdrawn without affecting their annual ISA subscription limit, which stands at £20,000 for the current tax year.

Investors can also transfer their existing Cash, Stocks & Shares and Innovative Finance ISAs to us. They can make either full or partial transfers from ISAs opened in previous tax years, and full transfers from ISAs opened in the current tax year.

 

*Terms apply. See offer terms for full details.

**Tax treatment depends on the individual circumstances of each client and may be subject to change in future.

***Capital at risk. Target rate is variable net of ongoing management fees and bad debt.

 

Article author

Gareth Mackie

Gareth Mackie

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If you invest through LendingCrowd you should understand that your capital is at risk.

LendingCrowd is the trading name of Edinburgh Alternative Finance Limited, Company Number SC468392, authorised and regulated by the Financial Conduct Authority (Firm reference number 670991). LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Read more about the risk involved when investing and borrowing.

The company's registered office is 23 Manor Place, Edinburgh, EH3 7DX.

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