Innovative Finance ISA Providers

If you are looking for a high-interest ISA, an Innovative Finance ISA (IFISA) may be of interest. Thee’s a variety of IFISA providers now available, and you can compare the top ten IFISA accounts below.

All target return figures are listed before any applicable fees or bad debt. Click ‘More Info’ to find out more about each IFISA account. Please note, the following list of products is not yet comprehensive and other providers are available.

Top 10 IFISA Accounts

If you are interested in learning more about the Innovative Finance ISA and the peer to peer lending platforms involved, read these further topics:

Introducing the Innovative Finance ISA

The Innovative Finance ISA was launched in April 2016 to allow UK individuals to earn tax-free income on peer to peer lending. The “IFISA” has since been extended to cover more than just peer to peer lending, with the inclusion of debentures in late 2016.

Why the “best Innovative Finance ISA provider” is not always the account with the “highest interest rate”

Many peer-to-peer lending platform reviews lean heavily on the advertised rates of return, expressed in percentage terms. While a high advertised rate of return can certainly be appealing, it is vital that lenders (and would-be lenders) who are considering opening an Innovative Finance ISA take the time to fully interpret and apply context to the numbers that are being quoted by one peer-to-peer lending platform or another.

Comparing like-for-like IFISA returns

The first consideration in comparing like-for-like returns is that peer-to-peer lending is very different to regular cash saving. Whilst a traditional Cash ISA would generally be expected to achieve the headline advertised rate of return, the advertised peer-to-peer rate will generally be a ‘target’ rate of return; a rate of return which will likely vary over time based on a number of factors.

There are also various different ways in which peer-to-peer lending platforms choose to frame their target Innovative Finance ISA return rates – and it is vital to ensure that we are comparing like-for-like predicted returns when comparing different platform offerings. We’ll run through these different types of return below.

The annualised return represents the actual return on your IFISA investment, expressed as a percentage, and is calculated having deducted platform fees and bad debts, but with no consideration to income or capital gains tax.

The gross yield is the annualised rate of return that you are earning from the peer-to-peer lending platform before bad debts, platform fees and tax are applied.

Some peer-to-peer lending platforms in the Innovative Finance ISA space provide a third measure of return – the ‘estimated annual return’. These figures tend to be calculated in order to predict the actual return that an individual would earn if he or she were to hold a fully diversified loan book with that particular peer-to-peer lending platform and experience the estimated annualised bad debt rate applicable to each risk band. In effect, this is calculated as the average interest rate across the lender’s portfolio and deducting the applicable platform service fee (expressed as an annualised % of the loan book – perhaps 1%), as well as deducting the weighted predicted bad debt rate across the entirety of the loan book.

With this in mind, it is vital therefore to consider that not all headline returns are created equal. The real-world return that a lender is able to achieve through two different Innovative Finance ISA products could vary considerably, even if both products attracted an identical headline interest rate. Bad debts are by their very nature difficult to predict on a case-by-case basis; diversity of risk is therefore a key consideration. The management fees applied by each Innovative Finance ISA provider also vary in size and in nature.

Relative risks in peer to peer lending

When trying to establish the best Innovative Finance ISA one must also read beyond the numbers. Even after having taken into account the various difficulties in comparing advertised Innovative Finance ISA interest rates on a like-for-like basis, the lender must also consider the relative underlying risks inherent to the various different types of loans that will comprise each Innovative Finance ISA’s loan book. The headline numbers are not all that we need to consider. Would an Innovative Finance ISA portfolio comprising unsecured business loans at 8% be more or less attractive than a portfolio comprising secured commercial property loans at say 4.5%? How would our approach to comparing these two returns change if we were to discover that the unsecured business loan portfolio comprised 500 loans of £20, whilst the secured commercial property loan was a single advance of £10,000 to a borrower with no track record?

Then we have the matter of assessing the Innovative Finance ISA provider’s underlying stability. The peer-to-peer lending sector has boomed in recent years, but this form of lending is certainly not without its critics.

Withdrawing your ISA investment

Another angle to consider when comparing like-for-like Innovative Finance ISA offerings is the extent to which one is able to withdraw deployed funds further down the line. Many commercial peer-to-peer loans have a payback period of 5-7 years, meaning that lenders participating in the loan will in effect need to sell-on their loan parts if they need or want to realise their investment before the loan is due for repayment. Therefore, investors may wish to seek out Innovative Finance ISAs whose providers already have an active “secondary market” within which loan parts can be readily traded. The availability of a secondary market and a willingness by other investors to effectively buy up loan parts is a key consideration for all but the most long-term investors, yet these are factors which the lender cannot account for using a simple like-for-like comparison of two Innovative Finance ISA interest rates. Even having established the presence of an active secondary market, one must also consider any fees that would be applicable to the lender in the event that he or she were to choose to sell off some or part of their loan portfolio – as this will also impact the real-world return on that lender’s Innovative Finance ISA investment.

Liquidity and deployment

Platform liquidity is also a key area to consider when trying to determine the best Innovative Finance ISA offering because, unlike traditional Cash ISA saving, peer-to-peer lending does not necessarily offer a return on lenders’ capital from the moment it is committed. Whilst a Cash ISA would typically be expected to pay interest from day one, funds invested into an Innovative Finance ISA will usually only start to attract interest returns from the point at which the peer-to-peer lending platform has actually been able to deploy that cash to one or more of its borrowers.

As a result, lenders must consider not only the advertised ‘headline’ rate of return but also the extent to which the Innovative Finance ISA platform is able to deploy funds at that headline rate – and over what period of time.

For example, it may be that one IFISA provider is advertising an 8% annualised return and another provider is advertising a 6.5% return on a like-for-like, fully diversified basis after fees and bad debts. All things being equal, the 8% yield will, of course, be the more appealing of the two offerings. In reality, however, platform liquidity – and the ability of each platform to deploy the lender’s capital at these two respective interest rates – could on their own have a significant impact on the real-world returns experienced by the lender. It may be, for example, that the Innovative Finance ISA provider advertising an 8% return is – by virtue of its high pricing point – not able to deploy all of the lender’s funds overnight.

Funds are held by the IFISA platform itself until lent out, and often the lender will receive zero return on any funds that are not deployed. This means that if the platform were to take six months to deploy the lender’s capital at the higher 8% rate, this return would only be achieved for the last 6-9 months of the year. All things being equal, the lower rate 6.5% IFISA would very likely outperform the 8% IFISA over the same period if the lender’s cash was deployed from day one.

Access to deployed funds can be sped up through an IFISA platform which facilitates a secondary market. These secondary markets allow lenders to access returns immediately by purchasing loan parts from lenders who are looking to liquidate.

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Innovative Finance ISA account risks

Innovative Finance ISA lending carries a different risk profile to both the traditional Cash ISA and the Stocks & Shares ISA.

Unlike many savings products (such as Cash ISAs), peer-to-peer lending – the main activity covered by the Innovative Finance ISA – is not presently protected by UK Government’s Financial Services Compensation Scheme (FSCS). This is one of the most important considerations for investors who are seeking to migrate some of their existing capital from cash saving to peer-to-peer lending.

The FSCS is the UK’s state-backed compensation scheme for savers who deposit funds with authorised financial services firms. In effect, the FSCS exists to provide state-funded compensation to savers in the event that an authorised firm which sits within the scheme is unable to repay the money that savers have deposited with it. The scheme extends to cover most form of bank and building society savings accounts as well as insurance products, mortgages and certain investments. Crucially, peer-to-peer lending, the form of investing for which the Innovative Finance ISA was developed, is not currently included within the FSCS’s remit, meaning that there is no automatic state-backed compensation for lenders who deploy capital using an Innovative Finance ISA.

Instead, lenders must to an extent rely on the Innovative Finance ISA providers themselves to assess and manage risk both at the point at which a loan offer is extended to a borrower and then also during the months and years during which the loan is to be repaid.

A lot of platforms operate internal reserve funds, pools of capital which are retained by the peer-to-peer lending platform and intended to be distributed to lenders who are left out of pocket in the event that a borrower is unable to meet their loan repayment obligations. Where a borrower is unable (or has demonstrated that it is not likely to be able) to meet its repayment obligations, a platform might, for instance, call upon its reserve fund to cover (or at least contribute towards covering) any outstanding interest and capital repayments not yet satisfied by the borrower.

When attempting to compare the best Innovative Finance ISA providers it is important to consider that such internal reserve funds (where they are in use) are not formally regulated. Instead, the funds are operated on an entirely discretionary platform-by-platform basis. The ability and willingness of any given platform to use its reserve fund to cover any shortfall is by no means guaranteed. There are also likely to be interest rate pricing differentials between those platforms who do provide this additional layer of security, and those which do not – meaning it is difficult to compare like-for-like predicted returns in purely quantitative terms.

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Which accounts provide the highest interest rate IFISA

Whilst it is ostensibly straightforward to compare and various %-returns on offer to determine the highest interest rate Innovative Finance ISA, there are a number of other factors which must come into play when attempting to determine which Innovative Finance ISA will provide the best return to the lender.

We must first consider that we are comparing estimated returns and not guaranteed returns – yields are not always guaranteed and bad debts will and do happen in this sector. When comparing IFISA offerings we must also make sure at the outset that the relative target returns of the various different platforms have been expressed on like-for-like terms. If one platform’s 8% return rate is expressed before tax, bad debts and platform fees are taken into consideration, and another platform’s 6% return rate is expressed after these factors have been taken into consideration, the real-world %-return rates could, in fact, be very similar, if not identical, all things being equal.

We must also weigh up the relative attractiveness of headline interest rate figures within the context of risk diversification. As we mention above, bad debts can – and will – happen in the peer-to-peer lending market, meaning that a fully diversified loan book attracting interest at 8% could well stand a much better chance of delivering its target return on investment compared to an undiversified loan made to a single party at an identical rate of interest.

Innovative Finance ISA platform liquidity – the ease with which lenders can both deploy and withdraw funds – is also a key area consideration not covered by headline interest rates. A higher advertised rate of return could very well prove meaningless if the lender finds that his or her Innovative Finance ISA provider is unable to actually deploy the funds for the first 3-6 months.

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Closing an IFISA account early

Secondary markets are ‘loan marketplaces’ that allow users to sell their loan parts onto other savers before the loan term finishes, also called ‘selling-out’. These loan markets (operated by the provider themselves) can be highly liquid, with loan sales completing within hours – allowing the individual to withdraw their funds much sooner than if they were to wait until the loan term expires. It is important to note that IFISA platforms will have varying degrees of liquidity, and the time frame in which an early withdrawal can be made will differ.

The downside to a loan sell-out is the fee that often comes with doing so. A saver can expect to pay a 0.5-1% fee on the outstanding amount left in the loan term if they sell-out early. It is important to research the ISA before depositing as some platforms can be inflexible and your cash may be locked up for longer than you would like. The loan terms and sell-out fees for all available Innovative Finance ISAs can be found by viewing the available IFISA accounts above.

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