P2P lenders warn rate hike won’t go far enough
Peer to peer lenders have warned savers that the latest increase in the base rate will not have a meaningful impact on cash savings.
Earlier this month, the Bank of England’s Monetary Policy Committee voted to increase the base rate for the first time in almost a decade, bringing it from 0.5 per cent to 0.75 per cent.
However, financial experts were quick to point out that the current rate of inflation is still 2.4 per cent, which means that savers who are earning interest of 0.75 per cent or less will be losing the equivalent of 1.65 per cent in value.
“The increase in interest rates is a significant moment as it is the first time the Bank of England has raised interest rates above 0.5 per cent in nearly a decade,” said Max Lehrain, chief operating officer of P2P lender Relendex. “However, for savers, this change should act as a wakeup call as it is not likely to have a material impact on their investment meaning that those stuck in standard savings accounts are still missing out.
“This is in large part down to the rate of inflation far outstripping interest rates, even with today’s increase. In simple terms this means that if your savings earn 0.75 per cent interest they are being eaten into by the effects of inflation.
Angus Dent, chief executive of P2P platform ArchOver took the opportunity to remind savers that only half of all savings account rates went up after the last base rate rise.
“There’s good reason to be underwhelmed,” he said. “But this is certainly a step in the right direction for the cautious Bank of England. While such an incremental rise won’t shake the earth, and probably means business as usual, it nevertheless spells good news for the UK.
“The country is still hungry for a stronger economy, ten years after the financial crash. Both savers and investors are now aware that to chase higher returns, they need to open the door to alternative opportunities. Alternative finance options that offer higher yields – without sacrificing security – offer savers a path to higher returns in a still-struggling economy.
“Savings accounts still aren’t the safety net they once were. Despite this rate rise, savers still need to cast the net wide in the hunt for higher returns.”
Meanwhile, RateSetter’s chief executive and founder Rhydian Lewis warned savers not to expect significant increases in their cash savings rates even with the new base rate.
“It will be interesting to see how long banks take to pass the full increase on to savers,” he said. “To be honest, the banks’ past track record is appalling.
“The banks won’t hesitate to put up rates for borrowers. This means that the gap between the rates banks pay to savers and charge to borrowers will widen further – providing greater opportunity for highly efficient platforms like RateSetter that operate within that gap.”
P2P lenders were keen to stress the opportunities for savers to make inflation-beating returns by investing in alternative finance products or though the innovative finance ISA structure, with Lehrain claiming that P2P investors could make “substantially higher returns”.
“With traditional lenders offering low returns on their savings accounts and cash ISA products, savers who are looking to achieve higher rates of returns should still consider alternative options,” added Lehrain. “P2P lending for example, can offer substantially higher returns, giving a good income boost when interest rates are still relatively low.”
Relendex analysis suggests that savers who place £5,000 in a cash ISA for three years would be likely to earn returns ranging from just £15 to £113. By comparison, the same amount of money invested in an innovative finance ISA which offers eight per cent interest would deliver returns of £1,300 over a three-year period.