Like many investors, you may be thinking, ‘What exactly is the Innovative Finance ISA?’
Basically, it is a tax-free investment wrapper which can offer returns of up to 16 per cent through funding loans or other investments.
First floated in 2015 by then-Chancellor George Osborne, the Innovative Finance ISA (IFISA) was intended to spark interest in the alternative finance market, and in peer to peer (P2P) lending in particular.
The IFISA was officially launched in April 2016, but it is only recently that firms have been able to offer their ISA products to investors. This is partly due to the rigorous regulatory process that IFISA providers have undergone.
The Financial Conduct Authority (FCA) has been known to spend more than two years analysing each P2P firm’s applications before finally granting them approval.
This is because the peer to peer sector is still very much in its infancy.
The Evolution of P2P Lending
The first P2P platform (Zopa) was only founded in 2005, and the sector didn’t really take off until after the global financial crisis.
Back then investors liked the idea of cutting out the middleman and either lending or borrowing directly from another individual or business.
Over the years, the P2P model has evolved to include business funding, property funding, and even car financing.
Borrowers can apply for personal or business loans, and investors can access higher interest rates by lending their money over a fixed term, to fund projects, business expansions or consumer loans.
Compare the Best Fixed-Rate ISAs
Innovative Finance ISA Returns
Investor returns can range from between 2.2 per cent to 15 per cent, depending on the level of risk involved. With the addition of an IFISA wrapper, lenders can invest up to £20,000 per year in P2P investments, completely tax free.
However, the IFISA stamp of approval is no guarantee that your money is safe.
Innovative Finance ISA Risks
Most P2P platforms claim to have a default rate of between one and five per cent, which can either translate to diminished overall returns (if you have invested across a range of different loans), or the loss of your entire capital investment (if you have invested in just one loan).
As a result, many investors are still – understandably – wary of these new investment structures.
But others are rapidly becoming IFISA evangelists, delighted to have found inflation-busting returns in an otherwise low-rate environment.
If you are considering an IFISA investment, you will need to make sure that you choose the IFISA provider that is right for you.
It’s recommended to read and follow the guidelines provided by the platform, as well as the experts to reduce the risk of loan defaults hurting your investment.
Read on for our list of the current IFISA providers.
Who are the IFISA providers?
At present, there are just 27 firms who are authorised to offer IFISAs, although this figure is likely to rise in the near future. All of the providers listed below have been authorised by the FCA, and have received IFISA approval from HMRC.
This asset-backed lender launched its IFISA in August 2017. Accounts can be opened with a minimum of £100.
Returns offered: 10-15 per cent, per annum.
Run by Zopa co-founder Bruce Davis, Abundance was one of the first to offer the IFISA. It specialises in ethical investments that help society and the environment.
Returns offered: between 4 and 12 per cent, depending on the project.
Offers asset-backed loans packaged as fixed-rate bonds, including the firm’s specialist Pensioner Bonds.
Returns offered: Between 3.14 per cent (for a cash bond) and a 30.90 per cent fixed total return (for a compounded high yield bond).
A property-focused platform, with a minimum investment of £1,000.
Returns offered: 10-18 per cent
This crowdfunding platform raises funds for companies through the issue of shares (equity) and crowd bonds (debt).
Returns offered: 8-12 per cent.
Offers equity and debt-based finance to British businesses, with EIS, SEIS and ISA tax relief for investors.
Returns offered: 9-12 per cent.
Award-winning crowdfunding platform which specialises in both property and business loans.
Returns offered: 5.43-7 per cent.
An offshoot of established investment firm Downing LLP, Downing Crowd sells crowd-funded loans as fixed term bonds.
Returns offered: 3-7 per cent
Secured P2P lender which invests in British businesses. There is currently a waiting list for its IFISA.
Returns offered: Monthly returns of between 5.5 per cent and 6.5 per cent.
An asset-backed P2P platform which specialises in sub-prime loans to both businesses and individuals.
Returns offered: Up to 16 per cent, depending on the loan type.
Allows investors to spread their ISA across a number of different P2P platforms via the Goji Diversified P2P Lending Bond.
Returns offered: approximately 5 per cent
An asset-backed lender which targets high net worth individuals. Minimum investment is £10,000.
Returns offered: 6-15 per cent
Property-focused lender which holds a 20 per cent stake in every one of its loans. Offers short-term investments of between 6 and 12 months.
Returns offered: Up to 7.2 per cent
Invests in buy-to-let mortgages with term times of up to ten years. Both fixed rate and tracker rate loans available.
Returns offered: 3.54 per cent fixed rate.
Another property-backed platform which offers a wide range of residential, buy to let and bridging loans.
Returns offered: 5-12 per cent
Offers a variety of consumer loans, all of which are backed by the ‘The Sheild’ – an in-house insurance policy which covers any investor losses.
Returns offered: 4-5.5 per cent
Offers one of the most flexible IFISAs on the market. The platform offers debt refinancing loans, and growth loans for small businesses.
Returns offered: 6 per cent targeted by the Growth IFISA; between 5.95 and 12.25 per cent on the Self-Select IFISA.
Run by former City bigwig Nicola Horlick, Money&Co auctions off business loans with a high credit rating.
Returns offered: Approximately 8 per cent.
Focused on green energy projects across the UK, Mongoose offers both debt and equity crowdfunding options to investors.
Returns offered: Approximately 5 per cent.
Octopus Choice invests in UK properties, offering variable returns depending on the loan values. It is backed by its parent company Octopus Investments.
Returns offered: 4.1 per cent (as at 24 September 2017)
Offers loans on high end properties across the UK, through debt, equity and hybrid bond offerings.
Returns offered: Up to 11 per cent.
Commercial property specialist. Groups loans into tranches, depending on the risk involved, to minimise risk to investors.
Returns offered: 5-12 per cent.
An SME-focused lender. Investors bid for different loans, choosing the amount they want to lend and the returns they expect to receive.
Returns offered: Average net return of 9.8 per cent.
Hosts live auctions where investors can bid for parts of secured property loans.
Returns offered: Up to 10 per cent
Investors can access a range of asset-backed business loans, packaged as IFISA-friendly bonds.
Returns offered: Up to 6.2 per cent.
Offers investments in corporate bonds, with a minimum investment threshold of £5,000.
Returns offered: 11.1 per cent average gross returns per annum.
The first P2P platform to be established in the UK. Zopa is one of the most popular IFISA providers, and as a result there is currently a long waiting list for new IFISA investors.
Returns offered: 3.7-4.5 per cent.
London Capital and Finance, provide fixed rate innovative finance ISAs with 2 or 3 year terms. The rate of returns offered are favourable at 6.5-8% per cent but funds are not protected by the FSCS like a cash ISA would be.
Due diligence would need to be researched into each of these products, as risks are greater with IFISAs than when investing into a cash ISA at a bank.
Also published on Medium.Last updated: July 24th, 2018