What is an Innovative Finance ISA?
Put simply, the Innovative Finance ISA (IF ISA) allows individuals to use their annual ISA allowance to lend funds through property investment, whilst receiving the benefits of tax-free interest. The UK Government introduced the Innovative Finance ISA in April 2016 – but awareness amongst investors has been limited, to say the least. 2017 research suggests about half of investors have never heard of an IF ISA, and has left many asking, exactly what is an innovative finance ISA? IF ISAs are different from cash ISAs and stocks and shares ISAs, and it’s important to understand them before making decisions on how you want to invest your own money.
What sets an IF ISA apart from cash ISAs and stock and shares ISAs?
Innovative Finance ISAs can offer more than double the rates offered by cash ISAs because of the key principles underlying secured peer to peer lending and (in The House Crowd’s case) property development loans – the “middle man” bank has been cut out, meaning borrowers pay more in interest in exchange for speed and ease of receiving their loan, while investors receive more as a result. After all, two’s a party and three’s a crowd.
Measuring the difference between IF ISAs and cash ISAs requires more than just interest rate comparison. For example, unlike a UK bank or building society account, peer to peer lending and property development investments are not currently protected by the Financial Services Compensation Scheme (FSCS). This can put some people off, however, most providers should be able to offer an alternative – for example, at the House Crowd, every loan made within our Innovative Finance ISA portfolio is secured by a legal charge over a UK property or land asset. This means the borrower’s land or property can be possessed and sold in the event of the borrower not repaying. The IF ISA is only available to UK taxpayers aged 18 or over. There are no immediate plans to introduce a Junior Innovative Finance ISA for the under-18s, which does exist for cash ISAs. Additionally, the IF ISA does not include equity-based investing. If you’re interested in this, it’s safe to say that IF ISAs are not for you.
The House Crowd ISA
With our Innovative Finance ISA, we automatically diversify your investment across a portfolio of peer to peer loans (commonly known as bridging loans) and property developments, which are managed by House Crowd Developments. This saves you the time and hassle of managing a property investment portfolio yourself. Your Innovative Finance ISA earns an interest rate of 7% per annum, 365 days a year, with absolutely no downtime. This as a real benefit for investors who don’t have the time to manage a diverse portfolio, and we have calculated that investors funds can be ‘in-between’ investments for up to 30% of the time as well, offsetting the benefits of investing in individual peer to peer loans typically offered at marginally higher interest rates.
The minimum investment term for the IF ISA is three years. You can either receive interest twice a year, or you can choose to compound your interest within the tax free-wrapper. If you choose to compound your interest, you can earn an average annualised return of 8.2% over five years. Invest from £1,000 to £20,000 a year. Unlike a stocks and shares ISA, we offer fixed rates, meaning you can earn predictable and consistent returns. More that can be said for stocks and shares! And in the unlikely event we’re unable to recover your capital, after a default event, we will cover ten percent of any capital loss as compensation – decreasing your overall risk. If you think a hassle-free, tax-free, high-interest ISA already sounds good, we’ve got some even better news – it’s free to open an Innovative Finance ISA with The House Crowd. To learn more about our IF ISA, Register your free account here.