Brexit has delivered its first marked consequence since the announcement of Britain’s divorce (whenever that is) from the EU — depending on how you see Theresa May’s appointment as PM. Brexit created an immediate earthquake post-announcement — highly dramatic — and then a ripple of aftershocks, mostly surrounding when article 52 will be invoked; short and long-term ramifications on the economy; severity of social division; and so on. We’re still pondering much of this…
However, Moody’s, the ratings agency, has confirmed the UK economy will slow but not instigate another recession as the effects of Brexit recede. UK economy will grow 1.5% this year and 1.2% in 2017, showing a drop in growth trend, but not a crash.
One thing is certain, however, you will not receive the best savings rates on the market from your high street bank. Not even close.
BoE cuts base interest rate to 0.25%
Bank of England Governor, Mark Carney, announced a cut of 25 basis points to the base interest rate in early August. This is a halving of the first cut to interest rates, seen in 2009 when the rate was slashed to 0.5%, and a new record low for UK interest rates.
Here is a graph to demonstrate:
The Bank announced additional measures to stimulate the UK economy, including a £100bn scheme to force banks to pass on the low interest rate to households and businesses. It will also buy £60bn UK government bonds and corporate bonds. Carney has indicated the rate could drop even further, but remains ardent this was a necessary step at this time:
We took these steps because the economic outlook has changed markedly, with with the largest revision to our GDP since the MPC (Monetary Policy Committee) was formed almost two decades ago.
Mark Carney, Governor Bank of England
How interest rate cut will affect savings
To convey in simple terms:
- £25 less in interest a year on a £10,000 savings pot
- £40 of gross interest earned in 1 year on a £10,000 savings pot
Traditional current accounts pay a tiny amount of interest, as I’m sure you can attest while reading this. Some now pay interest as much as 5% on a limited account, but where they’re to be found and how the mechanics actually work with regards to withdrawal and fees are other matters.
According to Moneyfacts, there are 385 savings accounts that could end up offering no interest at all if banks and building societies pass on the whole reduction. It found 60 variable rate accounts on the market paying an interest rate of 0.25% or less, alongside 325 accounts that are closed to new business but still hold customers’ cash.
60 variable rate accounts on the market paying 0.25% or less
P2P lending: a viable savings alternative
Peer-to-peer lending offers some of the best interest rates on the alternative investment market, where lenders can earn annual rates in the region 5%+ from investing in consumer, business and/or property loans.
Here are some key features of P2P lending for those new to this innovative asset class:
Total lent 2015: £2.7bnAvg deposit amount: £5,000Typical length of loan: 3–5 yearsTypical rate of return: 5–7% p.aEstimate total active investors (UK): 250,000Types of loans: secured and unsecured consumer, business and property loans
For more information on peer-to-peer lending, including risks, visit our Guides section by clicking the button below.
Here are some examples of major UK peer-to-peer lending platforms, often called peer-to-peer lenders, as featured on Orca Money. Visit the lenders profiles by clicking ‘Lenders’ in the Learn drop-down in the nav bar for more info on lending platforms.
One of the “big three” lending platforms, RateSetter is the only UK lender facilitating loans to all three asset classes lent to in P2P lending, predominantly focusing on unsecured consumer loans. It has lent over £1.3bn since 2010 and offers rates in the region 2–6% p.a changing daily.
The creator of peer-to-peer lending, this is the largest platform in the UK and specializes in unsecured consumer loans, allowing retail investors to invest in loans for purchasing cars, houses, funding weddings and so on. It has lent over £1.6bn since 2005 and offers three products with fixed rates: 3.5%, 4.3% and 6.7% p.a.
A multi-account peer-to-peer platform lending to businesses and property developers. Assetz Capital has lent over £130m since 2012 and offers products/accounts with interest rates ranging from 3.75–7% p.a for auto-diversified accounts and up to 18% p.a for the manual loan selection product — a riskier investment account.
Unlike the three platforms listed above, Rebuilding is an example of a manual loan-selection platform where you are required to select loans to invest in. You create and managing your own portfolio, essentially. Platforms
like this will meticulously vet borrowers prior to accepting them onto the platform and often take various forms of security on the loan, such as an All Asset Debenture and Personal Guarantee.
Innovative Finance ISA: a boon for savers
Introduced in April, this tax-efficient ISA wrapper allows you to store a single or multiple P2P investments (depending on the ISA provider) in an IFISA, earning interest on the investment tax-free. Due to the complexities of peer-to-peer lending, namely the illiquidity of the asset class, ISA rules have been adapted to fit.
For more information on the IFISA, including the ‘Can’ and ‘Cannots’ and which platforms currently offer an IFISA, click the button below and read our infographic. Alternatively click here to read material on the Innovative Finance ISA.
To find out more about one of few platforms offering the Innovative Finance ISA, read the ‘Crowdstacker Investment Review’ written by the Orca team earlier this year, and find out how you can earn upwards of 6% per annum interest tax-free.