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I have an emergency fund I am happy with and a Stocks and Shares Lifetime ISA where I am saving up for a house. As I am going to be going into my last year of university I was researching higher interest savings accounts with lower risks than stocks and shares. I would like it to be sort of a middle ground between my emergency fund which I can access almost immediately with no penalty, and has minimum interest rate and my LISA from which I can only withdraw money with 25% penalty. I came across Innovative finance ISA and I am wondering if that could be a good fit for this purpose? Also is there a reason to invest my money as an ISA considering I am nowhere near reaching my personal savings allowence? And lastly is there something else I am missing or should be aware of with this kind of investment/account?

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This answer is based on my personal experience with an ifisa over the last 12 months. I didn't do the necessary due diligence before making my investment and am paying the price for it now.

My investment was with "funding secure" which went into administration towards the end of last year. The administrators are still in the process of recovering debts on behalf of us investors and it looks like its likely to go on for several more months at least. Another ifisa provider (lendy) also went into administration last year before funding secure. Both of these providers offered property development loans at high APR rates secured against the property being developed.

Based on the information published by the provider I wrongly assumed this would be relatively low risk. They said that loans would only ever be given at a max "loan to value" of 70%, and that if the loan was failed to be repaid then they would be able to take possession of the property and sell it to repay the loan. They also published stats on their website showing excellent rates of loans repaid and very low rates of money defaulted. Several months after opening the account I figured out that these stats were wildly misleading, with tricks used to manipulate the stats such as not putting loans into default status even if they were 12 month overdue. These two company's both got approval from the FCA to offer an IFISA, so don't assume that means anything.

If I was looking at this again I would:

  • Don't pay much attention to the information published by the provider and instead rely on others experiences e.g. trustpilot reviews. I wouldn't go near any providers which don't have a few years track record.
  • In hindsight I wouldn't consider any provider which offers property development loans
  • I would only invest a small proportion of my total investable cash into an ifisa. The FCA now recommends no more than 10%, which now sounds a sensible starting point. Once you have some personal experience with it you will be in a better position to assess it
  • Don't chase the highest advertised "interest rate". People who need to borrow at these extortionate rates will only do so because the banks won't lend to them at a sensible interest rate e.g. because they are considered to be high risk
  • Check the information they publish for borrowers as opposed to the information they publish for investors. When you take into consideration their fees the APR may be significantly higher than what you get paid as interest, which will help you to gauge the risk level.

You mentioned about being able to access your cash. Bear in mind in a lot of cases you don't get your money back until the borrower repays the loan. There are a few which offer special facilities for early withdrawal but you would need to check the specific providers about how this works. Many of them also have a secondary market but there no guarantee you will find another investor to buy your loans.

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  • Thanks for a great answer, just wanted to let you know what I decided to do in the end. I chose one of the oldest and biggest providers in the UK with one of the lower APRs but which is also significantly lowering its losses and should be on it's way to turn profit in the future. I found a cashback offer which should "boost" the APR from the beggining and when I get it I'll decide if it's worth continuing.
    – David O
    Feb 11, 2020 at 9:09
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You are best advised to stay CLEAR of them. I have just pasted the salient points which would help you make the decision. No guaranteed returns, no safety net and risky. Continue with your LISA.

Make sure you understand the risks

Whilst advertised Peer-to-Peer returns (and by extension, implied Innovative Finance ISA returns) can compare favourably to other forms of ISA investment, this is not the same as Cash ISA investing and your capital is entirely at risk. The key risks associated with Peer-to-Peer lending can be found here – however, some of the primary considerations to any would-be Innovative Finance ISA holder are:

Unlike with savings, your cash is not protected

Most UK cash savings accounts (bank, building society and Cash ISA accounts) are protected by the Financial Services Compensation Scheme (FSCS). The FSCS is a Government-backed scheme which will compensate savers up to the value of £75,000 in the event that that bank, building society or Cash ISA provider were to fail. Peer-to-Peer lending platforms, and by extension Innovative Finance ISA providers, are not protected by the FSCS.

Quoted returns rely on funds being fully lent out

The quoted interest returns often assume that all of your capital is lent out for the entire year. In reality however, interest is rarely paid unless your cash has been deployed into Peer-to-Peer loans. If you choose to deploy larger sums into a Peer-to-Peer lending platform, it may take several days, even weeks, for that platform to fully deploy the funds and, during this time, you will very likely receive no interest return on your cash.

Also is there a reason to invest my money as an ISA considering I am nowhere near reaching my personal savings allowence

So do you have more money to save ? What is stopping you from saving more to match your allowance limits ? Don't forget about loosing all your money.

SOURCE

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  • I want some savings account with a higher interest rate but from which I could withdraw money with no or very small fee. Withdrawing money from LISA has a quite high fee. As for the full amount not being lent out, I would assume even then the interest should be higher than 1.15% which is the rate of my easy access savings pot.
    – David O
    Feb 6, 2020 at 18:51
  • @DavidO You seem to be asking for product recommendations which aren't allowed on this website. I would advise to google for saving accounts, lots of options come up. I personally use Marcus.
    – DumbCoder
    Feb 7, 2020 at 7:49
  • @DumbCoder Pedant's note: not your fault, and not terribly important, but that source is somewhat out-of-date... the figure for the FSCS protection you won't get is currently £85,000 (Feb 2020). It was increased from £75,000 at the end of January 2017 (link).
    – TripeHound
    Feb 7, 2020 at 11:31
  • @TripeHound Thanks for that. My main intention was to point out protection and no protection so didn't check it.
    – DumbCoder
    Feb 7, 2020 at 12:20
  • @DumbCoder I probably only noticed because I updated an answer about FSCS the other day. And it doesn't alter you main point: not being protected for 75k is the same as not being protected for 85k!
    – TripeHound
    Feb 7, 2020 at 12:22

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