An
innovative finance ISA (IFISA) provides you with an opportunity to utilise a peer to peer (P2P) lending network - essentially you are lending someone else or a business money through the provider of the IFISA.
Companies offering an IFISA will offer different investment opportunities. The main categories are:
- Lending to individuals. Borrowers take out personal loans, and you (and others) fund the loans. You gain money as the borrower is paying interest on the loan.
- Lending to companies. A straightforward loan to a business where the company borrows from you (and others) against future payments it will receive from customers.
- Lending for property. You lend to a developer so they can build property. Once the development is finished, and the property is sold or rented, the developer can repay you the money.
Key factors for an IFISA are:
- Protection scheme. IFISAs are NOT PROTECTED by the Financial Service Compensation Scheme (FSCS). You could lose all of the money if the provider goes bust.
- Interest rates. Interest rates are not guaranteed, but instead have a target rate or expected rate.
- Opening balance. The minimum amounts vary across providers.
- Fees. Varies across the providers. Generally they are free to open, but you could be charged a lending fee and / or a transferring out fee.
- You can select where you want to lend. Once you open the account, you can select where and how much you want to lend (there is often a minimum), and the conditions of that loan will be provided to you before you commit. Different providers can specialise in different areas. For example CapitalRise tends to provide opportunities to contribute to loans secured against property. Many providers also have an auto-lend option, but you can set a maximum amount for each loan to reduce the risk.
- There's a pecking order. If you have a look at IFISA options, you'll see references to "senior lending" and "junior lending". Senior lending means you get repaid first (along with the other senior lenders) if the borrower has problems with the repayments. Junior lending means you get repaid last if the borrower has repayment issues.
- Withdrawing funds. To exit your investment early, you essentially have to sell your investment to another investor. This could take a significant amount of time.
- 10% recommendation. The Financial Conduct Authority (FCA) recommend that you do not invest more than 10% of your investable assets into P2P lending unless you are a sophisticated investor or a high net worth investor. The provider will ask you to "self-certify" that you won't invest more than 10% (or you can prove experience or high net worth).
- ISA Transfers in and out. Applicable if you are moving money from another ISA - ensure the new provider accepts transfers from your existing cash ISA, stocks and shares ISA or IFISA. Be aware, you may have to pay exit fees.
ALWAYS READ THE TERMS AND CONDITIONS OF THE INNOVATIVE FINANCE ISA BEFORE YOU COMMIT
What I have done. I don't have an innovative finance ISA. It is something I may consider in the future, but for now I'm content with my cash ISA, Lifetime ISA and stocks and shares ISA. If you are interested in this type of ISA, please do further research so you fully understand it.
