Compounding expectations
The House Crowd’s founder and chief executive Frazer Fearnhead explains why investors are turning away from cash ISAs and stocks and shares ISAs in favour of property-backed Innovative Finance ISAs…
PROPERTY-BACKED Innovative Finance ISAs (IFISAs) are not the only way for retail investors to access the opportunities in the UK housing market. For centuries, people have been investing in property directly by buying houses either to resell or rent; and by buying up stocks and shares which are linked with the property sector.
But according to Frazer Fearnhead, founder and chief executive of The House Crowd, it is property-backed IFISAs that currently represent the best value for money – especially when you look at the effects of compound interest. After all, property prices have stalled since the housing market crash of 2008, and stocks and shares are relatively inconsistent, while cash ISA rates have decreased.
“People want to get a better rate than cash ISAs and a more consistent rate than stocks and shares ISAs,” says Fearnhead. “To really benefit from compound interest, you need to invest regularly and for the long term. “It’s not unheard of for stock market investments to fall by 10-15 per cent in a single year, so if you have £100,000 in your fund, and it falls by 15 per cent, that means that your returns the following year are only based on £85,000. You have to have several years of significant gains to get back up to where you once were.”
By contrast, property-backed IFISAs offer relatively consistent returns within a tax-free wrapper, which means that investors can effectively earn interest on their interest, year after year. This is why Fearnhead himself has chosen to place the maximum value of £20,000 into the IFISA from his personal funds.
“My choice as an investor would be to opt with safe, steady returns with asset-backed security,” he says. “It’s much less hassle than having a buy-to-let property with tenants and a variable rate of return, especially when you are no longer likely to see high returns from capital growth.”
Fearnhead is not the only one taking advantage of the benefits of property-backed IFISAs. Over the past couple of years, Fearnhead has seen “very large amounts of money” being transferred into The House Crowd’s IFISA from other ISAs – primarily cash ISAs and stocks and shares ISAs. This is down to the fact that the platform offers higher rates than cash ISAs, more consistency than stocks and shares ISAs, and instant diversification across a portfolio of property loans.
The platform’s new auto-invest products allow investors to withdraw their money with just 30 days’ notice. According to recent data from Zoopla, it takes an average of 50 days to sell a house – and that doesn’t include the extra time required for legal checks and conveyancing. “In essence P2P property-backed ISAs allow you to invest in property as a bank does where you’re funding a loan secured against the property, you get a good rate of return on it, it’s generally a lot more stable than actually purchasing the property, and when you want to get out of it you can get your money back within 30 days,” Fearnhead explains.
“You’d be hard pressed to buy a house with £20,000. With an ISA your money is diversified across a number of different properties so if something does go wrong it is likely to affect only a small part of your portfolio.” Diversification, liquidity and consistent returns all within a tax-free investment wrapper – it’s easy to see why the IFISA appeal is growing.