RateSetter ISA: Tax Relief and Sector Diversification Wrapped in One

By Jordan Stodart | On March 1st, 2018
RateSetter_ISA

Today, RateSetter launched its Innovative Finance ISA (IF ISA) – the RateSetter ISA – to the market. To be clear, the ISA is open to new customers having previously being restricted to existing investors only. The launch of RateSetter’s IF ISA marks the last of the “Big Three” major players (Funding Circle and Zopa) to launch their respective ISAs onto the market. Below we give an overview of the RateSetter ISA, address concerns over the consumer-credit market in which RateSetter operates and invite you to consider whether the RateSetter ISA is an attractive addition to your portfolio as the tax-year end approaches.

 

RateSetter ISA Overview

The RateSetter ISA works much the same as the RateSetter Everyday Account, albeit with tax-relief on returns. Investors have the option of investing within RateSetter’s three Markets: Rolling Market; 1 Year Market; 5 Year Market.

 

Key Features

1. Flexible:         

You can withdraw funds when you need them and replace when you can without affecting your annual ISA allowance.

2. Protection:

The RateSetter Provision Fund provides a buffer of cash paid by borrowers in order to repay any borrower defaults.

3. Returns:         

Average 3.6% to 5.1% per annum.

4. Tax-relief:      

No tax paid on returns generated from RateSetter investments.

 

 

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RateSetter Markets 

Rolling Market 

3-month average: 3.6% (Correct as of 7th February 2018).

Loan terms: Your money will be invested in loan terms between 6 months and 5 years.

Earning: Your loans are continually repaid and reinvested at either the prevailing Rolling Market rate or the rate at which you set. Your interest accrues for every day that your funds are on loan.

Risk: RateSetter offers protection through its provision fund but this is not a guarantee. This is an investment product and your capital is at risk if borrowers do not repay.

 

1 Year Market

3-month average:  4.4% (Correct as of 7th February 2018).

Loan terms: Your money will be invested in loan terms up to 1 year.

Earning: Your capital and interest will be repaid at the end of the loan term. If your loans are fully repaid early your money will be reinvested according to your settings.

Risk: RateSetter offers protection through its Provision Fund but this is not a guarantee. This is an investment product and your capital is at risk if borrowers do not repay.

 

5 Year Market

3-month average:  5.1% (Correct as of 7th February 2018).

Loan terms: Your money will be invested in loan terms up to 5 years.

Earning: Your capital and interest will be paid as the loans are repaid, usually monthly. If the borrower fully repays early your money will be reinvested according to your settings.

Risk: RateSetter offers protection through its Provision Fund but this is not a guarantee. This is an investment product and your capital is at risk if borrowers do not repay.

   

RateSetter ISA

 

Diversification to Mitigate Consumer-credit Concerns

It was reported by the FT earlier in the week that RateSetter’s main competitor, Zopa, who is fully focused on the UK consumer market, is anticipating falling investor returns despite increasing its volume of higher risk loans. The expected lifetime defaults at origination has increased rapidly in the past two years following the introduction of D&E graded loans. Unfortunately, this increase in risk is not offset by an increase in return which largely remains around the 5% mark across the loan book. 

 

Zopa_default_rates

Figure 1: Expected defaults compared to actual defaults 2005-2017, Zopa

 

The issue of rising risk at Zopa largely revolves around pressures in the consumer credit market, where a low cost of borrowing and high levels of competition have driven up outstanding consumer credit.

RateSetter, initially, solely lent to consumer borrowers and is often still regarded as a consumer lending platform. So, do these issues exist at RateSetter also? To a certain extent yes, they do, we can see the 5 Year Market rate dropping from the highs of 2012.

 

RateSetter_5_Year_Market_Rate

Figure 2: RateSetter 5-Year Market Returns, Orca Analytics

 

However, unlike Zopa, RateSetter has diversified its lending base away from a pure consumer lending platform. If you compare the loan book totals of the last 3 months with the total loan book, we can see a decrease in lending to individuals. This is perhaps reflective of challenges in the consumer lending market.

 

Figure 3: RateSetter Portfolio Breakdown, RateSetter

 

Looking back further, we’ve seen a gradual shift towards lending into business and property over the years. Using the Orca Analytics service, we can see this below.

RateSetter_Loan_Book_Breakdown_Business_Property

Table 1: RateSetter Loan Book Breakdown by Business and Property, Orca Analytics

 

If we compare the loan book composition in 2013 versus 2017, this is even more apparent.

 

RateSetter loan book breakdown of borrowers, 2013

RateSetter_LoanBook_Breakdown_2013

Figure 4: RateSetter Loan Book Breakdown 2013, Orca Analytics

 

Key

Business loans: black segment

Property loans: dark blue segment

 

Note: In the key, the yellow segment entitled ‘Property Development’ contains no data. All Property development loans are represented by the dark blue segment.

 

RateSetter loan book breakdown of borrowers, 2017

RateSetter_Loan_Book_Breakdown_2017

Figure 5: RateSetter Loan Book Breakdown 2017, Orca Analytics

 

The pie charts illustrate a reduction in exposure to consumer loans, as a greater portion of the loan book is allocated to more secure business and property loans.

Lending to other lending businesses (wholesale) which caused issues for RateSetter has also stopped.

 

Find out more about RateSetter’s Innovative Finance ISA at our IFISA Tracker page

Innovative Finance ISA

 

Stay up to date with RateSetter with Orca analytics

RateSetter Loan Book Data

 

RateSetter ISA Conclusion

As the end of the tax-year approaches, you might be considering how you use the remainder of your £20,000 ISA allowance. Diversifying your portfolio with stable, predictable credit should be worth consideration. What’s more, you can gain tax relief on the returns with the Innovative Finance ISA. RateSetter could be that very tax wrapper to hold your peer to peer loans. Concerns over the consumer lending market should be brought to attention, but, RateSetter are demonstrating their awareness of this by diversifying their lending away from consumer and into business and property. 

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