What impact will negative interest rates have on ISAs?

By Jo Bentham23rd May 2020

Bank of England (BoE) Governor Andrew Bailey has revealed that negative interest rates are under ‘active review’ for the first time in the BoE’s 325-year history.

Article main image

Speaking to the Treasury Select Committee, Andrew Bailey stated;

“We do not rule things out as a matter of principle. That would be a foolish thing to do. But that doesn’t mean we rule things in either.”

The Governor then went on to reveal that policymakers are assessing the experiences of other central banks that have used negative rates.

The announcement comes after two emergency moves in March which saw the BoE base rate cut from 0.75% to 0.25%, and then further to 0.1% (the lowest on record) in a bid to prop up the UK economy in the wake of the effects of the COVID-19 pandemic. 

It also follows the sale of negative-yielding government bonds in the UK for the first time ever, where £3.8 billion of three-year gilts at a yield of -0.003% were sold to investors who will get back less than they paid upon maturity. 

But what would negative interest rates mean for those holding - or considering - an ISA?

 

Low interest rates on Cash ISAs and consequences for the Stocks and Shares ISA

Cash ISA interest rates are already at significantly low levels, with the best easy-access Cash ISA currently on the market sitting at 1.01%. With inflation fluctuating between 0.8% and 1.5%, in some cases, Cash ISAs are struggling to keep pace with inflation - which of course means the value of savings may well be eroded over time.

The introduction of negative interest rates may result in a reduction of the rates offered on Cash ISAs  - meaning investors could be receiving very little to no interest on their savings, while running the risk of increased fees. 

As negative interest rates effectively mean commercial banks will be charged a fee on the deposits that they hold at the central bank, there is the possibility that some of this cost could be passed down to the investors. However, it’s considered unlikely that banks would make this move, as they fear customers may pull their money from the bank in favour of other, less traditional methods of storing cash.

Investors holding a Stocks and Shares ISA may also feel the consequences of negative interest rates, as dividend-paying companies see decreased yields. 

Already, British brand Burberry has scrapped dividend payments to shareholders after their sales plummeted 27% due to the COVID-19 lockdown. 

 

The impact of the alternative finance market and the IFISA

The alternative finance market is likely to play a significant role in the bounce-back of the UK economy. 

SME and property backed lending through the peer-to-peer and debt-based securities market have been crucial in supporting both small and medium-sized businesses and property development projects in the aftermath of the 2008/09 financial crisis, and they’re expected to be just as critical in the fallout of the COVID-19 pandemic.

This is evidenced as the government announced in recent weeks that peer-to-peer lenders are eligible to apply for accreditation from the British Business Bank (BBB) to take part in the Coronavirus Business Interruption Loan Scheme (CBILS), which was introduced to provide financial support to small and medium-sized businesses affected by COVID-19.

The Innovative Finance ISA - which allows investors to hold peer-to-peer loans and debt-based securities under the ISA tax wrapper - offers investors a tax-efficient way of supporting businesses and regional house-builders, in turn having a positive impact on the economy and society. 

Explore the benefits of a MAVEN Bonds IFISA:compare rates and calculate target tax free returns

The IFISA is uncorrelated to the BoE base rate, meaning in the event of a drop to negative interest rates, they would be affected to a much lesser extent than the likes of a Cash ISA. 

The underlying asset of an IFISA is an important factor in determining whether - and if so, how - it will be affected by the current pandemic. 

It’s already evident from its inclusion in CBILS that SME peer-to-peer lending through an IFISA will uphold its importance, but the current housing shortage and constant demand for mixed tenure housing developments also suggests that property lending through an IFISA will continue to be vital.

 

Insights from the MAVEN Bonds team

Simon Lenney, Independent Chairman at MAVEN Bonds;

“There has been a great deal of speculation on how quickly the UK residential property market will recover from the economic fallout of the global COVID-19 pandemic and what that recovery might look like.

There is a distinct sense of pent up demand, with many agents reporting that buyers and sellers are gearing up to transact once the lockdown restrictions are lifted.

Rightmove says it enjoyed 5.3m visits on Tuesday of this week - up four per cent on the comparable day of 2019 and the busiest day for portal visits this year since March 5, well before the lockdown began. Zoopla has stated that there are 373,000 transactions worth £82 billion currently on hold.”

Craig Peterson, Board Member at MAVEN Bonds;

“2020 had certainly started with a positive outlook for residential property and the wider property market. Initially, there was quite a bounce as the months of uncertainty over the election and Brexit began to fade. But after the sudden arrival of such an unprecedented and sobering event, we will inevitably see a significant impact on the way we all live and work in the future.

I sit on the Board of Homes by Carlton, a strategic delivery partner for MAVEN Bonds.  The company is experiencing encouraging enquiry levels across all sites as lock down emerges. It is also strengthening relationships with Housing Associations and exploring mixed tenure development opportunities moving forward.”

Simon Walker, Managing Director at Homes by Carlton;

“The overall demand for housing remains, however, it's likely we will see new trends emerging. There still appears to be a pent up demand in the private sale market. As the UK emerges from lockdown restrictions we will see how this unfolds. Rent to buy continues to be a very popular tenure, with significant demand for new high quality rental homes.  We also feel housing design may adapt to provide further levels of flexibility to accommodate increased levels of home working.”

The re-emergence of all strands of the residential development sector in the coming weeks and months will be challenging and intriguing. In a post COVID-19 world, the markets - like many facets of our lives - will no doubt evolve in line with ever shifting priorities. There will be challenges but also opportunities.

The team at MAVEN Bonds remain cautious but committed to supporting well researched, well structured residential development projects that have the potential to deliver returns to our investors and make positive and lasting changes to our communities.

 

The MAVEN Bonds IFISA

Helping you to make your money work harder. Targeting tax-free returns of up to 7.75% per annum.

MAVEN Bonds provide investors with access to fixed term investments by generating returns from making secured loans available to experienced companies within the UK’s property sector.

Our approach enables investors to benefit from higher interest rates when compared to many other alternative investments, whilst supporting the UK’s residential and commercial property development market.

Read more:download our brochure to find out more about MAVEN Bonds

 

The MAVEN Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).