The Innovative Finance ISA was launched in April 2016 by the UK government and hence is a comparatively new service in the investment marketplace. However, it's one which has grown a lot of attention and which fills a long-ignored gap. TheIFISA aims to meet both borrowers and investors' requirements in the form of a peer to peer loans or bonds. Investments that are held through the Innovative Finance ISA tax-free wrapper is utilized to provide funding to borrowers.
While the IFISA investment can go to several different businesses, property development is the only area in which the bond investments held within the Innovative Finance ISA will make an impact, with money invested by used to help fund property development. As an industry where cash flow issues and overrun projects are the norms, there is a high demand for short term finance in property development projects. This, along with other commercial finance requirements, presents a lot of opportunities for investors, if their approach is right. You may be wondering about the scale of opportunities for investors, how they mitigate risks and the overall picture for the investment. Let's dive into the details, so all your questions are answered.
How IFISA Boost the UK economy?
Investments through Innovative Finance ISA offer better returns on investment to investors. They also have a wide economic impact as they lend funds to businesses, which, in turn, work on projects that boost the economy. Furthermore, investments through IFISA accounts also create flexibility in the lending market. It ensures that businesses have access to short-term loans required for success. Besides, it gives consumers access to credit; they otherwise might not have been able to get.
Most property developers get rejected by banks, which mean they can't get the funds needed to deliver housing developments. In the United Kingdom, there is a shortage of housing. Hence the UK government has a target of 300,000 new houses per year to be met.
There are initiatives in the development industry that aim to offer a solution to the housing shortage and affect the process of property funding. For example, in social housing, the flat-pack homes have started to be built, where one unit is put together within a week. This decreases the usual time lags that developers face, but it also reduces the risk. If this production model is to be adopted in the private residential sector, it can help meet the UK housing demand.
Transitioning to this kind of production model would mean that investors can quickly receive returns since the short development time can lead to fast repayment of loans. Also, it can decrease the overall risk of investment. However, this would require a change in the way finance is perceived. Instead of seeing property funding as lending, it should be viewed as a cash flow process. For investors, the opportunity remains, and the developers can access the funding quicker.
How to Mitigate Innovative Finance ISA Risks?
The Innovative Finance ISA has gained a lot of popularity since it was launched in 2016. In tax year 2017/18, six times more IFISA accounts were opened then the previous tax year. The increase was from 5,000 to 31,000. The main attraction of an IFISA is that it offers investment services with high-interest rates and allows individuals to receive an income of almost £20,000 tax-free. Also, there are Innovative Finance ISA investments on the market, which payout quarterly to the investors instead of yearly. This allows investors to benefit from the potential returns regularly.
However, with a high-interest rate there is a need for investors to think about if they need to invest through an Innovative Finance ISA. Just like any other type of investment, there is a risk involved when you invest through IFISA, and these investments are not covered by the FSCS (Financial Services Compensation Scheme).
But, you can mitigate this risk by staying away from the scamIFISA providers in the market. You can recognize them as they offer overambitious and unrealistic returns on investments. Generally, the higher the interest rate, the riskier the investment, and there are more chances of borrower defaulting. A return rate of 6%, including risk, is realistic, and a rate of 12% indicates a high risk.
You can also mitigate risk by looking at for IFISA providers who offer asset-backed IFISA. Still, remember there is no guarantee that all your capital will be repaid. Most Innovative ISA providers also offer auto diversification, which means your investment portfolio is diversified by lending loans to different numbers of borrowers, which also mitigates the risk.
Investment through FISA can be a win-win situation for both borrowers and investors, as it acts like a bridge between an investor and a borrower. While investors can see better returns with a high-interest rate, any borrower can get the financial support needed to complete property development projects across the UK, which will boost the economy. These loans can also help address problems like the housing crisis by providing property funding. However, investors have to approach this opportunity with care. In an area where there is always a risk, choosing for an IFISA with a realistic interest rate can pay dividends.