How to boost your income during the cost-of-living crisis

As the Bank of England increased interest rates for the ninth consecutive time since last December, the cost-of-living pain will continue to pressure consumers.

The rate rise to 3.5 per cent means that more households will be dealing with precarious finances next year, according to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The latest increase will cause issues particularly for those paying off credit cards, variable mortgage deals or those who want to find a new fixed rate offer, she pointed out.

Read more: Young people turn to personal loans to cope with cost of living

“Bank of England policymakers will still want to tread carefully, fearful that the economy could be shoved into a deep contraction if rate rises are too steep,” she said. “It’s likely that the next moves will be moderate with 0.25 per cent hikes expected next year pushing the base rate to between 4.5 per cent to 4.75 per cent, although less clement economic weather might see more restraint from policymakers.”

For Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, those getting their income from investments will need extremely high returns to keep pace with soaring costs.

For savers, the rise in rates means more pain as lenders pull some of the most competitive fixed rate savings deals. For those searching for yield, peer-to-peer lending platforms could be an option to diversify their investments and bank some returns. However, rising rates could create other issues for borrowers, who will need to contend with the higher cost of paying back their debt.

Earlier this year, P2P ratings and research firm 4th Way warned investors not to be afraid of rising rates.

“All the historical bank data 4thWay’s specialists have seen shows that there’s not a strong correlation between rates going up and worse profits after deducting bad debts,” 4th Way said. “In the times where they have correlated, those higher rates have invariably offset enough bad debts that lenders in general continued to make at least some money.”

Read more: FCA: Credit shouldn’t be demonised as cost of living bites

According to Simon Lenney, chairman of Carlton Bonds, investors can benefit from exploring the alternative space in the current environment, whether it is through “diversifying into property as UK house prices continue to climb considerably, targeting inflation-beating interest rates via P2P lending following consumer price index figures reaching 41 year highs, or considering private equity as a result of volatile stock market fluctuations”.

P2P lending has a proven track record of being able to deliver inflation-beating returns even during periods of economic uncertainty. Exclusive data from Peer2Peer Finance News previously found that Innovative Finance ISAs – the tax wrapper for P2P investments – have returned between 7.8 and nine per cent per annum over the past four years, even after any defaults and other losses have been considered.

P2P investors should be aware of the correlation between risk and return, but can diversify their portfolio with a range of good-quality platforms at different points on the risk spectrum.

For example, Loanpad offers returns of between 3.6 per cent and 4.8 per cent depending on the product, but is seen as one of the safest platforms by 4th Way.

Platforms such as Kuflink offer returns of 8.08 per cent, with loans secured on UK property, while Shojin returns range between 10 and 15 per cent, for investors interested in other products such as mezzanine loans.

But the rate rises could put pressure on existing investors in P2P lending, as more will need access to cash. Indeed, Assetz Capital recently decided to close its retail platform as it saw retail investors withdrawing capital on a net weekly basis as rates continued to rise.

“With almost no demand today from retail investors for the products that we can offer in the face of higher interest rates and the wider economic conditions at present, we must move on in order to effectively support the continued growth of the small housebuilder and to give small- and medium-sized enterprise businesses access to capital in the form of property secured lending,” the firm said.