P2P lending retains its edge as base rate rises
Peer-to-peer lending platforms believe they will retain a competitive advantage over traditional lenders even as the Bank of England base rate continues to creep up.
Last week, the central bank raised the base rate for the eleventh consecutive time since December 2021, taking it to 4.25 per cent.
It means the cost of borrowing is now at its highest level in nearly 15 years, with some concerned that inflation, which is driving the rising rate, will persist.
It seems unlikely that interest rates will return to their historical low of 0.1 per cent in December 2021 for a very long time. However, P2P platform bosses do foresee the rate gradually falling to somewhere more akin to the level it was prior to the 2008 financial crisis.
Read more: How will the property downturn impact P2P lending?
Despite the rising base rate, Kuflink chief executive Narinder Khattoare explained that banks are not offering significantly higher rates to deposit savers.
“The quarter-per-cent raise shows we are getting towards, if not the end, of the increase in rates; it’s about where we were pre-credit crisis and probably where it will remain for the foreseeable, and then eventually will come down to around three per cent,” he predicted.
“There will always be an option for savers to deploy funds in P2P as the alternative to the banks and I believe it’s here to stay. These agile businesses are able to move real time to give borrowers and deposit savers what they want with realistic rates that can be achieved by investors.”
Khattoare added that Kuflink had already increased its rates and did not envisage them going up any higher, particularly as bank deposit rates seem to have plateaued at between three and four per cent at the highest levels.
Read more: Consumers borrow more amid rising pressure on personal finances
Abundance joint managing director Bruce Davis agreed that savers are not seeing the returns that investors are currently able to realise.
“The rise in rates over the last few months has translated to higher borrowing tariffs for companies seeking to raise finance which in turn is passed on to investors through higher interest rates on the bonds we offer,” he said.
“Investors are seeing the benefits of higher interest rates in terms of higher expected returns on their investment unlike hard pressed savers – although of course, your capital is at risk.”
Despite this, he said as a specialist in ethical investments, Abundance is keeping a watchful eye on the impact of inflation (particularly rising energy costs) on some sectors which are looking to fund investments to transition to net zero, which might lead to an increase in credit risk.
“Our Municipal Investments (Local Authority Securities) are benchmarked against the government borrowing rate (gilts) which has seen a significant rise in the last few months with the latest offering from Westminster City Council paying a 4.2 per cent return fixed for five years,” he explained.
“We believe that these local council investments offer a good return for a relatively low risk investment which allows investors to lock in higher returns for the next five years if, as the Bank of England expects, rates of interest and inflation return to target levels over that period.”
Read more: Loanpad raises investor rates again
Meanwhile, LandlordInvest managing director Filip Karadaghi said his platform had been increasing rates in line with the rising base rate.
“Interest to lenders on our loans has been increasing in response to the fact that we charge borrowers more now,” he said. “We expect them to be in the range of eight to 17 per cent per annum depending on the loan.”
LandlordInvest publicises an investor rate of up to 12 per cent on its website, suggesting the highest potential return has increased significantly. However, Karadaghi said that the firm has offered 17 per cent and higher on certain loans in the past.
Read more: How will the property downturn impact P2P lending?