Despite rumours about the Bank of England base rate starting to rise later this year, we may have to wait a while longer before interest rates on standard accounts get back up to that level.
But what’s this? An18-month bond paying 5.65%? It might sound too good to be true, but this is no trick. This 18-month bond really does pay a monthly return of 5.65% before tax – the only difference is that Wellesley & Co. is a peer-to-peer lender rather than a traditional savings provider.
In other words, it takes money from savers and lends it out directly to borrowers – negating the need for banks and building societies, thus getting a better rate for both parties.
Here, we take a closer look at the deal, its pros and it cons – and ask whether you should take the plunge.
What’s the deal?
The Wellesley & Co. is offering 18-month fixed-rate savings bond which can be opened with as little as £10.
However, the good news for more serious savers keen to take advantage of the 5.65% (or 5.73% annual) rate is that there is no limit on how much you can invest.
The bond is one of a several fixed-rate savings accounts offered by the peer-to-peer lender, ranging from a six-month deal paying an annual return of 3.75% to a five-year bond paying 7.50% annually.
With all of the bonds (with the exception of the six and 12-month options) you can choose to have your interest paid monthly or on maturity.
And in all cases, the capital is repaid on the maturity of the term, while the advertised rates are inclusive of any fees.
Who is it good for?
Even if you’re too young to have been interested in savings accounts before the credit crunch, you cannot have failed to notice other savers’ heartfelt complaints about the low interest-rate environment of the last five years or so.
And this account pays decent returns to all – so long as you are willing to tie up your money for 18 months and go without the protection that would have been offered to you at a bank or building society (albeit with a lower rate) on your cash.
This leads us to our main catch with this account. As a peer-to-peer lender, Wellesley & Co. is not covered by the Financial Services Compensation Scheme (FSCS) which would protect the first £85,000 of your funds if they were held with a traditional savings provider, such as a bank or a building society.
It does however offer its own security which it calls the Provision Fund – an emergency ‘pot’ held in Trust by a vetted independent third party and which currently holds double the funds needed for savers to be reimbursed.
Wellesley & Co. also differs from most peer-to-peer firms because the cash you invest will be lent out to small to medium-sized (but experienced) investors in residential property, rather than to individual consumers.
The company claims that this offers extra security for savers, as the properties can always be sold at auction should things go wrong. However, you will need to assess this risk for yourself and whether it is worth taking for the extra return on your funds.
The other catch is that you will pay an interest penalty if you need to access your money before the end of the agreed 18-month term – and getting your hands on your cash also relies on there being a new investor to take your place, although Wellesley & Co. promises to, “prioritise the release of your funds before making new loans”.
What’s the verdict?
This is an exciting option for savers who are sick of receiving poor interest rates and are prepared to take on a bit of risk to earn a better return. The monthly interest option makes it a particularly attractive proposition for savers looking for a regular income from their money.
The 18-month bond is not the only Wellesley & Co. account offering an eye-catching rate. With an annual return of 7.50%, the five-year bond is also streets ahead of traditional bonds of the same term on the wider savings market, few of which offer above 3.00%.
However, some economists think that improved unemployment figures could mean that interest rates start rising by the end of the year. Either way, you may prefer the freedom of reassessing your accounts in 18 months’ time rather than tying your money up for five years.
For more on what happens to your cash when you opt to invest in peer-to-peer, read Laura Howard’s article, Are peer-to-peer firms all the same?