Winners and losers of five years of record-low interest rates
Today marks half a decade since the Bank of England slashed the Base Rate to 0.5%. It's been there ever since. And while that's been good for some, it's been a nightmare for others.
Today the Bank of England’s Monetary Policy Committee (MPC) held the Base Rate again at 0.5%. Nothing unusual about that, you might think. But this month marked five years since the MPC took the decision to bring the Base Rate down to an all-time low in the wake of the credit crunch.
During the period since, MPC members have come and gone, including the Governor himself, with Canadian Mark Carney taking over the hotseat from Mervyn King. However, the committee's decisions have had a huge impact on our money.
Side-effects of the low-interest medicine
Two very obvious side-effects of the record low rate have been experienced by savers and mortgage borrowers. For savers, it’s meant that the interest rates on their money have plummeted, making it a lot harder to keep pace with rising prices.
For borrowers with interest rates linked to Base Rate, the reverse has been true and they have seen their repayments fall.
And both scenarios have been exacerbated by the recent Funding for Lending scheme. This was cooked up by the Bank of England as a way of trying to pump money into the economy via cheaper lending to banks and building societies, which would then be passed on to mortgage borrowers and small businesses.
Certainly the mortgage part of it has been successful, with record-low rates. On the flipside, it’s caused further hardship for savers as their interest rates have fallen further as institutions no longer need their cash to lend out.
The effect on mortgages
Research by financial data provider Moneyfacts has found that the lowest rate on a two-year fixed rate mortgage at 60% loan to value (or LTV; the percentage of the property’s value being borrowed) was 2.99% in March 2009. Today it’s just 1.48%.
So on a £150,000 mortgage borrowed for a 25-year term, including fees and charges, today’s borrower will pay £788.96 less over the two-year introductory period.
And the difference is even more pronounced when you look at a first-time buyer wanting a mortgage at 90% LTV. In 2009, the cheapest two-year rate was 5.99%; today it’s 3.45%. That’s equivalent to a saving of £5,046 over that two-year term.
Now this second example is slightly disingenuous because of the influence of another scheme – in this case the Help to Buy scheme designed to help people onto the property ladder. Even without this stimulus, though, rates would have fallen.
The Council of Mortgage Lenders estimates that borrowers have collectively saved around £100 billion over the past five years.
The effect on savings
The change for savers is even starker. In March 2009, the top instant access rate was 3.35%, whereas now it’s 1.50%.
The top one-year fixed rate account has dropped from 3.9% in 2009 to 1.9% today. Meanwhile, the top instant access Cash ISA rate has fallen from 3.61% to 1.75%.
A study by McKinsey estimated that savers lost a cumulative £66 billion in interest between 2007 and 2012.
To put that into further perspective, investment platform Hargreaves Lansdown says that £1,000 put into an average savings account in 2009 would be worth £1,040 in cash terms now. However, in real terms the effects of inflation mean it would be worth £870.
This has left savers looking at alternatives ranging from current accounts, with banks and building societies offering far higher rates in a bid to get more people switching to them, to newer alternatives such as lending to other people via peer-to-peer websites, to investing in the stock market.
See rates on savings accounts and peer-to-peer lending
The future
Despite the slowly-improving economy, there are no signs Base Rate will increase in the short term, certainly not this year.
Indeed, MPC members have explicitly said not to expect a rate rise until next spring at the earliest, although the Bank of England has had to shift the goalposts on its recent ‘forward guidance’ following better than expected figures. Whether any rise comes before or after next year’s General Election remains to be seen, and will be an interesting talking point in the build-up.
Are you a winner or loser of the low interest rate world we've been living in for the past five years? Share your thoughts in the Comments box below.
Earn up to 5% AER with a current account
More on interest rates:
What next for inflation and interest rates?
Where to earn most interest on your cash
How a rate rise would affect your mortgage repayments
Countdown is on to use up 2013/2014 ISA allowance
Comments
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These artificially low interest rates are there for only one reason; to allow the government to reduce the value of its debt. In the meantime, savers are stung, pensions pots are stung and the economy appears to be doing better when it is not. If the banks (public companies owned by shareholders, remember) had been allowed to fail, the shareholders would have been stung (as well as the bankers) but we would have recovered from the problem by now. Shareholders, of course, are the ones that should be taking the risks of the company, not the taxpayer. Then, if that had happened, interest rates would probably be at more of a market level. r.
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The usual thing has happened over the five years. Anyone who has initiative and gumption, and who can get up off his arm and do something has done exceedingly well; whereas any dead beat loser who blames his misfortunes on the government, the younger generation, the drunken coachman, or is more concerned about the activities of divers celebrities, has lost significant amounts of their wealth. To be honest, I went out and started to use my imagination in thinking up ways of investing money. The result is that you start to discover ways undreamed of. Sometimes you make more money lazing around the house in your dressing gown, than you would by going out to work. Often the investments you find would hitherto never have been called investments by any stretch of the imagination. And often the investments are risk free. Some of the investments that were paying me gewgobs on my principal were actually guaranteed by the UK government. And all of them have been perfectly legal. (It's much more fun that way.) If you do find a nice little earner, keep your mouth shut. If you tell other people, the opportunity will go away, because the clodhoppers have moved in. A case in point. Take our old friend, National Savings and Investments and their index linked savings certificates. A well-known personality spread the word that you could get bigger returns from these than you could from a high street bank. The clodhoppers started sinking their savings into them, and NS&I took the certificates off the table. Now nobody can get these things anymore. The economy is getting worse as the government continue to inflate the currency, and the national debt augments to the tune of £5 and a half million every 20'. Anyone who leaves his money stuck in an account....I can't remember who said it, but he said that if you leave your money in one place for a long period of time, the money will start to stink. And he's right.
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Why do we pay enormous sums to a Canadian (Carney) to just sit there and do nothing? Surely we could have employed a British governor to do nothing, but at half the price! If low interest rates are the appropriate strategy in a slumped economy, why didn't that happen the last time? I seem to remember paying 17% on my mortgage! Back then, savers were getting in excess of 10% - nobody, least of all the government, seemed to care one jot about me and my financial straits! Now I am a saver - and again, nobody seems to care a jot!
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13 March 2014