2009: The beginning of the story
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The economic turbulence of last year has left many people confused and scared about their personal finances. As the Bank of England took dramatic action to boost the economy, both savers and borrowers have had to work out what the new economic climate means for them.
Some borrowers have watched with delight as their mortgage repayments dipped ahead of Christmas. A customer on an average two-year tracker deal on a £150,000 mortgage has to pay an estimated £2,622 a year less following the last three Bank rate falls, according to price comparison website Uswitch.
Now, with the Bank rate expected to fall again on Thursday, banks will have to weigh up passing on rate cuts to borrowers while preserving competitive savings rates. At the start of October the UK bank rate was 5%. By the start of 2009, after three successive cuts, it had dropped to 2% – the lowest since 1951.
In the UK, consumers borrow a lot more than they save – with borrowing at nearly £1.5 trillion compared with savings of up to £1.1 trillion. These Bank of England figures are no surprise as most people with mortgages have higher borrowings than savings.
So when the Bank rate comes down, the interest payments on all this borrowing should drop too. However, that is looking uncertain at the moment.
Those with mortgage deals that track the Bank rate have seen the biggest benefits, as their repayments automatically fall when the Bank rate falls. Yet, the
UK’s biggest building society the Nationwide has said that for its customers this automatic reduction will stop if the Bank rate falls below 2%.
Less that 10% of mortgage holders have a variable rate mortgage (SVR), so for them it is up to their lender whether the Bank rate cut is passed on. Looking at the figures from the last few months, most major lenders, with the exception of LloydsTSB-owned
Cheltenham and Gloucester for example, have failed to pass on the cut in full for those with SVR mortgages.
Their rates vary, and some which have not cut in full still remain the cheapest. Repayments have not changed for those on fixed rate deals.
However, the Council of Mortgage Lenders says that about 1.5 million homeowners’ fixed rate deals came to an end in 2008, and they estimate that the number could be roughly the same in 2009.
A year ago this was a real problem, as these homeowners were reverting to an interest rate (often the SVR) that was much higher than they were paying before. Now it is likely that many will see their repayments falling when their fixed rate deal comes to an end.
Lenders are unlikely to pass on all the next round of cuts as they have to balance the needs of savers who are rightly feeling short-changed.
Those who might be kicking themselves at the moment are people whose endowments – planned to pay off their mortgage – have not proved to be as good investments as they were hoping owing to market turbulence. They are likely to be receiving letters telling them they need to up their financial input, because the endowment won’t cover the amount needed.
One issue for the government has been whether people with lower mortgage repayments will spend or save the rest of the money. Spending would stimulate the economy, but faced with job uncertainty during a recession they might decide to save. Not that they will get much back in interest on savings in the current climate.
Some 38% of savings accounts for deposits of £5,000 now pay an interest rate of 1% or less, according to financial information service Moneyfacts. But there are some good deals if people shop around and are prepared to tie up their money in an account for a year.
While we borrow more than we save in monetary terms in the UK, the number of savers exceeds the number of borrowers, perhaps by up to seven to one. Particularly hard hit by the latest saving rates cuts are the elderly who partly live off the interest of their life savings.
The National Pensioners Convention says 80% of pensioners rely on savings or investment income. If interest rates continue falling, they are more likely to eat into those savings rather than simply spend the interest.
Ultimately, this all goes to prove that there are lots of variables that the banks and building societies have to consider when reacting to the Bank of England Monetary Policy Committee’s decision on Thursday.
Expect the banks and building societies to take their time thinking about it, using the phrase that rates are “under review”. Meanwhile consumers like me and you have little choice than to wait and see what economic fortunes 2009 brings.
