How has the base rate affected borrowers and savers?
by admin on 13/02/09 at 2:23 pm
In order to tackle the economic downturn, the Bank of England has made a number of base rate cuts over the past few months. There are two main ideas behind this:
· Reducing the wholesale cost of borrowing to lenders, and subsequently encouraging them to lend more money to businesses and individuals at lower rates
· Giving consumers less incentive to save money, and therefore encouraging more spending – which can help to fight off shrinking inflation or deflation.
However, there has been increasing debate as to the effectiveness of base rate cuts as a measure for combating the economic downturn. Some economists believe that base rate cuts are ineffective, and only serve to disadvantage existing savers.
Base rate cuts made in the last few months have affected different areas of the economy in different ways. Here we take a look at how borrowers and savers have been affected.
Mortgages
Mortgage holders have arguably been affected the most positively by the recent base rate cuts. In particular, many of those on tracker mortgages have experienced significant falls in their monthly outgoings.
At the peak of the market in 2007, it was not unheard of for borrowers to be offered rates that tracked at a fraction of a percentage above the base rate – meaning that some homeowners are now only paying a little above 1% in interest. Some mortgages had even been offered with rates tracking below the base rate, making their current mortgage payments extremely low.
Meanwhile, rates on new mortgages have come down on the whole, despite many lenders raising the margins between their interest rates and the base rate. Fixed-rate mortgages are available for as little as 3% to 4% at present (February 2008) – although lenders tend to require a large deposit for their lowest rates.
Loans
The effect of the recent base rate cuts on loans has arguably been minimal. Some lenders have lowered their rates slightly following the last few cuts – Nationwide have extended a trial period with a 7.9% interest rate on loans for existing customers, and other lenders such as Alliance & Leicester, Tesco Loans and Abbey are offering similar deals – but on the whole, the cuts have been nowhere near in line with the falls in the base rate.
However, this could change if banks become more confident in the coming weeks and months.
Savings
It’s a widely-held view amongst economists that savers are the worst-affected by the base rate cuts. In short, banks need to offer savings rates below the base rate in order to make money – meaning many savings accounts now offer less than 1% interest.
This is a problem because typical interest rates are significantly lower than the rate of inflation – currently 3.1% – meaning savers are technically ‘losing’ money. This may not be such a problem to people who simply want to put their money somewhere safe, but for those who rely on interest from savings as a source of income, the reduction in interest can be a serious burden on finances.
This article was written by www.ThinkMoney.com - loans, mortgages and debt experts in the UK.
