Page last updated at 00:15 GMT, Wednesday, 7 January 2009

Rates roulette for savers and borrowers

Analysis
By Kevin Peachey
Personal finance reporter, BBC News

Bank of England
The Bank of England's Monetary Policy Committee meet this week

The economic roulette wheel has left many people in a spin over their personal finances, as the Bank of England took dramatic action to boost the economy.

Some savers feel they placed a comfortable bet on black - only for it to come up red as interest rates tumbled in recent months.

"My wife and I saved for a comfortable retirement, but the government seems interested only in protecting the business community and mortgage holders," says one 87-year-old, who has seen the interest payments on his savings fall.

But others 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.

Going down

UK interest rate graph

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 drops too. Or does it?

Let's take a look at the trend in mortgages alone.

There are three main types of mortgages: tracker (around 40% of the market); fixed-rate (about 50%); and standard variable rate (SVR) (about 10%).

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.

Fixed rate deals

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.

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
Andrew Montlake, Cobalt Capital

Now it is likely that many will see their repayments falling when their fixed rate deal comes to an end.

So will this continue?

"Having seen a succession of interest rate cuts, with another likely to follow this week, there is not too much further for rates to go," says Andrew Montlake, partner at independent mortgage broker Cobalt Capital.

"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."

Does this mean that anyone preparing to get a new fixed rate deal will get better rates now than in the future?

End of the cycle?

According to Mr Montlake, homeowners able to offer a large deposit to banks - which are only prepared to lend to "safe" borrowers - might want to consider it.

"The products that we see in the coming quarter may well represent the nadir in the current cycle," he says.

"Those who fix in at this point are likely to be the winners in the future as interest rates will have to rise, perhaps as quickly as they have fallen, once we begin to climb out of the recession."

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.

Save or spend

One issue for the government has been whether people with lower mortgage repayments will spend or save the rest of the money.

For sale signs
Mortgages are affected by Bank rate moves

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.

"The question is how far can banks drive down savings rates before people think it just isn't worth it," says Kevin Mountford, head of savings at moneysupermarket.com.

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 is a suggestion that some good deals still exist 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 have little choice than to wait and see which numbers come up on the economic roulette wheel.

HOW MORTGAGE LENDERS RESPONDED

Lender SVR before Nov BoE decision SVR after Nov BoE decision Rate change (percentage points) SVR after Dec BoE decision Rate change
HBOS 6.50% 5.00% -1.5 4.75% -0.25
Nationwide BS 6.19% 4.69% -1.5 4.00% -0.69
Abbey 6.94% 5.44% -1.5 4.94% -0.5
Lloyds TSB/ C&G 6.50% 5.00% -1.5 4.00% -1
Northern Rock 7.34% 5.84% -1.5 5.34% -0.5
Barclays 6.64% No change 5.49% -1.15
RBS 6.69% 5.19% -1.5 4.44% -0.75
HSBC 6.25% 5.44% (5 Dec) -0.81 4.44% -1
Alliance & Leicester 6.94% 5.84% -1.1 5.34% -0.5
Bradford & Bingley 7.09% 5.59% (7 Dec) -1.5 4.84% (4 Jan) -0.75
Bristol & West 6.59% 5.49% -1.1 4.49% -1
Britannia BS 6.30% 5.30% -1 4.99% -0.31
Yorkshire BS 6.60% 5.60% -1 4.99% -0.61
GE Money 10.39% 8.44% -1.95 Under review
Coventry BS 6.84% 5.34% -1.5 4.99% -0.35
Standard Life 6.59% No change 5.79% -0.8
Clydesdale & Yorkshire 6.64% 5.14% -1.5 Under review
Chelsea BS 6.94% 5.79% (31 Dec) -1.15 Under review
Skipton 6.45% 5.95% -0.5 5% -0.95
One Account (RBS) (avg) 6.55% 5.55% -1 4.55% -1



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