Page last updated at 22:31 GMT, Thursday, 22 October 2009 23:31 UK

Your finances in the recession

By Ian Pollock
Personal finance reporter, BBC News

People outside an estate agent"s window in London
Some mortgage holders have saved thousands of pounds

It may be unfashionable to say so, but some people have managed to do well during the recession.

And if interest rates stay low, they may continue to do just as well.

This does not just go for people on low mortgages, but savers and car buyers too.


If you are one of those buying a home with a tracker mortgage - one where the interest rate is linked to the Bank of England's bank rate - you will know all about this.

The Council of Mortgage Lenders (CML) estimates that out of a total of 1.5 million trackers sold since April 2005, about 935,000 are still in force.

They will have been saving hundreds of pounds a month compared with the position back in July 2007 when the bank rate hit 5.75%.

Take someone with the average outstanding home loan of £110,000.

I think rates will be low for a long time and people on trackers will continue to benefit
Ray Boulger, John Charcol mortgage brokers

Since March this year, the bank rate has been at the historically low level of just 0.5%.

So if the borrower's tracker deal has been pegged at 1% above bank rate - now 1.5% overall - they are currently paying £442 a month in capital and interest payments, compared with £769 two years ago when they were being charged at 6.75%.

That is a saving of £327 a month.

Someone whose loan deal matched the bank rate exactly, at 0.5%, would now be paying only £391.

Ray Boulger of mortgage brokers John Charcol reckons these borrowers will continue to save money for some time to come.

"The view increasingly is that interest rates will stay low for longer, so I think rates will be low for a long time and people on trackers will continue to benefit," he says.

Most tracker deals come to an end after a few years - typically two, three or five - and then revert to the lender's standard variable rate (SVR) as the default option.

With the average SVR currently standing at just under 4%, that means some borrowers suffer a jump in their repayments once their tracker rate expires.

But Mr Boulger points out that some big lenders, such as the Cheltenham & Gloucester, Nationwide, Halifax and Skipton, have offered loans where the follow-on rate is capped at no more than 2% or 3% above the prevailing bank rate.

"It's a rare example of the small print working in favour of the customer," he says.


Conventional wisdom has it that while mortgage borrowers have benefited, savers have suffered.

Coins fallinto a jar
The low level of savings rates has been deceptive

But the facts show that that is not true, if the savers in question have been canny enough to move their money into the accounts with the highest rates.

The key has been the gap between the rate on offer, and the current rate of inflation as measured by the retail prices index (RPI).

In September last year when RPI was 5%, the average savings account, where no notice was required for a withdrawal, offered just 3.6%, according to the financial information service Moneyfacts.

Taking into account the money lost to the 20% tax rate on savings, this meant that those people were facing a loss of 2.12% on their money each year.

Although the interest on an average no-notice savings account rate has now fallen to 0.84%, inflation has plunged even faster, to minus 1.4% on the RPI in September.

So again, adjusting for the impact of tax, this means that these borrowers are now making a net 2.07% a year.

The situation is much better for those who have kept an eye on the ever-fluctuating savings scene, and have moved their money to the highest paying no-notice accounts.

A year ago these offered 6.51% and gave their savers a return, after inflation and tax, of just 0.79%.

Now, although the best headline rates for these accounts have fallen to about 3.3%, the plunge in the inflation rate means the savers are now getting a much better real return of 4.53%, after inflation and tax.

"Since May savings rates, especially those offered by banks, have gone up to get more funding than ever for savers," says Michelle Slade of Moneyfacts.

"The market has become competitive and rates have become attractive as banks try to replace the funds they can no longer borrow from the wholesale financial markets," she adds.

So, as long as lenders are desperate to raise funds, this situation may continue.

But be warned.

You will not get these rates if you simply leave your money in the account you opened a few years ago.

More than half of all savings accounts - 53% of them Moneyfacts says - in fact pay less in interest than the bank rate.

For instance, the popular Liquid Gold account with the Halifax, once widely advertised, still has millions of account holders even though it offers just 0.05% interest a year.

So inertia is the saver's enemy.


One group of people whose spending has been directly subsidised by the government has been car buyers.

A car being scrapped in a breakers yard in Harrow, North West London.
Manufacturers will still have to devise decent offers to keep people interested in buying a new car
Kieren Puffett, Parker's car guide

Desperate to stop sales of new cars coming to a complete halt, the government copied the example of the US, German and French authorities and brought in a scrappage scheme.

In essence this gave people with a car older then 10 years a guaranteed trade-in value of at least £2,000, half funded by the government, the other half funded by the car manufacturers.

So far 254,000 cars have been sold under the scheme, using up most of the initial £300m the government committed to it.

A further £100m has been chucked into that pot by the government, so another 100,000 or so people may gain from it.

Who has taken most advantage so far?

"The anecdotal evidence suggests it has been people aged between 40 and 60, with cash in the bank," says Kieren Puffett, editor of Parker's car guide.

The big sellers have been small city cars such as the Ford Ka, Ford Fiesta and the Hyundai i10 and i20.

One knock-on effect of all that scrapping has been to help push up the prices of used cars, so those in search of a cheap run-around have been disadvantaged.

But Mr Puffet thinks the scheme has changed the attitude of some would-be buyers.

"Most people hate haggling but the scheme has empowered people to walk in to a dealer and ask for a £2,000 discount."

What will happen when the scrappage scheme ends some time in the next year?

"That depends on the economy," says Mr Puffett.

"If loans are more accessible and people are more confident sales should at least continue at current levels, but I think manufacturers will still have to devise decent offers to keep people interested in buying a new car."


All this talk of savings rates and buying new cars may seem a bit hollow to anyone who has lost their job or had their pay frozen or cut.

But pay expert Alastair Hatchett at Incomes Data Services (IDS) thinks that the recent slowdown in the rise in unemployment may continue.

That has been partly because , in his view, many employers in the private sector took emergency action earlier this year to save money by freezing pay.

"About a third of private sector firms have had pay freezes and two-thirds have still had pay rises," says Mr Hatchett.

"There have been fewer than 10 examples of companies actually cutting basic pay rates," he points out.

Where earnings have been cut it has been due mainly to short-time working, as in the car industry, with cuts in shift allowances and the disappearance of overtime.

If the economy is in fact coming out of recession, Mr Hatchett says, then pay rises may resume for more workers.

"I think it will be rare for people to have two years of a pay freeze," he says.

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