Lack of interest
VICKY SHAW LOOKS AT THE IMPACT OF 10 YEARS WITHOUT AN INTEREST RATE RISE
IT’S now been a whole decade since the last time interest rates were increased by the Bank of England.
In July 2007, rates were increased by 5.5% to 5.75% – and since then, there has been a series of rate cuts.
So what’s been the impact for savers and borrowers – and how could you improve your financial situation?
SAVERS HAVE BEEN HIT HARD
HARGREAVES Lansdown has carried out analysis into the impact of descending rates, which has left the Bank of England base rate at a record low of 0.25%.
For cash savers, the paltry returns available mean £1,000 stashed in a typical instant access account over the past 10 years would be worth just £878 in today’s money, once the eroding impact of inflation is also taken into account.
And a huge £179bn is sitting in accounts earning zero interest – up from £23 billion 10 years ago.
In contrast to the situation for cash savers, the same £1,000 investment in the UK stock market in July 2007 could now be worth around £1,323 after adjusting for inflation, Hargreaves Lansdown calculates.
...WHILE BORROWERS HAVE BENEFITED
CASH savers have been feeling the pinch, but borrowers have seen the cost of their repayments kept relatively affordable with 0% credit card deals and record low mortgage rates in recent years.
The typical mortgage rate has fallen from 5.8% in July 2007 to 2.6% by July 2017, according to Hargreaves Lansdown’s analysis.
BUT STRONG GROWTH IN CONSUMER CREDIT HAS RAISED CONCERNS
BANK OF ENGLAND figures have shown consumer credit, which includes credit card, personal loan and overdraft borrowing, has been growing recently.
This has fuelled concerns that, as living costs rise, people could become over-reliant on credit – leaving them vulnerable.
Significantly, there have been signs of regulators moving to tighten up on lending.
The Bank of England has told lenders to prove they are not taking on too much risk.
FEARS SOME PEOPLE COULD BE IN FOR A ‘NASTY WAKE-UP CALL’
THE period of lower rates for longer means around eight million Britons have never seen an interest rate rise by the Bank of England in their adult lives.
Alec Pillmoor, a personal insolvency partner at audit, tax and consulting firm RSM, says: “This new generation of borrowers could well get a nasty wake-up call.
“Those who have been tempted by attractive loan and credit card deals, car finance offers and low-rate mortgages may well find that any such rise could leave them with less cash being available to meet repayments when they fall due. Those who are struggling now would do well to consider reining in any additional borrowing.”
SO WHAT SHOULD WE BE DOING?
LAITH KHALAF, a senior analyst at Hargreaves Lansdown, says savers can potentially make their money go further, if they: SHOP around for the best rates. Sometimes it’s easy to just leave cash in your current account, but chances are you could be doing better from a savings account. MAKE sure cash is held tax efficiently. Low interest rates and the new savings allowance have made people question the purpose of a cash Isa, but interest rates can rise and a cash Isa offers some future-proofing for your savings. CONSIDER a stocks and shares Isa if you don’t need the money soon, and can leave it invested for at least five to 10 years. Rates of return are higher, but so is the risk so you need to be willing to accept the ups and downs of the market. Borrowers should also make sure their debt is affordable even if interest rates rise, so they should work out whether they have some slack in their household budget which could be used if repayment costs do start to increase. Laith says: “Clearly paying down debt is also advisable, starting with the balances on which you pay the highest interest first.”
HOW... CAN SPENDERS TURN INTO SAVERS?
NEARLY one in three (30%) of us describe ourselves as “spenders”, according to a new survey.
The research, from Leeds Building Society, found many of us go on a shopping spree just to cheer ourselves up – with women more likely to admit to this than men.
One in three (33%) of women say they sometimes shop to make themselves happier when they’re feeling downbeat, compared with one in seven (14%) men.
One in five (20%) generous women say most of their cash goes on gifts for other people, as do nearly one in 10 (9%) men.
But the survey also shows the effects of this form of pick-me-up is often short-lived. Two-fifths (41%) of women often feel guilty about their purchases, compared with 23% of men.
BUT YOU CAN TURN YOUR HABITS AROUND...
LEEDS Building Society has teamed up with consultant psychologist Dr Frank Ryan, to provide tips for those struggling to keep their money in their wallet:
Become a willpower “miser”.
After repeated decision-making your willpower can be reduced. In many supermarkets, for example, vegetables and salads are the first items you will encounter and select – but as you approach the checkout, you’ll encounter temptation from sweets, treats and glossy magazines as you queue.
Make decisions on what you’re going to buy in advance.
Consider making a shopping list so you’ll remember what you need.
If you’re tempted to spend while out shopping, distract yourself.
The impulse to buy something is often short-lived and can fade in five to 10 minutes.