Feeling the pinch? We’ve got tips on getting a better deal
Mortgage rates have fallen to record lows while £179 billion is sitting in savers’ accounts earning no interest. We look at the impact of 10 years without an increase in interest rates.
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?
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 £23bn 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.
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.
Bank of England figures have shown consumer credit, which includes credit card, personal loan and overdraft borrowing, has been growing strongly 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
The average number of homes for sale on surveyors’ books fell to just over 42 on average per branch in June – the lowest since the survey by the Royal Institution of Chartered Surveyors (Rics) started in 1978. England has told lenders to prove they are not taking on too much risk. The period of longer rates for lower 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 lowrate 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.”
Laith Khalaf, a senior analyst at Hargreaves Lansdown, says savers can potentially make their money go further.
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 your 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.
The Bank of England in London