£30bn Budget black hole will dwarf rate cut lift for Treasury
Winners and losers from Dr Carney’s crisis medicine
THE Treasury will save more than £1billion a year in interest on its debts after last week’s base rate cut by the Bank of England – but the sum will be dwarfed by a £30billion black hole in the Budget if the Bank’s forecasts for economic growth prove accurate.
The dramatic shortfall will form the backdrop to Chancellor Philip Hammond’s Autumn Statement, and will mean he may have to abandon his predecessor George Osborne’s debt and deficit targets.
The 0.25-percentage point base rate cut will bring down the cost of Government borrowing, providing a thin silver lining, but experts said the Bank’s warning that the economy would be 2.5 per cent smaller than previously expected by 2019 would mean a far lower tax take for the Treasury.
Carl Emmerson, deputy director of independent Budget researcher the Institute for Fiscal Studies, said: ‘Overall, the story will be one of a smaller economy, which means lower tax revenues and therefore more Government borrowing.
‘The Bank revised down GDP by 2.5 per cent. The rough model is that you multiply that by 0.7 to get how much extra borrowing the Government will require. That’s well over £30billion.’
On Government borrowing costs, he said: ‘One per cent off interest rates saves about £5billion, so 0.25 per cent means about £1.2billion.’
‘Hammond has two questions to answer. First, to what extent does he want to just live with higher borrowing or does he want to get back to Osborne’s targets at some point? Second, in the near term, because the economy is weak, does he want to do more that could mean easing off on austerity, or it could mean new measures that come in temporarily, like a cut in VAT.’
BANK of England Governor Mark Carney has taken drastic action to treat the ailing economy by cutting the base rate to a historic low of 0.25 per cent, among other measures. This has put mortgage borrowers in buoyant mood, with repayments set to tumble. But savers are in despair, as their returns will be squeezed still further. MARK SHOFFMAN and LAURA SHANNON provide a comprehensive wealth check.
BORROWERS
HUNDREDS of thousands of homeowners on tracker mortgages are set to be the biggest winners from Thursday’s base rate cut – as they watch their monthly payments drop.
Tracker mortgages follow the Bank of England base rate, so the quarter of a percentage point reduction means the monthly repayments on a 25-year repayment home loan of £150,000, based on June’s average tracker rate of 2.57 per cent a year, will fall from £683 to £663, saving borrowers £235 a year.
Some tracker deals last a set period, while others are lifetime trackers – with the deal in place for the full term of the loan.
Homeowners who have held on to a lifetime tracker deal since rates started to fall eight and a half years ago have seen repayments drop by a third from an average of 5.98 per cent in February 2008 – when monthly payments were £965 in the case above. David Hollingworth, of mortgage broker London & Country, says: ‘We saw enough customers opt for lifetime trackers at the last peak to suggest there are hundreds of thousands in this position.
‘In the summer of 2007, Chesham Building Society offered a lifetime tracker at just 0.09 of a percentage point above the base rate, while Barclays and Cheltenham & Gloucester offered 0.17 of a percentage point, which will now see annual interest rates of just 0.34 and 0.42 per cent respectively.’
According to the Council of Mortgage Lenders, 1.5million homeowners have trackers, accounting for 20 per cent of mortgage lending.
Some lenders use their own rate in tracker deals. For example, Barclays tracker mortgages follow the ‘Barclays Bank Base Rate’, but this typically mirrors the Bank of England base rate and the lender has promised that it will reflect the cut.
However, other lenders have limits on how low a rate can go, known as a ‘collar’, so it is important to check the small print of your mortgage deal or ask your lender before cracking open the champagne.
Homeowners on a standard variable rate – typically those who did not remortgage when their original deal expired – may not benefit to the same degree. Lenders often change their standard rates independent of the Bank of England. And at an average of 4.8 per cent, they are higher than many fixed-rate deals on offer.
Some lenders announced last week they would pass on the full 0.25 percentage point cut to standard rate customers, including Barclays, Halifax and Coventry Building Society.
Many borrowers, however, having heeded Carney’s past warnings of rate rises, opted for fixed-rate deals. The percentage of new borrowers taking out fixed-rate mortgages has risen from 76 per cent in the fourth quarter of 2012 to 91 per cent today, while the percentage of new tracker loans has dropped from 15 per cent to 8 per cent over the same period.
Most fixed-rate borrowers will be unaffected by the base rate cut, but they should not kick themselves, says Andrew Montlake, director of Coreco Mortgage Brokers.
He says: ‘The good news is that socalled “swap” rates – on which most
fixed rates are priced – had already priced in a cut to this level. Fixed rates are not going to get that much cheaper. And remember that the main reason for taking a fixed rate is one of security.’
The average two-year fix has fallen from 4.79 per cent in March 2009 to 2.48 per cent, according to comparison website Moneyfacts.
Borrowers with personal loans will be mostly unaffected by the cut, though new borrowers should see more competitive deals.
Credit card providers are notorious for keeping their rates high even when the base rate is low. For people who are highly organised, there are plenty of zero per cent deals available, if they are disciplined enough to pay off all borrowing during the zero interest period.
SAVERS
SAVAGE cuts to the rates paid on high street savings accounts are now seen as inevitable – and will punish the millions funding their retirement from cash savings.
Those setting money aside for future financial goals will also find their ambitions harder than ever to achieve, especially as the Monetary Policy Committee, which decides the Bank of England base rate, indicated it could cut the rate to a little above zero per cent in coming months.
Banks and building societies have already ruthlessly applied rate cuts to accounts – with 117 accounts primed for a chop even before last week’s announcement.
Many accounts already pay no or 0.01 per cent interest, as highlighted by the Financial Conduct Authority. The regulator aims to shine a light on poor saving deals as part of its ‘sunlight remedy’.
Andrew Gall, chief economist for the Building Societies Association, warns: ‘While a blanket cut in line with the base rate is not anticipated across all products, some rates will inevitably fall.’
The true impact of the cut may only take hold as summer fades.
Susan Hannums, at advice firm Savings-Champion, says: ‘Savers continue to be the sacrificial lambs to boost the economy and support borrowers. Providers no longer need a change in the base rate to cut savings rates, but we suspect most providers will take full advantage of this – and we expect things to accelerate. In a month the floodgates may open.’
The average easy access savings account pays 0.65 per cent a year. A reduction to mirror the base rate fall would strip two-fifths of returns. So a cut from 0.65 to 0.4 per cent would take £125 of interest from a £50,000 pot of savings.
Retired project manager Judith Lacy says the rate cut is ‘a blow’ to people living on savings income.
She adds: ‘It is worrying – and I know a lot of retirees who will feel the same. People might have to chip away at their capital savings more than they would like to.’
Judith, 51, a widow from Manchester, holds cash Isas and Government bonds but has taken a bit more risk with some of her savings by investing in peer-to-peer loans. With these savers lend to firms or individuals who need to borrow via online platforms such as Rate-Setter and Zopa, cutting out banks.
Judith earns between 3 and 6 per cent, but is cautious of putting too much in, because investors rely on borrowers repaying their debts.
Retirees looking for a stable income from an annuity have also been hit by the Bank of England’s decision to pump more money into the economy. Known as quantitative easing, this involves the Bank buying low-risk gilts – Government bonds – and this demand lowers their yield. This hits annuity rates as annuity providers buy gilts to provide a stable, guaranteed income based on gilt yields.
Richard Eagling, head of pensions at Moneyfacts, says: ‘It seems inevitable that annuity rates will take a hit.’