Savings |
|
Your Money > Savings Articles > Will interest rates...
|
|
By Richard Evans
For the average mortgage borrower that means a saving of around £250 a month. But given the current climate, is this wishful thinking? When the Government announced its extraordinary bailout of Britain's banks earlier this week, it made clear what effect it wanted the rescue to have on ordinary consumers: "To restore immediately," in the Prime Minister's words, "the availability of loans to consumers at last year's levels." In other words, not only is Mr Brown determined to prevent our banks from going bust, he also wants the markets for mortgages and unsecured borrowing restored to something like their pre-credit-crisis condition. But will the infusion of taxpayers' cash - on top of last week's half-point cut in interest rates from the Bank of England - be enough to bring this about? That depends on inflation. This is the reason why The Bank of England has not already cut rates by a larger margin, as it must try to meet the Government's inflation target of 2 per cent. So the news yesterday that the cost of living is increasing by 5.2 per cent has cast a big cloud over consumers' borrowing prospects. But there is a silver lining: that figure is now expected to fall steadily. And the further it falls, the further interest rates can fall too.
First time in a decade If the Bank did move to cut rates again by half a point alone this year, it would be the first time in over a decade this has happened. The problem for mortgage borrowers is there is no guarantee that any falls will be passed onto consumers. Take last week. After the Bank's decision, while some mortgage lenders negated its effect for new customers by increasing the margin on tracker loans by the same half a percentage point, others have failed so far to pass on the cut to borrowers with variable-rate mortgages. Meanwhile, the cost of wholesale interest rates - funds that banks rely on to raise capital - have remained stubbornly high. "The move by the government looks to be aggressive, with a firm intention to kick-start domestic lending," says Paul Niven of F&C Asset Management. But the Association of Mortgage Intermediaries says: "We hope this is not too, little too late as far as consumers are concerned." "The market and economists expect further cuts in base rate," says Richard Morea of London & Country, the mortgage broker, pointing to movements in "swap rates", which determine the price of fixed-rate mortgages. "Even before last week's cut, some were forecasting base rate to be around 3.75 per cent or even lower by the end of next year." But given the reluctance of some lenders to pass on the half-point reduction, he adds, it is hard to tell whether any further cuts will be reflected in the rates that homeowners pay. "It will be an anxious wait for many borrowers, although most lenders' recent track record has been good," he says. Turning to the Government's rescue plan, he adds: "It's too early to tell whether the measures will have an impact on rates - it will take time." David Black of Defaqto, the financial data provider, says: "The main reason for the absence of credit in recent months has been the lack of liquidity on the part of the banks, and this should be addressed by [the government's] moves. While it may take a bit of time, credit should become easier to obtain." What about Credit Cards and Savers? But he thinks it unlikely that the cost of unsecured borrowing, via personal loans and credit cards, for example, will reduce markedly, especially for those with blemishes on their credit record. Savers could also be affected by recent moves to bolster the banking sector. They have been offered attractive rates recently as banks scrambled for cash to fill the gap left by the disappearance of wholesale funding. If those markets return to normality, retail savings could be less in demand. "When the wholesale markets start operating normally again, the savings rates available will be affected," says Mr Black. "And the departure of the Icelandic banks, which have just gone bust, will reduce competition." He explains that savings rates have historically been set at a level below the Bank of England base rate, albeit with a handful of exceptions such as short-term introductory bonuses. "The past 12 months or so have been unique in flouting this relationship," says Mr Black. "When the wholesale market returns to normality, the rates offered by best-buy savings accounts will be substantially below their current levels." Useful links: |
Good news could be around the corner for borrowers. With some order restored to the banking sector, and interest rates already slashed from 5 to 4.5 per cent, experts are predicting that come Christmas the cost of borrowing could be less than 4 per cent - and could even fall to as low as 2 per cent next year, according to the Daily Mail.
| ||||||||||||||