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Flat as a base rate

Borrowing | Mortgage

By Justin Modray, published 04 March 2010.
Helpful? 0

Today’s decision by the Bank of England to maintain its base interest rate at 0.5% marks a year at this level. During this time we’ve seen the cost of borrowing generally rise slightly and a small decline in savings rates. Why?

Today’s decision by the Bank of England to maintain its base interest rate at 0.5% marks a year at this level. During this time we’ve seen the cost of borrowing generally rise slightly and a small decline in savings rates.

Nervous lenders

Not all borrowers have been hit. If you’re lucky enough to have a mortgage linked to the base rate then it’s probably been quite a good year. But some other mortgage rates, along with typical credit card, loan and overdraft rates have crept up.

Why? Most likely because there’s been a sharp increase in the number of borrowers failing to repay what they owe. Banks’ willingness to lend does seem to be rising, slowly, but lenders are being picky and generally demanding a higher premium to compensate for a greater perceived risk of not being repaid.

Looking at the Government’s insolvency figures it’s not hard to see why. Over 2009 the number of individual insolvencies increased by more than a quarter on the previous year hitting 134,142, equal to around 1 in every 320 adults. These are worrying figures and there could be more bad news to come before it starts to get better.

Stingy cash ISAs

Meanwhile banks and building societies have mostly been pruning back the rates they pay on savings accounts, especially cash ISAs. I think the main reason behind this is simply because they can. They’re not as desperate to attract funds compared to a year ago and cash ISAs are an easy target; the tax benefits mean savers are a little less rate sensitive versus conventional accounts. A few higher rates (comprising mostly of temporary bonuses) have recently popped up to catch some money either side of the tax year end, but they’ll probably fade in a couple of months.

When will the base rate rise?

For as long as our economy is struggling then there’s big pressure on the Bank of England to keep rates where they are. An increase would almost certainly damage our prospects of recovery.

Rising inflation is a threat, as hiking interest rates is the usual weapon of choice to keep inflation at bay, but the drivers behind the recent rise, oil and VAT, don’t really warrant this approach. In any case, the impact of higher oil prices on annual inflation figures should start to recede over the year (if prices are stable) and the impact of the VAT rise will fall away next January.

I’d therefore be surprised if we see a rate rise this year. And if it does I can’t see it being more than 0.5%.

Meanwhile, what about my savings and debt?

If your debt is costing you more than you’re earning on savings then consider using some savings to repay debt, provided there’s no prohibitive penalties and you still leave some money set aside for emergencies. Otherwise it’s simply a case of hunting out the best deals, as always.

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