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Seven years of low interest rates have 'cost savers up to £160bn' Seven years of low interest rates have 'cost savers up to £160bn'
(35 minutes later)
Seven years of quantitative easing and record low interest rates have cost savers an estimated £160bn, but supported strong increases in the prices of property, stocks and bonds. Seven years of quantitative easing (QE) and record low interest rates have cost savers an estimated £160bn, but supported strong increases in the prices of property, stocks and bonds.
Analysis by financial firm Hargreaves Lansdown suggests that up to £106bn is being held in accounts that pay no interest, as loose monetary policy has “annihilated” returns on cash. Analysis by financial firm Hargreaves Lansdown suggests that up to £106bn is being held in accounts paying no interest, as loose monetary policy has “annihilated” returns on cash.
Saturday 5 March marks the seventh anniversary of the day the Bank of England cut interest rates to its current historic low. The move followed five other sharp reductions as it tried to keep a lid on the growing financial crisis – between September 2008 and March 2009 the base rate fell from 5% to 0.5%. Saturday 5 March marks the seventh anniversary of the day the Bank of England cut interest rates to their current historic low. The move followed five other sharp reductions as the Bank tried to keep a lid on the growing financial crisis – between September 2008 and March 2009 the base rate fell from 5% to 0.5%.
At the same time, the Bank kicked off a programme of quantitative easing (QE), which saw money printed to buy government bonds (gilts) and corporate debt, in a bid to prop up the economy. So far, the programme of QE has been worth £375bn. At the same time, the Bank kicked off a programme of QE, which saw money printed to buy government bonds (gilts) and corporate debt, in an attempt to prop up the economy. So far, the programme of QE has been worth £375bn.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Loose monetary policy has supported rises in stock, bond and property prices over the past seven years, while annihilating the returns on cash.” Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “Loose monetary policy has supported rises in stock, bond and property prices over the past seven years, while annihilating the returns on cash.”
MortgagesMortgages
Hargreaves Lansdown said the average mortgage rate had fallen by 31% over that period, saving borrowers £270 a month on a £200,000 repayment month. Access to cheap credit has supported the housing market, leading to a 32% rise in prices over the same period. Hargreaves Lansdown said the average mortgage rate had fallen by 31% over that period, saving borrowers £270 a month on a £200,000 repayment. Access to cheap credit has supported the housing market, leading to a 32% rise in prices over the same period.
Figures from the Bank show that for a borrower with a 25% deposit, the average cost of a five-year fixed-rate mortgage has plummeted since 2009. At the time the base rate was cut it stood at 3.98%, but now borrowers are paying an average of 2.77%. Meanwhile, rates on two-year deals have halved, from an average of 3.98% seven years ago to 1.95% today. Figures from the Bank show that for a borrower with a 25% deposit, the average cost of a five-year fixed rate mortgage has plummeted since 2009. At the time the base rate was cut, it stood at 3.98%, but now borrowers are paying an average of 2.77%. Meanwhile, rates on two-year deals have halved, from an average of 3.98% seven years ago to 1.95% today.
Not much of that fall was registered immediately. Mortgage rates started falling after the first base rate cut in October 2008, but began creeping up as the credit crisis took hold and banks stopped lending to each other. Lenders became fussier, offering loans only to the most creditworthy borrowers who had considerable deposits. Not much of that fall was registered immediately. Mortgage rates started coming fown after the first base rate cut in October 2008, but began creeping up as the credit crisis took hold and banks stopped lending to each other. Lenders became fussier, offering loans only to the most creditworthy borrowers who had considerable deposits.
In 2012, the government attempted to kickstart the market with the Funding for Lending scheme, offering banks and building societies access to cash that they could lend to small firms and individuals. Rates have since tumbled and competition in the market has kept them low.In 2012, the government attempted to kickstart the market with the Funding for Lending scheme, offering banks and building societies access to cash that they could lend to small firms and individuals. Rates have since tumbled and competition in the market has kept them low.
“Mortgage costs have fallen significantly from pre-crisis levels, but this positive effect is laced with an underlying risk,” said Khalaf. “If borrowers get too comfortable taking on high levels of debt at low interest rates, they could be in for a nasty shock if and when rates rise.”“Mortgage costs have fallen significantly from pre-crisis levels, but this positive effect is laced with an underlying risk,” said Khalaf. “If borrowers get too comfortable taking on high levels of debt at low interest rates, they could be in for a nasty shock if and when rates rise.”
David Hollingworth, of mortgage broker London & Country, said borrowers should bear in mind that although the base rate had been at 0.5% for a long time, “it’s not normal and at some point it will change”. He said the 1.8 million first-time buyers who had entered the market over the past seven years were not naive but “you would urge them to prepare for the future and when they can to maybe pay more off their mortgage each month or reduce the term”.David Hollingworth, of mortgage broker London & Country, said borrowers should bear in mind that although the base rate had been at 0.5% for a long time, “it’s not normal and at some point it will change”. He said the 1.8 million first-time buyers who had entered the market over the past seven years were not naive but “you would urge them to prepare for the future and when they can to maybe pay more off their mortgage each month or reduce the term”.
SaversSavers
In November 2007, before the Bank started to cut interest rates, the average return on a one-year fixed-rate savings account was 5.99%. As the base rate fell, so did savers’ returns, and by the end of March 2009, weeks after it hit the record low of 0.5%, the average rate had dropped to 2.7%. In November 2007, before the Bank started to cut interest rates, the average return on a one-year fixed-rate savings account was 5.99%. As the base rate fell, so did savers’ returns, and by the end of March 2009, weeks after interest rates hit the record low of 0.5%, the average rate had dropped to 2.7%.
After more than three years hovering around that level, it started to fall again, as the Funding for Lending scheme came into effect. With no need to attract cash from retail deposits, the amount banks were willing to offer started to fall. Within six months of the scheme’s launch, the average rate on a one-year fixed-rate savings account fell by 0.5 percentage points to 2.18%. It continued to drop as the scheme was more widely used and encouraged banks to lend to each other. After more than three years hovering around that level, it started to fall again, as Funding for Lending came into effect. With no need to attract cash from retail deposits, the amount banks were willing to offer started to fall. Within six months of the scheme’s launch, the average rate on a one-year fixed rate savings account fell by 0.5 percentage points to 2.18%. It continued to drop as the scheme was more widely used and encouraged banks to lend to each other.
Hargreaves Lansdown said it believed savers may have lost out on a total of £160bn since 2009 – the equivalent of £6,000 for every household. Meanwhile, the amount of money held in non-interest-bearing deposit accounts has almost trebled since March 2009. Hargreaves Lansdown said it believed that savers may have lost out on a total of £160bn since 2009 – the equivalent of £6,000 for every household. Meanwhile, the amount of money held in non-interest-bearing deposit accounts has almost trebled since March 2009.
Susan Hannums, director of advice firm Savings Champion, said savers had suffered “seven long years of pain”. “Few people would have thought that rates would have remained at this low level for so long and even less the knock-on effects of the financial crisis could have had on savers,” she said. “Today, we’ve hit over 4,000 rate reductions for existing savers, with little sign of this practice slowing down.” Susan Hannums, the director of advice firm Savings Champion, said savers had suffered “seven long years of pain”. “Few people would have thought that rates would have remained at this low level for so long and even less the knock-on effects the financial crisis could have had on savers,” she said. “Today, we’ve hit over 4,000 rate reductions for existing savers, with little sign of this practice slowing down.”
And Ian Gordon, banking analyst at Investec, said: “My take on Funding for Lending is that it had an indirect effect on savings rates.” Ian Gordon, a banking analyst at Investec, said: “My take on Funding for Lending is that it had an indirect effect on savings rates.”
He added that its aim of acting as a confidence boost to banks worked, meaning that even though in the early years it didn’t actually achieve any increase in lending, it reduced the cost of borrowing for those firms. “Fast forward to today and what hasn’t changed is that the banks’ balance sheets are still strong.” He added that its aim of acting as a confidence boost to banks worked, meaning that although in the early years it did not achieve any increase in lending, the scheme reduced the cost of borrowing for those companies. “Fast forward to today, and what hasn’t changed is that the banks’ balance sheets are still strong.”
Gordon said banks no longer needed to attract savers’ money to lend out. In the event of a rate rise “the banks may be strong-armed into passing on the first one or two increases, but over time I expect they won’t be. The outlook for depositers is bleak. It’s bleak now and it will get bleaker.” Gordon said banks no longer needed to attract savers’ money to lend out. In the event of a rate rise, “the banks may be strong-armed into passing on the first one or two increases, but over time I expect they won’t be. The outlook for depositers is bleak. It’s bleak now and it will get bleaker.”
InvestorsInvestors
Despite recent jitters in the stock market, investors in UK shares have seen a return of 87%, or 138% if they reinvested the dividends, according to Hargreaves Lansdown’s figures.Despite recent jitters in the stock market, investors in UK shares have seen a return of 87%, or 138% if they reinvested the dividends, according to Hargreaves Lansdown’s figures.
QE has helped supply both liquidity and confidence to markets, it said, while low interest rates have helped companies access debt markets cheaply. At a time of miserable savings rates, firms paying dividends look appealing to investors. QE has helped supply liquidity and confidence to markets, it said, while low interest rates have helped companies access debt markets cheaply. At a time of miserable savings rates, firms paying dividends look appealing to investors.
Khalaf said this search for returns had led to strong performances from stocks such as Unilever, Reckitt Benckiser and British American Tobacco, “whose stable dividend payments have seen investors flock to them as ‘bond proxies’, seeing as bonds are paying so little interest”.Khalaf said this search for returns had led to strong performances from stocks such as Unilever, Reckitt Benckiser and British American Tobacco, “whose stable dividend payments have seen investors flock to them as ‘bond proxies’, seeing as bonds are paying so little interest”.