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Better Up or Better Down?
Better Up or Better Down?
This week saw 2009’s first cut in interest rates when the Bank of England brought interest rates in the UK to a historic low of just 1.5%. With US rates already at the bare minimum of 0.25%, financial experts consider it to be only a matter of time before the European Central Bank drops the eurozone’s 2.5%.
Recent interest rate slashes are designed to encourage spending and kick-start the failing economies in many countries. But does the individual really benefit from the cut?
The advantages are obvious for those with home loans, but only for those with tracker or variable-rate loans (around half the UK’s mortgage holders) and not always. As consumers have noted in recent months, lenders are generally slow to pass on interest rate cuts to mortgage holders and some never do. In addition, recent falls in interest rates mean that some tracker loans have already reached their minimum rate (known as the ‘collar’).
Falling interest rates are often good news for first-time mortgage holders, but low rates can mean banks are less keen to offer mortgages. Many lenders worldwide are currently offering few tracker loans and asking the borrower for large deposits – 40% of the property price is becoming increasingly common.
Further benefits of lower interest rates are that banks are more willing to lend money to other financial entities which, in turn, leads to more money in circulation. Business lending rates are also reduced, which as Ken Thorkildsen, Director of Obelisk Private Finance, points out, means jobs should be safer – a vital consideration at the moment when many countries are seeing their unemployment rates soar.
However, falling interest rates are not good news for everyone – those with savings are bearing the brunt. While banks are reluctant to reduce their mortgage lending rates, they are quick to drop the interest offered on savings accounts. For example, in the UK over one third of savings accounts for deposits of ₤5,000 or over pay interest at just 1% or lower. This means that the return on savings can be considerably below the rate of inflation. Pensioners with savings have been particularly hard hit.
Low interest rates also mean there will be less investment in UK banks, although nowadays few countries offer high interest. Brazil is one exception with rates of around 12%.
“In general,” says Ken, “there tend to be more savers in a country than borrowers and this means that the disadvantages of lower interest rates tend to affect more people than those who are benefitted.”
However, it looks as if for the time being interest rates are set to be at all-time lows in both Europe and North America. “As long as banks pass on cuts in interest rates to the mortgage holder, there will be benefits,” says Ken. “For the saver, I would recommend alternatives to savings accounts such as bonds and for those with large sums of money currently attracting little interest,investment in property is well worth considering.”
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