The Base Rate
After much media speculation, we can now expect the world to end as today the Bank of England has announced an increase to base rates (voting 7-2 to do so). The rate is now 0.50% instead of 0.25%. This is the first rate rise since July 2007. Seriously – over 10 years ago! One would hope that this would benefit everyone with some cash in a savings account at the bank, but we all know better than that don’t we? What is far more likely to happen is that lending rates for mortgages will gradually begin to increase. The nations largest Building Society currently has a standard variable rate of 3.99% and their base rate tracker rate is 2.50%, both considerably above the actual base rate at the time. Banks are generally a bit worse. So lenders may be inclined to sit on their hands and do nothing (for fear of being berated by minnows like me) though I suspect they are more likely to gradually increase their standard variable rate. But we now live in a world of image preservation, so perhaps they won’t all rush to increase rates.
People with Cash Savings
Frankly, I wouldn’t hold out too much hope of an immediate improvement to your savings rate. Inflation is currently 3% and nobody is offering anything near that on an instant access basis. You could shop around, but its a bit of a pain for the equivalent of a round of drinks for the year – and don’t forget the “safety” of the FSCS limits. Alternatively if you have £100,000 or more we can put you in touch with a service that will do this for you (and likely improve your FSCS cover).
Borrowers
There has been much talk about the impact of rate increases on borrowers, who are generally people that are working and repaying debt (hopefully). It is certainly the case that the low interest rate environment may well have lulled some into believing it was always this way, anyone older than about 25 frankly should know otherwise.
There is a tendency to chastise people for “borrowing too much” when this subject is reported in the media. However consider for a moment a couple of facts. Wages have not increased very much over recent years, house prices have largely continued to rise, unchallenged, except perhaps to apply some nervous brakes due to Brexit. However as Kirsty and Phil would suggest, prices are reflective of location, location, location. People have had to borrow significantly to buy homes. Those without mortgages looking to move or simply sell are stuck in the same “market” one that is dominated by sentiment. Anyone that has bought property in the last few years will be aware of the pain created by a huge tax bill – Stamp Duty Land Tax (SDLT). This was used to attempt to control property prices from spiralling ever upwards, has it worked where you live?
The increase, if passed on, will create additional outgoings, just when inflation numbers appear to reflect what we all know – prices are rising. The stockmarket tends to do well whilst there is ample inflation, not always, but often. Inflation helps reduce the “real” value of debt, so Government may say they don’t like it, but it kind of does their job for them without even trying. Some will find life a bit harder, as of today or indeed most of the last 10 years, few people expect rates to increase dramatically and nobody is predicting interest rates that are high.
As I have said previously, clearing debt, however good the maths works for having some, has an emotional value that cannot be overstated. Ask anyone without a mortgage.
Dominic Thomas
Solomons IFA
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk