by Mark Johnston
The Bank of England have decided yet again to keep the base rate of 0.5% which has led to a mixed response from experts. Some feel a sustained low base rate will help the economy recover whilst others feel that it is damaging exactly what it is suppose to preserve.
Many homeowners will be happy that the base rate has been kept at 0.5% as they continue to pay a lot less back per month than they would although many fixed rate customers would probably prefer an increase otherwise they feel that they are paying more than they need to. That said though, the real loosers are those with savings especially the over 60’s who rely on life savings in deposit accounts to provide an income.
One individual who is benefiting from the low interest rates said: “I have to admit I am enjoying this extended mortgage holiday… been so long now am starting to forget what it was like to be hit with £1,400 a month mortgage. I switched it to a interest only tracker to get it to below £1K a month in 2005, then when interest rate were cut to 0.5% it fell to just £200 a month, which is even less than my council tax. Going to be tough when rates go back up to 6%, although i doubt we will see 6% rates before my mortgage needs to repaid in 2026.”
The low interest rate may also provide a helping hand to the struggling housing market. Housing economist Martin Ellis from the Halifax said: “Interest rates are likely to remain very low for an extended period, which will support the improved mortgage affordability position for homeowners. As a result, we do not expect to see a significant fall in house prices.”
The drop in monthly mortgage costs have certainly been welcomed by many. Historically the mortgage payments for borrowers accounted for 50% of their earnings , this has now dropped 20% to just 30%.
The real losers in having such a low interest rate aren’t borrowers but savers. A spokesperson for Aviva recently said: “Over the last six months, we have seen a significant increase in the number of over-55s who are worried about the rising cost of living. Inflationary pressures have become stronger over this period, while interest rates have remained at historically low levels. The Government’s Emergency Budget and Autumn Comprehensive Spending Review have also left this age group feeling nervous that they will receive less support from the State.”
Those with savings need to adopt to the new post financial crisis environment and find different ways to make their money work harder. Ian Lowes from Lowes Financial Management said: “Income is the want of many clients yet income paying investments in a low interest rate environment are at a premium. Whilst the likes of equity income and fixed interest funds are likely to be the default option for many, there may be a better way – income from gains.While many people want an income from their investments, what they actually need is a regular payment and that’s not necessarily the same thing.
“A growth orientated portfolio can still produce the ‘income’ needed by way of automated regular or, ad-hoc withdrawals. Such a strategy means that a more diversified range of investments can be utilised; providing greater opportunity, and potentially lowering the risk.”
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