Is the UK ‘better off’ as the Base Rate Remains Stagnant?

by Mark Johnston

The Bank of England has decided to keep the base rate at a record low of 0.5% for the 34th consecutive month.

Recent figures from the Bank of England suggest that Britain’s home owners have collectively saved more than half a trillion pounds in mortgage interest payments as a result of the low interest rates. This is equivalent to around £50,000 per borrower.

A low base rate is especially good news for home owners who are currently on a variable rate mortgage, as their repayments will often line up with the Bank of England’s base rate.

Low interest rates are also good news for potential first time buyers as they can look at variable mortgages to help them on to the property ladder. Well that is of course providing they can save up the large deposits that are now the norm.

According to the mortgage brokers SPF private clients “from 2004 to 2007 the average lifetime tracker mortgage charged bank rate plus 0.7%, meaning the actual rate at the time was 6.2%. However, the interest rate now been paid is just 1.2%

As a result of this, monthly repayments on the average £250,000 lifetime tracker mortgage have fallen from £1,292 to £250 (on an interest only basis).

On the whole in the 3 years to December 2011, UK mortgage holders paid a total of £1,328 billion in interest. However in the 3 years up to March 2009, before the base rate was cut to 0.5%, mortgage interest payments totalled £1,897 billion, a difference of £596 billion or an average of £50,820 for each of Britain’s 11.2 million mortgages.

Unfortunately not all property owners have gained through low interest rates, most data assumes that all mortgage holders are on ‘rock bottom’ tracker rates when in fact many borrowers are actually on fixed or capped rates, so therefore do not benefit from the low base rate.

These saving have been handed at a time of strong inflation which is eroding the effect of any cash surplus.

High inflation has a knock on effect on the UK housing market as it means that the value of properties continues to fall. In light of this the Bank of England is scheduled to meet to review the rate of inflation and many experts believe that inflation will fall, which in turn will bring an element of hope to the housing market.

Although the low base rate has allowed some mortgage holder to gain, data has shown that they do this at the expense of savers in the UK.

Mortgage holders are certainly in a much better position than savers despite the fact that savers vastly outnumber borrowers.

Savers on the whole received a total of £975 billion in the 3 years between January 2006 and December 2008, but over the following 3 years when the base rate fell to 0.5% their income were reduced to £496 billion, which amounts to a fall of £479 billion.

Ros Altmann, the director general of Saga, said that it seems “official policy is to take money from people who have it and give it to those who borrow too much”.

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