Saving & Debt: Base Rate Should Not Discourage Caution
on: May 13, 2009, 2:50 am
Author: Think Money
on the recent spate of base rate cuts - and the resulting 0.5%
base rate - financial solutions company Think Money pointed to
the potential implications of the Bank of England's actions over
recent months, and urged savers not to risk debt problems by turning their backs
the short term," a Think Money spokesperson began, "it's
important to realise that many people - the vast majority of the
country - haven't benefited from these cuts in any way at all.
A full 50% of the UK's 11.75 million mortgages are fixed-rate
deals, 40% tracker and 10% SVR (standard variable rate).
anyone on a fixed-rate mortgage won't benefit any more than someone
who's renting their home. As for SVR deals, lenders aren't obliged
to pass on any reductions, and many have passed on only part of
these cuts. Even people on tracker deals haven't universally seen
their interest rates drop by the full 4% since October, as many
of those deals have come up against their collar."
the longer term, there's the question of what lessons people will
take with them once the recession is over. Many people on fixed-rate
mortgages will be looking at the low rates on offer today, calculating
how much they could save if they switched and comparing this against
the cost of the early repayment charges they would pay if they
left their current mortgage early.
future, they may be unwilling to sign up to fixed-rate deals -
or at least reluctant to sign up to the longer-term fixed-rate
deals which come with more substantial charges for early repayment.
other words, some may be tempted to sign up to a tracker or SVR
deal the next time the base rate reaches 5 or 6%, believing that
another fall will soon follow. There's nothing inherently wrong
with variable deals, but they're not suitable for everyone: people
whose monthly finances can only just cover their mortgage payment
should think very carefully before committing themselves to a
deal with an interest rate that could go up as easily as down.
For people in that situation, erring on the side of caution -
and taking a fixed-rate mortgage - could be far more sensible."
other long-term effect of these base rate cuts, of course, could
be in the country's attitude to savings. Now that the average
interest rate on instant access accounts has plummeted to little
more than 0%, interest is simply not keeping pace with CPI (Consumer
Price Index) inflation - and for people who aren't paying variable
mortgages, this figure is more relevant than the RPI (Retail Price
would, however, stress that interest is by no means the only reason
people should build up their savings. With or without interest,
a savings account is its own reward, helping people cope with
financial challenges without running into debt problems.
so, the thought of watching savings shrink in real terms may be
enough to put many people off saving in a standard savings account.
This could be terrible news: whether they stop saving altogether
or feel they need to 'gamble' their money in higher-risk investments,
they could be leaving themselves open to all kinds of debt problems
in the future."
Resources for editors:
Money Debt page: http://www.thinkmoney.com/debt/
Contact Details: Website: http://www.thinkmoney.com/debt/
Melanie Taylor - 0800 074 4222
South Langworthy Road,
Salford Quays M50 2ZY