Record Low Base Rate Four Years On - The Winners and Losers
CHESTER, England, February 27, 2013 /PRNewswire/ --
- With four years of low base rate - 78 per cent say it's made them more financially aware and 10 per cent worse off due to lower savings rates
- Introduction of Bank of England Funding for Lending Scheme has led to significant rate changes in mortgage and savings markets
With March 7 marking the fourth anniversary since Bank of England base rate dropped to a record low of 0.5 per cent, analysis by MoneySupermarket has shown that the cost of borrowing on mortgages and personal loans has fallen dramatically over the period, while savings rates have plummeted further since the Funding for Lending Scheme was introduced in August 2012.
Until the Funding for Lending Scheme was introduced, savers were benefiting from rates over six times that of base rate. In December 2011, the average top five easy access savings rate hit a high of 3.09 per cent but rates have dropped by over a third to just 1.93 per cent currently. Mortgage borrowers have fared much better, particularly for those looking to fix, with rates currently at an all-time low, while the number of products available to those with smaller deposits has continued to rise. However, the low base rate environment has led to over three quarters (78 per cent) of people saying they are more financially aware as a result of the base rate remaining flat according to a MoneySupermarket poll* of 2,000 site users.
In the mortgage market, rates are on the decline, dropping significantly since base rate fell. Average two-year tracker rates have hit a low of 2.50 per cent in February 2013, 0.81 per cent lower than in March 2009. For fixed mortgages, average rates on two and three-year fixed rate mortgages have also declined following base rate cut, with rates falling to record lows of 2.34 per cent for a two-year fix, and 2.89 for a three-year fix. This is a drop of 1.45 per cent and 1.63 per cent respectively since March 2009.
Although mortgage rates are at their lowest level ever, a MoneySupermarket site poll showed only seven per cent of respondents say they are better off due to lower mortgage rates.
Clare Francis, mortgage expert at MoneySupermarket, said: "On the face of it, borrowers are the winners of the low interest rate environment, with mortgage rates falling to an all-time low and the number of products available increasing by 37 per cent** over the last seven months as a result of the Bank of England's Funding for Lending Scheme. However, this doesn't tell the full story as many borrowers have been locked out of the market for much of the credit crunch due to falling house prices and the reluctance of lenders to lend, particularly to those with smaller deposits.
"Those borrowers fortunate enough to have sizeable equity in their homes are the ones who have been able to take advantage of lower mortgage rates over the last four years. It is only since the introduction of the Funding for Lending Scheme have we seen the market opening up for borrowers as lenders open their books to those with smaller deposits. Average mortgage rates have come down as a result, and over recent weeks we have seen average rates for fixed rate products hit an all-time low.
"One thing to watch out for though, is the cost of setting up a mortgage. Some deals have arrangement fees of up to £2,000 and these are often masked by a low headline rate. The impact of the fee on the total cost of the mortgage may mean it's actually cheaper to take a loan with a slightly higher rate but lower set-up costs. Borrowers should make sure they factor this in when comparing mortgage deals."
For those looking for borrow over £7,500 on a personal loan, we have seen some significant savings in the cost of borrowing over the past four years. The current lowest rate is 5.10 per cent APR, while in March 2009 the top deal was offering a rate of 7.90 per cent APR. Although rates on personal loans below £7,500 remain expensive, the current average rate on the top 10 personal loan at £5,000 is 7.56 per cent compared to 9.23 per cent in March 2009.
Borrowers looking to transfer existing debts to a market leading credit card have been able to benefit from some of the longest balance transfer deals on record. The current average balance transfer length is 24.4 months compared to just 14.7 months back in March 2009. However, the average rate on credit cards has gone up by 1.47 per cent to 17.56 per cent APR currently.
Kevin Mountford, head of banking at MoneySupermarket, said: "Personal loan rates have fallen dramatically over the past four years, however it is worth being aware that the best deals are generally only available to consumers with excellent credit histories. Before applying for a loan, or for any credit product, it's a good idea to check your credit history so you have a clearer idea of the products you are more likely to be accepted for based on your credit score.
"Additionally, we know that apathy often reigns with many credit card holders who are happy to languish on high interest rates with their existing provider. As a result, the tempting offers which will have initially swayed people to that credit card are likely to have changed or expired over time. With rates on the up, it is essential credit card customers review their card from time to time to assess whether it still suits their needs and financial situation; otherwise they will fail to get the best value."
A flat base rate has, however, not been good news for the savings market, with average rates currently at an all-time low. September 2011 saw average easy access savings rates hit a high of 3.09 per cent, falling to just 1.93 per cent in February 2013. It's a similar story with easy access ISA savings rates, which have fallen to 2.43 per cent from a high of 3.29 per cent in April 2009.
According to the MoneySupermarket poll, savers felt the impact of the falling base rate more than borrowers, with a ten per cent saying they are worse off due to lower savings rates.
Kevin Mountford, head of banking at MoneySupermarket, said: "It's no surprise savers have been the biggest losers as a result of Bank of England base rate falling, especially those who relied on the interest from savings to provide a regular income. For those who were used to good returns on their savings prior to the credit crunch, not only has the fall in base rate and high inflation hit them hard, but the introduction of the Funding for Lending Scheme has also been a double whammy, with rates plummeting by a third since the middle of last year alone. As a result, savers trying to make their money work as hard as it can do, have to look at alternative ways of maximising returns, such as offsetting, investments and peer-to-peer lending.
"However, with the majority of savings sat on low interest rates, savers can still benefit from switching to market leading deals. People need to be prepared to switch if they are not currently on the most competitive deal, especially as the majority of savings are sitting in accounts paying a derisory rate of interest. If you are a UK taxpayer, then using your tax free ISA allowance should be the first port of call for savers looking to limit the impact of inflation.
"It is also important to check your rate if you signed up to an account offering a bonus rate, as there are many deals coming to an end shortly, meaning you could be left on a very uncompetitive rate."
Notes to editors
It will be four years next month since the Bank of England base rate fell to 0.5%. How has this impacted your finances?
- I'm worse off because of low savings rates - 9.7%
- It's made me more financially aware and I now look for the best financial products - 77.5%
- I'm better off due to lower mortgage repayments - 7.1%
- It's caused me to worry about my long-term finances - 5.2%
- It hasn't impacted my finances - 0.3%
- I don't know - 0.1%
Total votes: 2005
Poll ran from 22nd to 27th February 2013
** Total number of mortgage products 1st August 2012 = 2,353. There are 3,223 mortgages on 27 February 2013 an increase of 37 per cent.
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