11/08/16Interest-ing times……..
Hello!
I trust you’re enjoying some ‘down time’ as well as the glimpses of great weather we have seen in parts.
While you contemplate whether its ‘Margarita Time’ allow me to provide you with some light reading……
My Blog this week has been triggered by the Bank of Englands’ decision, to cut Interest rates. My own view, was one of amazement. I genuinely thought that our fiscal policy was sound, and that the Monetary Policy Committee would hold rates, while the political parties sort themselves out. If I’m being completely honest, I think interest rates should have gone up at the back end of last year, but it is my perception, that we were playing a Mexican standoff with America-or should that be Canmerican Stand-off?
Those familiar with my blogs, will know I come at things from different angles and play out various scenarios-this blog will be no different!
So, lets assume all lenders pass on the 0.25% cut to all their clients
Taking my research from ‘This is Money’ (Feb 2016) the average London mortgage is £215k and the lowest average is in the North East where a mortgage is £79,500., so lets call the average mortgage £140k 0.25% of that, is £350 a year or £29 a month. If that makes a substantial difference in someone’s finances, then I’d question as to whether they should have got a mortgage in the first place. Moreover, if you are renting a property, will the Landlord pass the saving on to you? or as a saver, will the banks, building societies etc, hold off from cutting your rates further?
So here’s my left field thinking;
If an Institutional lender (bank, building society etc) is seeing rate cuts from the top and they are being pressured to pass these on, then their revenues must start to reduce. Lending is what these institutions are there for, but they will-contrary to popular belief-continue to be stringent, because they do not want to end up on the front page of a newspaper being cited for ‘Irresponsible lending’ and the obligatory photograph of a sad faced family and in this litigious society we find ourselves in, I can’t blame them. So if they are not making their money from Lending..Now at this point, I’ll look at Commercial Lending-Whilst banks have a matrix of pricings, using a rule of thumb of 3-4% over base, still only generates 3.25-4.25%..a long way off from the 6%-7% they were earning 10 years ago. Banks and building societies have decimated their financial advisory salesforce-no income from that now and there is no fat on interest rates to hold back from savers. To me, this leads to increased charges (I’ve already had the letter-my charges go up over 200% from September) and possibly-Current account fee’s. We are, as a country, in the minority with regards to not having current account charges. I know some you may have super duper accounts that come with an annual fee, but not everyone has that-yet.
So an interest rate cut that broadly affects borrowers and savers can suddenly start to affect anyone who has a bank account….
With regards to savers, they are being pushed beyond their limits. ridiculously low interest rates for the last 9 years have seen many try to achieve those halcyon days by using well thought out investment strategies, however, some have succumbed to the investment scam and even as I post this, there are so called ‘experts’ emailing people with stories of Armageddon and they shouldn’t trust anyone-apart from the writer of the email, who happens to be a financial whizz…its dodgy preachers all over again, asking you to call/subscribe.
I do wonder, if the ‘pull’ on Mum, Dad, Grandma, Granddad etc, could lead to two generations funding one….
Lets say Bill is 25, a graduate & earning £35k per annum. Wants to get on the housing ladder and spies a lovely property for £250k. He can borrow 5x earnings (£175k) which leaves him way short. Bill knows that Grandma has £150k in the bank earning 0.1% and Bills’ parents have £100k earning the same (you can see where I’m going, can’t you?)..Bill says ” If you lend me £250k, I’ll pay you £1400 per month, for 25yrs, giving you back £420,000. Now, there is a risk of unemployment on my part, but look at the return on investment I’m giving you” that equates to over 6% a year return….Now I know this isn’t an everyday conversation going on up and down the country, but cutting interest rates could make people think this way..giving up the liquidity of cash, to the illiquidity of property, for income.
So, Interest-ing times indeed. I personally would have sooner seen VAT return to 15%. This would make a huge difference to anyone, that bought/sold vat rated goods..that’s pretty much everything we buy and whether you’re a tenant, homeowner, borrower, saver you would have benefited. The Bank of England have left themselves with no wriggle room at all-even though further cuts in interest rates maybe on the cards,-Mark Carney has no ‘interest’ in negative interest rates.
Enjoy the rest of your summer…Is it G&T o’clock yet? must be 5pm somewhere……!!
Victor xx
