The Impact of the Base Rate on Savers and Borrowers

I wrote this some time ago and did not get round to posting it. So here it is now (with some recent figures). Further to my blog about the (not so) recent Base Rate change, I will now look at this from 2 ends of the spectrum – savers and borrowers.

Savers

For savers, the outlook is grim. The table below (produced by Standard Life) shows the return on savings of £10,000. With inflation at 2%, over 5 years, the real value of the £10,000 will be reduced to £9,171. Meaning that although in 5 years’ time it may look like you have more money, in reality, what you could buy with that money would less than you could buy now. You’d either get 8% less, or have to spend more. Understandably, the picture is worse over 10 years.

£10,000 invested (2% inflation) After 5 years After 10 years
Real value Loss in buying power Real value Loss in buying power
Base rate 0.5% £9,286 £714 (7% fall) £8,623 £1,377 (14% fall)
Base Rate 0.25% £9,171 £829 (8% fall) £8,411 £1,589 (16% fall)

Source – Standard Life 2016

However, what are the chances of base rates staying at 0.25% over 5 or 10 years? If we look back over historic figures, the period preceding this latest reduction was the longest without a change in base rates. It lasted for just over 7 years which could have reduced the buying power of money by between 7-14% (inflation over the same period was just over 1% so in reality, it would be less than this). Other than those 7 years, you will see from the graph below the base rate has been quite changeable in previous years. The Highest being 17% in November 1979 – when savers would have been happier and borrowers not so.

Having said that, 7 years of 0.5% interest on cash plus inflation will not have provided savers with much of a return. If you compare that to say Standard Life Myfolio Market III a passively managed “balanced” fund which has returned on average 9.06% per annum for the last 5 years, 54.1% cumulatively, this isn’t a pretty picture (Trustnet Fund Factsheet 26-Jul-2017).

Borrowers

For borrowers today, with base rate being at its all-time lowest rate this could be the ideal time to fix into very competitive mortgage deals. A mortgage adviser recently helped one of my clients who has a mortgage of £186,000 and the property was valued at £300,000. He was on a variable rate of 3.89% and his monthly repayments were £1,316.81. Based on the value of his house against the loan that he had, they were able to secure him a rate of 1.99% which was fixed for 5 years costing him £1,074.95 per month. This is a saving of £241.86 per month or £14,511 over 5 years fixed without his interest rate increasing.

Both of these cases exemplify why now is the time to go and see an Independent Financial Adviser. Contact me for a complimentary initial meeting.

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