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Savers vs borrowers: what an unfair fight
Four years of ultra-low interest rates have battered savers but made life easy for borrowers. Independent pension expert Ros Altmann says it's all wrong.
by Michelle McGagh on Mar 04, 2013 at 17:00
Ros Altmann, an independent pensions expert, has produced figures which show how the financial crisis has rewarded borrowers at the expense of savers.
In the past four years savers have been punished as the Bank of England has held its base, short-term rate of interest at an historic low of 0.5% in order to avoid a depression.
Long-term interest rates have also been kept artificially low by the Bank’s policy of ‘quantitative easing’ in which it has created £375 billion of money and used it to buy government bonds, or gilts, as a way of stimulating the economy.
There is speculation that signs of recent economic weakness will prompt the Bank to extend QE by at least another £25 billion this week.
Meanwhile the speed with which banks and building societies have cut savings rates and pulled savings accounts has jumped alarmingly since the government launched its Funding for Lending Scheme last August.
The £80 billion the government has set aside to encourage new lending had the unfortunate effect of making lenders uninterested in savers whose money they would traditionally have wanted in order to lend on to borrowers.
Altmann has calculated what the impact of all this has been on a saver with £100,000 and a borrower with a £100,000 mortgage.
Someone with £100,000 in a cash ISA in 2008 would have lost £2,790 a year in income, or £232.50 a month, by now.
Those who locked their money away into fixed rate bonds have fared worse, losing £2630 a year, or £253 a month, according to her sums.
The average fixed rate cash ISA offered a rate of 4.81% in March 2008 but by January 2013 that had reduced to 2.02%. Rates on fixed rate bonds have dropped from 4.95% to 1.91% over the same period.
The dwindling savings rates leave savers little choice but to move more money into a riskier but potentially higher growth stocks and shares ISA if they want to achieve a real return on their money after inflation.
On the flip-side, homeowners have seen the cost of borrowing tumble. The average two-year fixed rate mortgage for a borrower with a 25% deposit has fallen from 5.8% in March 2008 to 3.06% in January 2013, a monthly gain of £255. Borrowers who have automatically moved on to their lender’s standard variable rate (SVR) when their mortgage deal ended have benefited from a fall in rates from 7.24% to 4.4% over the same period, a monthly gain of £237.
Altmann said: ‘Low rates have been disastrous for millions of savers. The real value of their income and capital has fallen as inflation has remained above target.’
She challenged the economic beliefs behind the pro-borrowing stance of the government.
‘Academic models predict that, as rates fall, the economy will recover because banks should lend more, giving firms and households easier access to credit to expand their businesses, buy homes or other goods and services, and boost economic activity. However, I believe the negative side-effects of low rates have been underestimated and have actually prevented recovery,’ said Altmann.
‘Low interest rates act like a tax increase on millions of savers and pensioners by reducing their income. Low short-rates cut the income of savers and low long-term rates reduce pensions and annuities.’
She added: ‘Those who have behaved responsibly, lived within their means and tried to provide for themselves are being penalised in order to help borrowers and banks, many of whom borrowed or lent too much.’
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