As expected, the Bank of England's Monetary Policy Committee confirmed this week that base rate would be held at the historically low 0.5%, marking the fifth anniversary of it being at this level.
It's had knock-on effects across the financial services industry, but it's a definite tale of two halves. On the one hand we have the mortgage sector, which has benefited from record-low rates with homeowners cashing in on vastly reduced repayments, but on the other hand we have savings, with people generating meagre returns for their money…
Moneyfacts analysis has revealed the extent to which mortgage rates have fallen over the last few years. In March 2009, when base rate fell to its record low, the lowest rate available for a two-year fixed 60% loan-to-value (LTV) mortgage was 2.99%. Today's equivalent, however, charges just 1.48%, resulting in a true cost saving of £788.96 over the two-year term (based on a £150,000 mortgage and taking into account fees and introductory offers).
In better news for first-time buyers, even this amount falls into insignificance when compared to the savings of those seeking a mortgage at 90% LTV. Five years ago the best rate that could be found at this level was 5.99%, but today that has fallen to 3.45% – making a true cost saving of £5,046.88 over a two-year term.
"In 2009, no one would have dreamed that mortgage rates would fall to their present low and stay that way for five years," said Sylvia Waycot, editor of Moneyfacts.co.uk. "The savings on a two-year mortgage now compared to 2009 is literally thousands of pounds for a first-time buyer."
For savers, however, it's a very different story. Moneyfacts research shows that the top-paying no notice account five years ago was offering 3.35%, whereas today that's fallen to just 1.50%, equating to an average loss in return of almost £19 a year based on a £1,000 investment – and that's before the ravages of inflation and the taxman have had their effects.
These days the only way to get close to the 3.35% rate would be to lock your money away. Moneyfacts figures show that savers will need to open a seven-year fixed rate bond just to achieve returns close to those possible with no notice accounts five years ago – currently the top-paying seven-year account pays 3.50% – and while that's fine for those with a long-term outlook it isn't so good for savers that might need access to their funds.
It highlights the difficulties savers are currently facing, and although the market might be hoping for base rate to increase there's no telling when this will happen – or even if this will have a negligible effect.
"The historic low BoE base rate, combined with Funding for Lending, means savers have seen returns virtually disappear", said Ms Waycot. "Worse still, the interest paid on savings accounts is now out of kilter with base rate to the extent that even if base rate rises, it might not lead to saving rates rising in tandem as they previously did. The only time savers will get better rates is when banks need savers' money. The problem is we can't bank on when that might be."
With base rate not expecting to increase in the foreseeable future – analysts are currently predicting that a rise would be unlikely until next spring, with rates potentially increasing to 1% by the end of 2015 and 2% by the end of the following year – the current run of low rates could be here for a while.
However, that's not necessarily a bad thing, even for savers. It's a great time to make the most of record low mortgage rates, so why not take the opportunity to overpay? Some of the money that you'd put in cash savings could easily be spent on your mortgage instead, helping to reduce the overall value of your loan before rates eventually rise. You'll want to make sure you're on the best deal too, so if it's time to remortgage don't forget to compare the options to keep those repayments as low as possible.
Why not look to alternative saving options as well? A stocks and shares ISA could be a great alternative to cash savings and could produce more measurable returns, and of course, don't forget about regular ISAs to maximise your tax-free benefits.
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