The elderly parents of a close friend of mine are selling the family home they have owned for donkey’s years not because they are too infirm to live there, want to downsize or fancy a little cottage by the coast. The reason is that their savings – no matter how cleverly placed – are earning next to nothing and now they have to break into the capital of their home.
They took a look at equity release and decided it wasn’t for them – and frankly I can’t blame them. Instead they are going to release a wodge of capital by selling and moving on.
You could say eventually they would have to have sold regardless and better they make the decision when they are fit and healthy. But that misses the point that because of the pitiful rate paid to savers, combined with the hidden (from official statistics) inflation that everyone is suffering from, they are being forced to up sticks at least five years before they needed too. And it really doesn’t have to be this way for my friend’s parents.
The Monetary Policy Committee has just left rates on hold at 0.5 per cent for the 28th month on the trot. Setting aside for a minute the fact that this is helping to imbed inflation back into the economy, holding rates so very low also means there is no benefit for people to put away money, and for those who have cash squirrelled away they are actually much poorer. This has all been made worse by the fact that the banks have been given a free ride to pay savers a pitiful amount so to help in the gradual repair of their balance sheets.
It is one of the great ironies of the financial crash that those who did the right thing and set money aside have been paying the price for the horrendous mess, all because the policymakers decide that we must continue to spend rather than save. As a result, since rates were cut to 0.5 per cent, those relying on savings for income have in effect seen their wealth cut by about 10 per cent, when inflation is taken into account.
One of the most notable achievements of the last Labour government was to cut pensioner poverty dramatically, but due to the careless approach of the Bank of England in recent years, this hard-won gain is being taken back. And as opposed to paying tax – as most pensioners do – many will have been forced into the insidious arms of the means-tested benefits system.
So successful has been the policy of disincentivising thrift that the savings ratio – the amount of money we put away out of our total income – has fallen to about a fifth of the historic norm and well behind that of our nearestcompetitors France and Germany.
In turn, low levels of saving actually stultifies growth in banking because the lower the deposits held the less banks can lend out – particularly now that regulators seem interested in how much money a bank actually hold. What’s more, it has crucified the mutual building society sector as you can see from the actions of Norwich & Peterborough right.
There is also a moral dimension to all this. Not only are the responsible and best in our society – the savers – being punished, but also life options are being closed off. A little more than a decade ago I was working in a job I hated. I needed to make a radical change. Savings were key to the transition. I was able to use them to support myself as I retrained. Savings equals options, and there is nothing like the back-up you have when you are not beholden to a job to pay the rent or mortgage the next month.
Yet the MPC continues to hold rates; millions of thrifty people get poorer and the moral bankruptcy of all this is ignored.
Cashback mortgages creep back into the market
Last week saw the return of the cashback buy-to-let home loan. Platform, part of the giant Co-op financial services company, started to offer a £500 cashback incentive – as well as free valuation service – on its range of buy-to-let mortgages.
Now, £500 is hardly an indication that the UK mortgage industry is partying like it’s 2007 (cashbacks of £10,000 were not uncommon back then) but nevertheless it’s significant as it underlines the increasing competition in the buy-to-let sector. We have had firms returning to this type of lending and even the odd new launch such as Yorkshire building society.
The fact is that during the recession and to many’s surprise, buy-to-let landlords have been resilient with relatively low levels of repossession. With fewer people able to get their own standard mortgage more have stayed in rented homes boosting rent levels. At the same time, interest rates have been kept artificially low – last week the Bank rate was kept at 0.5 per cent – limiting costs to buy-to-let landlords.
The truth is that, apart from overseas investors, buy-to-let is just about the only game in town in much of the housing and mortgage market.
Is it a merger or a shotgun wedding?
If you’re a member of the Norwich & Peterborough (N&P) building society, you’ve probably had a rather large and bulky envelope thundering through your letterbox in the past few days. This contains information and a voting pack for the special general meeting to be held next month over the proposed merger of the N&P and the larger Yorkshire building society.
N&P’s management insists that this is not a shotgun wedding, but there is certainly a whiff of cordite about the whole occasion.
Essentially, N&P needs the merger badly because since the credit crunch, like many other building societies, it has seen its profit margins squeezed to within an inch of life. A mis-selling scandal related to the collapse of Keydata has also blown a £50m hole in the balance sheet. In short, the N&P needs to get big to retain its current branch network and broad range of offerings – it, unlike quite a few societies, offers a current account.
People who are members of N&P because they have a mortgage with the society have a great incentive to say yes. N&P says that it will equalise its standard variable mortgage rate between it and the Yorkshire if the merger gets the go-ahead, which in effect means a 0.35 per cent cut in rates to borrowers. That’s about £20 a month for some on a £100,000 mortgage.
Savers and investors in N&P have nothing concrete in the way of incentive to vote yes – unless holding on to to what they have is the prime concern. However, they probably will do so as the best place for the building society is in the arms of the bigger and stronger Yorkshire. But with N&P about to be swallowed up, what price all those medium sized societies keeping their independence? Not high, I reckon.