The Money Insider: Nightmare for savers set to continue into 2011
The unwelcome November inflation figures released this week rub more salt into the wounds of UK savers.
Saturday 18 December 2010
Not only have people been struggling to find a decent return on their cash, what little they do manage to achieve is being virtually wiped out by the impact of inflation with CPI now sitting at 3.3 per cent, compared with 1.9 per cent for the same month in 2009.
The latest Moneynet research reveals that it's not just inflation that savers have to contend with, it's falling bond returns too.
Interest rates on fixed rate savings bonds have fallen sharply since this time last year across all terms from one to five years. Comparing the best rates year on year, the one-year rate is down 0.55 per cent, two-year down 0.6 per cent, three-year down 1 per cent, while four and five-year deals are down 0.8 per cent and 0.75 per cent respectively.
While these figures don't look that alarming in isolation, when you look at the impact it could have on interest income in hard cash terms it's a different matter.
For example, someone with a £150,000 nest egg would see their annual net interest income reduce by £960 if they lost 0.8 per cent on the rate, and with higher inflation to contend with too it highlights just how bad 2010 has been for savers.
The 64 million dollar question is: when will rates start to increase? Expert opinion seems to be divided with some people suggesting mid-2011, and others saying no move until 2014.
Whenever the rate increases begin I'm sure it will be a gradual process with rates being tweaked by a quarter percentage point at a time so as not to upset the fragile economy.
It would be nice to think that things will pick up in 2011, but I'm not holding my breath on that one.
How long will base rate stay at 0.5%?
Back in March 2009 base rate was chopped to just 0.5 per cent, the last of six consecutive monthly cuts which saw it tumble rapidly from 5 per cent to the record low where it has stuck fast ever since.
But with inflation raising its ugly head again and proving to be more stubborn than the Government will have hoped, maybe a rate change will be on the cards sooner than anticipated.
The last 20 months have proved unpalatable for both savers and borrowers, but particularly tough for the latter, as they try to come to terms with the continued fall out of this economic instability.
Up until the credit crunch, the UK had witnessed a decade or more of seemingly never-ending house price rises, coupled with low unemployment. During this period there was an abundance of cheap credit available, either via plastic, loans, overdrafts or mortgages.
The problem was that buoyant property prices masked the real underlying debt issues, with people in financial difficulties finding it far too easy to remortgage their way out of trouble.
That 10-year long credit party is now well and truly over, but the after- effects continue to haunt lenders and, ultimately, UK consumers.
The housing market is in an extremely fragile state and with unemployment still close to a 13-year peak, banks, building societies and credit card providers are operating a scrooge-like risk strategy when granting credit.
Even though base rate remains stubbornly low, lenders' costs have escalated due to high levels of bad debts and increased costs associated with having to hold additional capital reserves.
So while lending hasn't dried up completely, the amount of credit granted remains much lower as applicants are subjected to a far more rigorous risk assessment. The upshot of lower volumes and higher costs is that instead of mortgage rates falling along with base rate, they are in some cases higher and look to remain that way as we move into the new year.
Mortgage rates for those with 25 per cent or more equity have improved during the last 12 months with some deals now sufficiently attractive to tempt people away from standard variable rate borrowing.
However, if you're in the unfortunate position of looking for finance of 90 per cent loan-to-value then your options remain very limited and those products that are available have interest rates at a level that will make you wince.
Co-op moves into pet insurance
With Christmas just around the corner, no doubt new kittens and puppies will be on many festive wish lists. If your family is making room for a new four-legged friend, don't forget to insure yourself against potentially wallet-draining vetinary bills. With the new Co-op cover starting at £10.69 per month for dogs and £6.32 for cats, it seems a small price to pay for that added peace of mind.
Andrew Hagger is an analyst at Moneynet.co.uk
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