Forget the Budget binge, it's the hangover that matters

YOUR MONEY
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The Independent Online
The Budget on Tuesday may be a bit of a non-event for Britain's borrowers and savers. But watch out for some fireworks to come.

Boosting the now-recovering housing market is hardly the priority it once was, so the Chancellor could further reduce mortgage interest tax- relief. However he is unlikely to want to risk upsetting the property- market applecart, and the value of the Miras tax perk is pretty marginal anyway and therefore hardly a candidate for a fat-cat cut. Nor does encouraging saving seem a burning political priority, and there are few obvious loopholes demanding closure.

What's likely to have a more direct effect on saving and borrowing is how the City reacts to the Budget. The more Mr Clarke is seen to give away, the more pressure there is likely to be on mortgage rates to rise. And - not before time - that could well mean higher savings rates too.

In particular, the City's reaction will dictate the longer-term interest rates on which many fixed-rate mortgage and savings deals (fixed-rate Tessas, for example) are based. But other mortgage rates and even the interest on humble instant access savings accounts could rise.

When Mr Clarke announced his quarter-point rise in base rates to 6 per cent last month, most lenders said they would not raise their standard mortgage rates until they heard the Budget speech. But many have already upped their fixed-rate offers and pared away discounts.

Another quarter-point rise in the base rate is already pencilled in, so a hike in most lenders' standard mortgage rate of 6.99 per cent seems a foregone conclusion. Add in further dwindling of discounts as the housing market continues to recover, and that means higher mortgage rates for all, bar those already locked into fixed-rate deals.

Savings rates, in theory at least, should be hauled up on the coat-tails of these increases in borrowing costs. I say in theory because some of those societies that are converting into banks might think they can continue to get away with paying poor rates while their savers await their windfalls. Those societies not handing out windfalls have less of an obvious hold on their savers, however, and might well see this as an opportunity to emphasise their claimed advantage over the would-be banks by increasing rates. If they don't up their savings rates, this could even be a signal of a further windfall on the way.

HIGHER interest rates are definitely on the way for one set of debtors - those owing the taxman money. At the moment the Revenue charges interest of 6.25 per cent on overdue tax and pays the same rate on overpaid tax.

From January it will be charging 8.5 per cent, while paying just 4 per cent. The increased debt rate is bad news for those still struggling to complete this year's return. And both rate changes come as taxpayers are set to start wrestling with the new system of self-assessment, which may well mean an increase in overpaid tax and late payment. Trust the taxman to make you feel bad.

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