That cutting question again

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The Independent Online
RUMOURS about a possible cut in interest rates swirled around the financial markets on Friday. Was the Government really up to something or was it a misreading of the subtle signals that rule the money markets?

Even if it was a false alarm, the expectation of future cuts in interest rates have been reawakened. A cut of just 0.25 per cent would not be enough to trigger a movement in building society lending or savings rates. But if further down the road there were to be a cut of 0.5 per cent, then the societies would be in a bit of a pickle.

On the one hand, they have tried pushing down mortgages rates as low as possible to try to stimulate the property market. Rates for the key first-time buyers are down to unsustainably low levels - the Halifax for instance charges just 8.5 per cent for the first year, well below the rates paid on some of its savings accounts.

But rates are clearly not the key to the malaise in the housing market. Fear of unemployment and the wider problems of the economy are blotting out any glimmers of sunshine from the simple arithmetic of the affordability of mortgages.

If there is a chance of taking off the mortgage pressure, the societies cannot just concentrate their efforts on potential buyers. They will have to help existing borrowers who have been sliding into arrears.

On the other side of the sheet, the societies are under incredible pressure for savers' cash. National Savings, which has been primed to help fund the Government's borrowing needs, can jack up rates without looking at the effect on borrowers on the other side of the see-saw.

National Savings will be piling on the pressure next week, when it announces details of the new bond that offers a rate fixed for 12 months aimed at basic rate taxpayers.

Some societies are already taking in a high proportion of their funds from the money markets - and at rather high rates. So there is little room to manoeuvre.

If interest rates do come down, then borrowers will gain and savers lose, but neither as much as they might respectively hope and fear.

Official figures from the banks show that there is still pounds 10.89bn in traditional non-interest paying current accounts, which means that even with average interest rates at a puny 2 per cent, customers are 'losing' pounds 217m in interest each year.

That seems more than careless. With a little effort customers with a bit of cash in the bank could make their money work for them. On pounds 1,000, Save & Prosper pays 5 per cent net, the Britannia Building Society 4.42 per cent and Bank of Scotland 4.12 per cent.

That may not earn you a fortune, but at least it could fund decent take-aways.

The life insurance companies and regulators are continuing their skirmishes over the early surrender of endowment policies.

When someone cashes in a policy before it has run its full term, it has not had time to recover from the high start- up costs, and will be a poor investment.

The high commissions paid on these policies, which make them so attractive to investment advisers to sell, are of course one of the fundamental reasons why they are such poor value.

The Securities and Investments Board has said that the high number of policies being surrendered - more than a quarter within the first two years - is proof that they are being wrongly sold in the first place, but a group of insurers has got together to try to prove that surrenders are due to unforeseeable circumstances such as divorce.

Meanwhile the regulators are threatening to force the life companies to give those who opt out of staying the course a better deal - even at the expense of other policyholders in the case of mutuals, or shareholders in the case of quoted companies.

A new marketplace in second-hand policies which takes advantage of the poor surrender terms has sprung up, and last week it was spotlighted by the launch of Kleinwort Benson's investment trust which invests soley in discarded with-profits life policies.

The obvious moral of this tale is to be wary of taking on a long-term commitment such as a 25-year endowment, and once in, to be even more wary of jumping ship.

Those who need instant cash can sometimes arrange to take a loan against the value of a policy from the issuing company, and couples with joint policies who are splitting up can arrange to have the policy assigned to one partner rather than surrender it.