The Impact Of Low Interest Rates On Individuals

The Bank of England reduced its base interest rates to an all-time low of 0.5% over two years ago and it has remained at this 315-year low ever since

. There is constant debate amongst economists as to the pros and cons of keeping the base interest rate so low with good points on both sides of the argument.

This article looks at the impact of low interest rates on individuals. Low interest rates are not good for savers but do help those looking to borrow.

Savers

Low interest rates are definitely not good for savers. It means they are getting very little interest on any money they have in a regular savings account and are effectively losing money once inflation is taken into consideration. Therefore, for savers to get a decent return on savings they really need to invest. It is the only way to make a good return on their money. There is a degree of risk but many see it as a better option that keeping it in a bank account. An ISA can therefore be a good option with no tax to be paid on interest or capital gains. You can get around 3% interest rates on a cash ISA (six times that of base rate) but even more with a Stocks and Shares ISA.

Mortgage Holders

The low interest rates are beneficial to many with a mortgage. Mortgage rates are not as low as the 0.5% base rate, but the lower the base rate is the lower mortgage rates are, with many tracking the Bank of England rate. This means they are a certain amount above base rate, so when the base rate was reduced the interest on these mortgages was reduced. Low interest rates dont help all mortgage holders though, with interest unchanged for those with fixed mortgages. Fixed mortgages protect again increases in interest but, unfortunately, means these mortgage holders cannot benefit from lower interest rates.

Home Buyers

Better interest rates are currently available on new mortgages than they were a few years ago, although some claim banks havent reduced them by as much as they should. This means tracker mortgages will start out with a low interest rate and fixed mortgages are available at a lower rate than they would have been previously. To an extent, though, this is mitigated by factors that negatively impact home buyers. There is a faltering housing market with few properties on the market. Prices have not fallen by much despite the struggling housing market with many choosing to stay put until they can sell for a higher price. The overall situation is not particularly good for first time buyers. While interest rates may be relatively low, obtaining a mortgage is proving difficult to many who would have found it easier four or five years ago. A higher deposit is require, something many potential first time buyers are unable to afford.

Other Loans

There is some good news for those looking to take out loans other than mortgages. Personal loans are available at better rates than normal, meaning those requiring a car loan, for example, are better placed.

Andrew Marshall

by: expo09

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