Millions 'forced Into Gambles' By Low Rates

[Sancho Panza]

Telegraph 4/9/13

' Britain’s “blinkered” policy on interest rates is forcing savers and borrowers to take dangerous gambles, a former government adviser warned today.

Dr Ros Altmann, a former Downing Street consultant, said the Bank of England is driving savers and borrowers to take "too much risk” by keeping Base Rate at 0.5pc.

She said borrowers are being enticed into taking on loans at artificially low rates as mortgage lending picks up and house prices rise.

In some cases, lenders are offering as little as 1.48pc on new home loans - a record low. Meanwhile, personal loan rates have fallen to 4.8pc - far below the levels during the pre-2007 boom years. Dr Altmann said this is enticing many into long-term debt they can may not be able to afford. Her fear is that when rates rise, many will be stretched to breaking point trying to service the debts they have accumulated.

Meanwhile, savers are pouring money into stock market investments because the rates on cash savings accounts have plunged.

The average return on easy access accounts has dipped from 6.52pc in September 2008 to 1.63pc today, according to price comparison website Moneysupermarket.com

Many who rely on the income from their nest eggs are pulling the money out of cash accounts and putting it into more volatile shares, bond and other investments, figures indicate. For example, sales of investment funds hit their highest level in more than two years in July, with £2.2bn flowing in.

Dr Altmann said: “Ultra low interest rates are distorting the economy now, driving borrowers and savers to take on too much risk. This is what caused the crisis in the first place, when financial markets misunderstood or mis-priced risk and encouraged irresponsible borrowing or lending.

“Until 2008, house prices were boosted by irresponsible lending in the form of 'Self-cert', interest-only and 125pc mortgages, which helped borrowers pretend they could afford large loans. Everyone believed these loans were not too risky because house prices were rising sharply, the same seems to be happening again.

“This time, borrowers are being lured in with record low mortgage rates instead, but the principle of rising house prices validating the borrowing once again underpins policy. Low rates are unhealthy for the economy as they mislead borrowers by subsidising loans

“Rather than providing cash savings for banks to recycle to riskier lending - as would be the normal function of the banking system - savers are being forced to turn to riskier activities themselves in order to stop the value of their savings eroding.”

Dr Altmann said rates the Bank of England should increase rates slowly now, to avoid sharper rises later. Savings and mortgage rates are closely linked to the Bank of England Bank Rate, which has sat at 0.5pc since March 2009.

“House prices are already booming in many areas, and will be further boosted by the Help To Buy scheme that will expose taxpayers to large losses if mortgage holders default on their loans in the next few years.

"I strongly believe the Monetary Policy Committee (MPC) should start gently easing interest rates up now, giving people a better idea of what they can really afford, rather than the illusion of affordability created by current artificially low rates.”

The Bank of England's MPC meets tomorrow to discuss its next move on interest rates. New Governor of the Bank, Mark Carney, has indiciated that rates are unlikely to rise until unemployment falls to 7pc from its 7.8pc level today. The Bank's economists have predicted this won't happen until 2016. However, some economists say a recent pick-up in the UK economy could pave the way for rates to rise earlier.'

[SleepyHead]

Total common sense, very good........... therefore it won't happen.

[SuperChimp]

Leaving your money in a savings account is a risk in itself. Look at Northern Rock.

Just because most people have done something for a long time does not mean it is without risk.

[19 year mortgage 8itch]

"Force"?

[Bruce Banner]

Leaving your money in a savings account is a risk in itself. Look at Northern Rock.

Just because most people have done something for a long time does not mean it is without risk.

How many people lost money in Northern Rock?

[Bruce Banner]

"Force"?

Yes, I thought that was an odd thing to say!

[cybernoid]

"Force"?

Well its not much of a choice. If you're not rich so will need a typical LTV and have a typical income you can either buy which means taking an enormous gamble on your future cost of borrowing or you can rent which means your living circumstances are at the whim of some del boy chancer who thinks they're smart.

If you dont want to rent for understandable reasons you have to buy, and in buying you have no choice but to gamble.

For the majority of course they don't consider it a gamble, they have no idea the cost could go up enormously and they all feel rather proud they now 'own'. Never ending wealth for them! What an achievement, etc etc. When the inevitable happens it won't be their fault either.

[ThePiltdownMan]

Telegraph 4/9/13

The average return on easy access accounts has dipped from 6.52pc in September 2008 to 1.63pc today, according to price comparison website Moneysupermarket.com

No way was the average rate 6.52 just 5 years ago

[Bloo Loo]

No way was the average rate 6.52 just 5 years ago

It was in Iceland

[SuperChimp]

How many people lost money in Northern Rock?

They all would have if the government hadn't stepped in. The whole system would have collapsed.

It is a massive risk.

[wonderpup]

Osbourne's 'help to buy' will create a zombie army of borrowers most of whom will be massacred if rates rise even a little in the future- luckily he does not give a f*ck about those people- they are mere footsoldiers in the re-election campaign- totally expendable.

And best of all they will love him for it- for a while.

[MrPin]

It was in Iceland

A country now famous for it's "Unicorn factories"!

[19 year mortgage 8itch]

Retread

Edited September 4, 2013 by 7 Year Itch

[19 year mortgage 8itch]

Well its not much of a choice. If you're not rich so will need a typical LTV and have a typical income you can either buy which means taking an enormous gamble on your future cost of borrowing or you can rent which means your living circumstances are at the whim of some del boy chancer who thinks they're smart.

If you dont want to rent for understandable reasons you have to buy, and in buying you have no choice but to gamble.

For the majority of course they don't consider it a gamble, they have no idea the cost could go up enormously and they all feel rather proud they now 'own'. Never ending wealth for them! What an achievement, etc etc. When the inevitable happens it won't be their fault either.

Sorry, I have to call ******** every time you do this. That people gamble on their mortgage rates OR where they put their cash is true, that the vast majority are forced into anything?

Pull the other one.

This is Altman so she's trying to get at savings rates being low, her VI, old *****.

[silver surfer]

Isn't Ros Altman the head of Saga, the business which does holidays and insurance for the over 50's?

She's been trying to become the (unelected) spokesperson for the over 50's for some while, and has inserted herself into politics and the media at every turn. Her vested interest and her arguments have always been clear, if it hurts better off pensioners then it's bad, if it benefits better off pensioners then it's good.

Nothing wrong with having a consistent point of view, my only concern is that she tends to be the advocate of the wealthier pensioner rather than pensioners in general without ever making that clear. But because she's good at playing the media game she's the one that always gets the airtime to put the pro-pensioner argument, even if it's very much a partisan argument that largely ignores the plight of those pensioners depending just on state pensions.

[interestrateripoff]

Moving interest rates upwards will test the solvency of the UK banking system.

[silver surfer]

Moving interest rates upwards will test the solvency of the UK banking system.

In which case interest rates won't move up.

[frederico]

In what way is taking a long term variable rate loan a gamble, it's certain that rates will rise at some point, just a matter of next year or a little bit longer.

So no, not a gamble, just a stupid transaction by both parties if the borrower can not afford much higher repayments.

[frederico]

In which case interest rates won't move up.

Just watch that debt rise and wait.

The only reason all this good economic news would actually be good is if the tax take increased at a faster rate than costs and people's wages rise faster than inflation.

Until that happens the trajectory is still oblivion.

[long time lurking]

In which case interest rates won't move up.

Just like they are not in the U.S.A

I can acknowledge the fact TPTB have a fair amount of control as they have already demonstrated ,but my fear is they will bury their heads in the sand until it`s too late then the markets will dictate the rates ,if that happens those in power will have no power or control what happens after that IMO every month that goes by the corner they have painted themselves into is getting smaller

[olliegog]

was trying to remember what interest rates were in 2008/9 and found these interesting statistics:

http://www.swanlowpark.co.uk/savingsinterestannual.jsp

so the last 5 years are the LOWEST they have ever been

would be interesting to compare inflation figures for the same years

found the comparable inflation figures

http://www.swanlowpark.co.uk/rpiannual.jsp

looks as if it has never been a GOOD time to be a saver either the rates are rubbish or inflation erodes the savings anyway

Edited September 4, 2013 by olliegog

[interestrateripoff]

In which case interest rates won't move up.

They are attempting to build a boom on low interest rates if they succeed when that fecker blows the policy response is going to be rather interesting.

[zugzwang]

In what way is taking a long term variable rate loan a gamble, it's certain that rates will rise at some point, just a matter of next year or a little bit longer.

So no, not a gamble, just a stupid transaction by both parties if the borrower can not afford much higher repayments.

Asymmetric stupidity as the taxpayer has been needlessly implicated in re-inflating the bubble through HTB.

[Bruce Banner]

They all would have if the government hadn't stepped in. The whole system would have collapsed.

It is a massive risk.

I doubt that the whole system would have collapsed, merely a lesson learned by those who went for the highest interest rates regardless of risk. Labour should have stuck to the then FSA guarantee limits.

Keeping money in savings accounts, up to the current FCS £85K limit per banking license, is not, in my opinion, a massive risk.

[zugzwang]

They are attempting to build a boom on low interest rates if they succeed when that fecker blows the policy response is going to be rather interesting.

The UK's debt trajectory is unsustainable. Even within current growth/spending expectations the annual interest on the national debt is set to exceed £80bn by 2017. Asset prices have to be brought back into line with cashflows. Either interest rates go up to bring asset prices down, or inflation takes off massively to take current prices to the Moon. And if inflation takes off then so too will gilt yields and mortgage rates. There's going to be a bloodbath.