Five years of low rates – but how much longer?
Published 25 March 2014
Low interest rates are good news for borrowers – but there are ways to prepare so you don’t lose out when they rise too.
Last week marked the fifth anniversary of the Bank of England reducing the official bank rate to 0.5%. It’s been this low ever since.
It’s been good news for borrowers since March 2009. While the aftermath of the credit crunch means that lenders are much more cautious about who they lend to – with many putting strict criteria in place that borrowers have to meet so they can’t be accused of lending irresponsibly – the rates attached to this credit have been more favourable.
For instance, in February 2008, just over a year before the base rate was reduced to 0.5%, it was at 5.2%. That’s far from the highest it’s ever been – which was 17% at the end of 1979 – but it’s also far higher than it is today. So, just why is a low base rate of interest such good news for borrowers?
Put simply: because it makes borrowing cheaper. Most banks, building societies and mortgage providers set their own interest rates very closely to the Bank of England’s base rate. So, when the base rate goes down, theirs will follow, and when it goes up – you get the picture!
This means that it’s been cheaper to borrow over the last few years than it was before the recession. For example, if you took out a five-year fixed rate mortgage just after the base rate first reached 0.5% five years ago, you’ll have saved thousands of pounds in interest compared to someone who took one out just a year earlier, when the base rate was 5.2%.
However, just because borrowing has been cheaper over the last few years, it doesn’t mean it’s been easier. In fact, in the wake of the credit crunch it’s become harder to borrow as banks and building societies make every effort to ensure the people they lend to can afford to repay it.
The economy now appears to be firmly on the road to recovery, and experts are suggesting that the Bank of England will start to raise the base rate from next year. So what does this mean?
Well, it’s good news for savers, who should soon be able to enjoy a healthier interest rate on the money they put away for a rainy day. And it doesn’t have to be bad news for borrowers either.
It looks as though it will be about a year until the Bank of England starts to raise its rates again, so if you have a mortgage you could consider fixing it now while rates are still low. This means you’ll be protected from any increase in your lender’s interest charges when rates do go up again.
There’s no reason why increasing rates have to be seen as bad news for homeowners and other borrowers. By taking steps to prepare for a coming rate rise now, you can enjoy the benefits of low interest for longer.