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[I381]Interest Rates For Investments

by Abbi Rouse, Abb

In its January meeting, the committee opted to keep the interest rate at 5.5 per cent. This follows on from the quarter percentage reduction which took place in December. And although a cut has not taken place, today's announcement may still be welcomed by those consumers who are struggling to cope with the five rises implemented by the Bank since August 2006.

Following on from the hold, homeowners may well discover that pressure on their finances does not increase over the first few weeks of this year as their monthly mortgage repayments will stay the same. In addition, consumers could find that costs attached to loans, credit cards and other demands on their spending will not rise.

David Kuo, head of personal finance for the Motley Fool, reported that despite Alistair Darling, the chancellor of the exchequer, calling for loan lenders to pass on last month's interest rate cut to homeowners - this is yet to happen. However, he did point that lenders are not obliged to reduce rates on their mortgage products, loans and credit cards as the MPC's decision acts solely as a guide to "the cost of borrowing".

He said: "It is quite sweet of Mr Darling to be concerned about mortgage payers. But it is also quite wrong of him to fill homeowners with empty hopes that rate cuts by the Bank of England will trickle into their pockets. High street lenders are currently more concerned with rebuilding their battered businesses than repairing consumers' finances. Therefore, many homeowners are unlikely to reap the benefits, even though there are indications that the Bank of England may continue to cut interest rates to stimulate the flagging British economy."

"When times get tough, the tough get going and homeowners need to get moving too. They need to use their guile to help themselves rather than rely on the empty gestures of politicians," Mr Kuo added.

Meanwhile, Ray Boulger, spokesperson for mortgage adviser John Charcol, claimed that the MPC's decision to keep the base rate of interest the same could place major financial pressure on a select group of homeowners. In not opting to lower rates, Mr Boulger suggests that the committee has cost those who are on a variable rate mortgage some 105 million pounds per month in mortgage interest payments. He also stated that there is "further bad news on the inflation front" for many consumers, which includes utility firm npower's recent announcement that its price are to rise by up to 17 per cent.

Following today's announcement, those people who are concerned about their capacity to manage their money over the coming months may find that now is a good time to get a cheap loan. Meanwhile, the MPC keeping interest rates consistent may also be welcomed by those who are looking to make payments on loans and credit cards. A recent Savings Brake study by Unbiased indicated that during July and September an estimated 11.7 billion pounds was borrowed through loans, credit cards and overdrafts. It was suggested that the climate of high interest rates during the summer months had lead many people to take out a loan to meet various demands on their finances.

The Bank of England decision today to drop interest rates to 1½ % is the lowest interest rate in the Banks 314 year history, since it was established in 1694. The Banks of England's reason for another drop in the base rate is their concern about inflation, the costs of imports as sterling is very weak on the international markets; they are worried about the damage to savers and they want to prevent this recession turning into a full blown depression. Banks have a balancing act of getting enough money in, keeping savers happy and keep the mortgage borrowers paying their mortgages.

The cause of this financial turmoil started with the credit crunch

A credit crunch occurs when there is not enough credit or money available. The Bank of England has reduced interest rates to try and encourage lending by the bank and to make borrowing more affordable. This has not helped the lack of money supply as there is still not enough money around to start with and people looking to borrow money for a home or to invest in a business will still not find the money they need to borrow. It does not matter how low interest rate are if there is not enough money available.

When will the Bank of England reach their senses and realise that if they reduce the base rate any further then they will penalise the very people who save money with all the banks, building societies and investment fund. It is believed that there are more savers then borrowers in the United Kingdom. If we are to fight our way out of this recession then we will need to reward the Savers with fair interest rates. We need to recognise the importance of savings if we plan on climbing out of this recession.

Who are the winners and losers from today's interest rate reduction?

Unfortunately there are more losers than winners. Pensioners who rely on the interest from their savings to boost their often inadequate pensions will have seen their income from savings decimated further today. Today there are more than 80 saving accounts that are paying less than ½% per annum. It is estimated that 38% of current saving accounts are paying 1% per annum or less and more than three quarters of saving providers announced that they are providing savers with the full rate cut as they are announced by the Bank of England

If the interest rates charged by the banks and building societies were to drop to 0% you could find savers paying the banks and building societies for the privilege of them looking after their savings, this has happened in the past. Advice to saver you need to shop around for the best interest rates and make sure that you save no more than £50,000 in each savings account so that you are protected by the government should the bank fail. Life is more difficult for savers who want to save rather than spend. Savers have invested around a £1 trillion and borrowers are responsible for around £1.5 billion and there are more savers then borrowers currently.

Not all Mortgage borrowers will benefit from the drop in the Bank of England's base rate today. In general homeowners with their mortgage on a tracker rate mortgage have done very well with the recent drops in the base rate. But they are now finding that some of the mortgage lenders are not willing to pass on the base rate cuts. The devil appears in the detail of their mortgage contract as some lenders have a collar clause which means that they will not drop their mortgage below say 2% irrespective of how low the interest rate goes. The Nationwide has said that they will not be passing on any more interest rate cuts.

Mortgage borrowers on fixed rate mortgage deals will see no change in their monthly mortgage payments. Some mortgage providers have said that they will not be passing on any reductions in the base rate to their borrowers that are on their standard variable rates. Other lenders have said they will pass on some of the reduction. Nationwide, HSBC and Lloyds TSB have said that they will pass on some of the reduction to their borrowers on their standard variable rate (SVR).

Article Source : Pg. 25

About Author

Both Abbi Rouse & Mark Aucamp are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Abbi Rouse has sinced written about articles on various topics from Personal Finance, Careers and Job Hunting and Diabetes Treatment. Abbi Rouse writes for All About Loans where visitors can apply for and also focuses on. Abbi Rouse's top article generates over 49500 views. to your Favourites.

Mark Aucamp has sinced written about articles on various topics from Finances, Sell Home and Free Credit Report Score. Contributing author Mark Aucamp has been providing Talk Money Blog with regular advice and comments. Mark is recognised as an authority in the field. Mark Aucamp's top article generates over 9900 views. to your Favourites.