This Wednesday marks the five-year anniversary of the Bank of England’s record low 0.5 per cent interest rate.
For some people that low interest rate has been good news, for others it has been bad.
Five years ago this week, on 5 March 2009, the Bank of England took the dramatic step of cutting interest rates to their lowest level in more 300 years.
The previous 18 months had seen Northern Rock nationalised, RBS, Lloyds and HBOS rescued by massive taxpayer bailouts, and Lehman Brothers collapse in the United States.
House prices were falling, car sales plunging and Britain found itself facing a deep depression.
For a decade before the crisis the Bank of England had dealt in finely tuned adjustments, quarter point cut here, or a quarter point rise there.
But in 2008 everything changed – and it took just five months to slash the base rate from 5% down to 0.5%.
One of the main ‘winners’ of low interest rates are mortgage payers.
Homeowners with mortgages have been the big beneficiaries of record low rates, especially those who have had mortgage deals tied to the base rate as it plummeted.
There will be many who without the rate cuts would not have been able to hold on to their homes at all. In the previous housing crash in 1991 there were 75,000 repossessions in a year, but this time the number hit only 50,000 in 2009, according to the Council of Mortgage Lenders, and quickly fell back. Last year there were 29,000, despite the squeeze on household incomes.
Mortgages have also been paid off more quickly, with the Bank of England’s reporting that repayments have exceeded the withdrawal of equity by more than £10bn in every quarter since the summer of 2010.
However, there is little evidence that people have been taking the chance to overpay and make inroads into their borrowing. With food and energy bills going up, some may have simply diverted any savings into paying for something else.
But among the ‘losers’ are small savers, who outnumber mortgage holders by seven to one. They have lost out on around £65bn in interest payments since the Bank of England slashed rates, according to consultants McKinsey.
- It is expected that the sixth anniversary of the 0.5% rate will be upon us before the Bank of England even starts to contemplate raising rates – and that they will peak at 2.5%-3%.