Interest Rate Rise - a good idea ?

[yorksrob]

No mortgage today, though, fortunately.

Ah, the stuff of dreams !

 

[Dai Corner]

I remember all that - 100% mortgage in 1996 but with the irritating extra life insurance policy. Why? If I died I didn't have anyone else at the time so the place would be sold to pay off the mortgage. After a couple of years the "value" of the property had increased significantly so I remortgaged with a 75% mortgage and no stupid insurance policy. No mortgage today, though, fortunately.

I think @Bald Rick was referring to the insurance policy you had to buy which would pay out if you defaulted on the mortgage, the lender repossessed the house and sold it, pursued you for any shortfall and still didn't get all their money back.

Life assurance for single buyers just made life easier for the lender if you died. The lender got their money direct from the insurer and left the executors to sell the property.

Mortgage paid off after being made redundant in 2004.

 

[jfollows]

I think @Bald Rick was referring to the insurance policy you had to buy which would pay out if you defaulted on the mortgage, the lender repossessed the house and sold it, pursued you for any shortfall and still didn't get all their money back.

Life assurance for single buyers just made life easier for the lender if you died. The lender got their money direct from the insurer and left the executors to sell the property.

I'm sure you're right, it was just that at a time when money was tight I remember having to pay an extra £10.24 (I can still remember the amount, it was so annoying!) per month on something I didn't want and didn't need. Fortunately I was better able to shop around when I remortgaged a couple of years later - I engaged a broker and one of my requirements was "no life insurance policy" of course.
It all worked out in the end.

 

[Bletchleyite]

I remember all that - 100% mortgage in 1996 but with the irritating extra life insurance policy. Why? If I died I didn't have anyone else at the time so the place would be sold to pay off the mortgage. After a couple of years the "value" of the property had increased significantly so I remortgaged with a 75% mortgage and no stupid insurance policy. No mortgage today, though, fortunately.

Because normally the deposit covers the risk of negative equity. The lack of one requires insurance to cover it too.

 

[brad465]

The Great British Peso really taking shape, after a rate rise less than what The Fed did yesterday:

UK may already be in recession - Bank of England

The warning comes as the Bank raises interest rates to 2.25% - the highest level for 14 years.

www.bbc.co.uk

UK interest rates have been raised to 2.25% from 1.75%, marking their highest level in 14 years.
It is the seventh time in a row that the Bank of England has raised rates as it battles to stem soaring prices.
The increase takes borrowing costs to their highest since 2008, when the UK banking system faced collapse.
Interest rates have been rising since last December as the rise in the cost of living has accelerated.
Inflation - the pace at which prices rise - is currently at its highest rate for nearly 40 years.
At 9.9%, it remains five times higher than the Bank of England's target of 2%.
Inflation is also widely predicted to head higher in October despite government intervention to limit the impact of gas and electricity costs on households.
Raising interest rates makes it more expensive to borrow which should, theoretically, encourage people to borrow less and spend less. It should also spur people to save more.
However, there is also a risk that increasing the rate could hit the UK's economic growth.
Although interest rates are now at a 14-year high, they are still comparatively low by historical standards.
Following the financial crisis, borrowing costs have stayed at, or close to, record lows after the Bank of England intervened with cuts following the UK's vote to leave the European Union in 2016 as well as during the Covid pandemic.

 

[DelayRepay]

Well I'm glad I fixed my mortgage earlier this year, and have no other debt. I have savings so will benefit from higher rates.

But a lot of households will not be in the same position. I have an economics degree so I understand the theory of increasing rates to control inflation, but at a time when the government have to subsidise everyone's electricity bills, I am not convinced this is the right move. It will just cause more hardship for families whose mortgage rates aren't fixed, or whose fixed rates end, or who have credit card debt. And it will hurt businesses because people have less discretionary spend. I'm not sure it will really help to control inflation, given much of our current inflation is driven by a shortage of supply, rather than excessive demand.

 

[Broucek]

Well I'm glad I fixed my mortgage earlier this year, and have no other debt. I have savings so will benefit from higher rates.

But a lot of households will not be in the same position. I have an economics degree so I understand the theory of increasing rates to control inflation, but at a time when the government have to subsidise everyone's electricity bills, I am not convinced this is the right move. It will just cause more hardship for families whose mortgage rates aren't fixed, or whose fixed rates end, or who have credit card debt. And it will hurt businesses because people have less discretionary spend. I'm not sure it will really help to control inflation, given much of our current inflation is driven by a shortage of supply, rather than excessive demand.

I tend to agree. I suppose reducing demand will help at the margin but surely fixing the causes of the supply issues are what's needed... And putting interest rates up won't mitigate high gas and oil prices (which affect the cost of many goods and services)

 

[Bletchleyite]

I tend to agree. I suppose reducing demand will help at the margin but surely fixing the causes of the supply issues are what's needed... And putting interest rates up won't mitigate high gas and oil prices (which affect the cost of many goods and services)

An interesting question is when rates should go up, though. The historically low rates at the moment aren't overly helpful in many ways because they discourage prudent saving which helps people to weather economic shocks and encourages overborrowing. A more "natural" rate is around 5-6 per cent. We could do with slowly edging them back up there at some point.

 

[brad465]

I tend to agree. I suppose reducing demand will help at the margin but surely fixing the causes of the supply issues are what's needed... And putting interest rates up won't mitigate high gas and oil prices (which affect the cost of many goods and services)

Except for the fact that most commodities are traded in dollars, and the exchange rate is poor; higher interest rates improve the value fo one's currency, especially if more favourable than the other currency in a given exchange rate.

 

[Howardh]

An interesting question is when rates should go up, though. The historically low rates at the moment aren't overly helpful in many ways because they discourage prudent saving which helps people to weather economic shocks and encourages overborrowing. A more "natural" rate is around 5-6 per cent. We could do with slowly edging them back up there at some point.

If bank/building societies interest rates were 6% I'd be skipping!

ISA's are a bit of a rip-off though, I can't find any that go close to the best non-ISA rates, so maybe it's better to go for the standard accounts and pay tax (if you earn enough interest to do so); a few months ago I got a bond at 2.5% - less 20% tax is an annual rate of 2% - whereas my ISA offer was only 1.7%. The first £1000 of interest is tax-free of course, making the bond even better. **And better still if your income such as pension doesn't reach the tax threshold of around £12500.

Sure both will have risen in the last couple of months, but I bet the best ISAS are still way below the best ordinary rates?

 

[Broucek]

If bank/building societies interest rates were 6% I'd be skipping!

ISA's are a bit of a rip-off though, I can't find any that go close to the best non-ISA rates, so maybe it's better to go for the standard accounts and pay tax (if you earn enough interest to do so); a few months ago I got a bond at 2.5% - less 20% tax is an annual rate of 2% - whereas my ISA offer was only 1.7%. The first £1000 of interest is tax-free of course, making the bond even better. **And better still if your income such as pension doesn't reach the tax threshold of around £12500.

Sure both will have risen in the last couple of months, but I bet the best ISAS are still way below the best ordinary rates?

I've been moving money out of cash for a while (except for an emergency buffer in a mortgage offset account). Even if the stock market is static the dividend yield is way above what a savings account will pay.

 

[johncrossley]

If bank/building societies interest rates were 6% I'd be skipping!

ISA's are a bit of a rip-off though, I can't find any that go close to the best non-ISA rates, so maybe it's better to go for the standard accounts and pay tax (if you earn enough interest to do so); a few months ago I got a bond at 2.5% - less 20% tax is an annual rate of 2% - whereas my ISA offer was only 1.7%. The first £1000 of interest is tax-free of course, making the bond even better. **And better still if your income such as pension doesn't reach the tax threshold of around £12500.

Sure both will have risen in the last couple of months, but I bet the best ISAS are still way below the best ordinary rates?

Yes, *cash* ISAs are rip-off, but bank and building society accounts are only really for short term saving. Long term saving should be in equities, and ISAs are hugely beneficial in avoiding capital gains tax. It is unfortunate that the same ISA brand is used for cash savings, causing confusion.

 

[Bletchleyite]

ISA's are a bit of a rip-off though, I can't find any that go close to the best non-ISA rates, so maybe it's better to go for the standard accounts and pay tax (if you earn enough interest to do so)

If you're in the higher rate you get £500 pa of interest tax free (£1K if you just pay the basic rate). The majority of people probably have nowhere near enough savings to even get close to that at current typical rates (with them often being around 1-2% it means £25K+ of savings in "cash" form, which most people won't have even close to), though I accept some people do.

 

[Howardh]

Yes, *cash* ISAs are rip-off, but bank and building society accounts are only really for short term saving. Long term saving should be in equities, and ISAs are hugely beneficial in avoiding capital gains tax. It is unfortunate that the same ISA brand is used for cash savings, causing confusion.

Yes I should have clarified cash ISA, I forget there are two!

Regarding stock markets, I doubt my dividend this/next year will rise anything like as fast as interest on savings, and those savings up to £85,000 per organisation* are government protected if the bank goes under; I don't think the same applies to shares?

*some banks and/or building societies are under the same umbrella with different names eg. Clydsdale Bank/Virgin Money are combined as one regarding the financial compensation scheme (??).

Example, if you had xxx shares in a company that went under, then those shares are valueless and there's no government bail-out?

 

[johncrossley]

Yes I should have clarified cash ISA, I forget there are two!

Regarding stock markets, I doubt my dividend this/next year will rise anything like as fast as interest on savings, and those savings up to £85,000 per organisation* are government protected if the bank goes under; I don't think the same applies to shares?

*some banks and/or building societies are under the same umbrella with different names eg. Clydsdale Bank/Virgin Money are combined as one regarding the financial compensation scheme (??).

Example, if you had xxx shares in a company that went under, then those shares are valueless and there's no government bail-out?

Well, yes, that's the risk with shares. But you are guaranteed to lose money by putting money in a savings account, as the interest rate is below inflation. Historically, in the long term, shares have outperformed cash historically.

 

[Howardh]

Well, yes, that's the risk with shares. But you are guaranteed to lose money by putting money in a savings account, as the interest rate is below inflation. Historically, in the long term, shares have outperformed cash historically.

Not if one is clever. Building society rates will eventually get close to inflation, and if one can see inflation falling, then get a decent 3/4/5-yr fixed deal at that point and more than likely money will be gained as inflation and BoE rates fall. Long way off that at the moment admittedly!

 

[DelayRepay]

Example, if you had xxx shares in a company that went under, then those shares are valueless and there's no government bail-out?

Best approach is to spread your risk by choosing a fund that invests in hundreds or thousands of companies, rather than picking individual shares yourself. It also helps to spread the risk of poor performance, e.g. if some companies can't pay dividends due to a bad year.

Obviously, the more risk you take, the higher the potential returns, but the more you stand to lose.

 

[Broucek]

Best approach is to spread your risk by choosing a fund that invests in hundreds or thousands of companies, rather than picking individual shares yourself. It also helps to spread the risk of poor performance, e.g. if some companies can't pay dividends due to a bad year.

Obviously, the more risk you take, the higher the potential returns, but the more you stand to lose.

Exactly. Trying to pick stocks yourself is a bit of a mug's game and has more downside risk

 

[dk1]

At least they are growing at 0.5 rather than 0.25%

 

[yorksrob]

Exactly. Trying to pick stocks yourself is a bit of a mug's game and has more downside risk

I worked in a telephone stockbrokers at the time the dotcom bubble burst.

A lot of people got their fingers burnt.

 

[Bletchleyite]

Exactly. Trying to pick stocks yourself is a bit of a mug's game and has more downside risk

Some find it fun, but like betting on sport it is best done purely for that purpose and using small amounts you can afford to lose, not your pension or life savings.

 

[Howardh]

Some find it fun, but like betting on sport it is best done purely for that purpose and using small amounts you can afford to lose, not your pension or life savings.

Ironically isn't it the stock market that keeps the old age pension going? Never understood the ins and outs, but if shares tumble then the government has to find our pensions from somewhere else??

Anyone help me out on that?!!

 

[Bald Rick]

Ironically isn't it the stock market that keeps the old age pension going? Never understood the ins and outs, but if shares tumble then the government has to find our pensions from somewhere else??

Anyone help me out on that?!!

no. The stock market (and bond market, and property market) funds private pensions. The ‘old age’ pension, ie that provided by Government, comes from general taxation.

 

[JamesT]

Ironically isn't it the stock market that keeps the old age pension going? Never understood the ins and outs, but if shares tumble then the government has to find our pensions from somewhere else??

Anyone help me out on that?!!

The state pension is ‘unfunded’, today’s pensioners are paid from today’s tax receipts, the stock market isn’t involved.

Companies that still have defined benefit pensions would be most in trouble from the stock markets underperforming and leaving a deficit that would have to be filled additional contributions from the employer and/or employee.
Defined contribution pensions where the person is close to retirement would be most at risk, though most funds ‘lifestyle’ the investments to avoid a sudden drop just before they need to pay out.

Apart from places where the government is the employer, there’s not really anything the government has to do in relation to pensions and the stock market. Indirectly they might need to pay out more in benefits such as Pension Credit if people’s pensions aren’t good enough, but that’s not the government having to find our pension.

 

[Howardh]

Thanks for that info!

 

[Magdalia]

The state pension is ‘unfunded’, today’s pensioners are paid from today’s tax receipts, the stock market isn’t involved.

Apart from places where the government is the employer, there’s not really anything the government has to do in relation to pensions and the stock market.

Most occupational pensions, paid by the government as an employer, are also unfunded, and paid out of tax receipts. The major exception is Local Authorities, which do have Pension Funds, investing the contributions and paying out the pensions.

 

[Islineclear3_1]

If bank/building societies interest rates were 6% I'd be skipping!

ISA's are a bit of a rip-off though, I can't find any that go close to the best non-ISA rates, so maybe it's better to go for the standard accounts and pay tax (if you earn enough interest to do so); a few months ago I got a bond at 2.5% - less 20% tax is an annual rate of 2% - whereas my ISA offer was only 1.7%. The first £1000 of interest is tax-free of course, making the bond even better. **And better still if your income such as pension doesn't reach the tax threshold of around £12500.

Sure both will have risen in the last couple of months, but I bet the best ISAS are still way below the best ordinary rates?

Who remembers TESSAs? I had one that paid just over 6% before they were abolished.

How long until the higher interest rate is passed on to savers?

 

[DelayRepay]

ISA's are a bit of a rip-off though, I can't find any that go close to the best non-ISA rates, so maybe it's better to go for the standard accounts and pay tax (if you earn enough interest to do so); a few months ago I got a bond at 2.5% - less 20% tax is an annual rate of 2% - whereas my ISA offer was only 1.7%. The first £1000 of interest is tax-free of course, making the bond even better. **And better still if your income such as pension doesn't reach the tax threshold of around £12500.

If I was in charge, I would scrap Cash ISAs, and increase the personal savings allowance significantly to, e.g. £10k per annum.

Cash ISA rates are not competitive because they are more costly for banks to operate than normal savings accounts, due to additional HMRC reporting and compliance requirements.

 

[johncrossley]

Who remembers TESSAs? I had one that paid just over 6% before they were abolished.

How long until the higher interest rate is passed on to savers?

Some accounts have been increasing their rates soon after the change in base rates. The problem is the base rate is so low. In the latter years of TESSAs, the base rate peaked at 7.5% in 1998. The easy access best buy is currently Ford Money at 1.95%, only 0.3% lower than the base rate, and you can get a fixed rate for 4%, well above the base rate (obviously in preparation for future increases in the base rate, so it won't look like such a good deal before long).

 

[DannyMich2018]

I'm sure most Banks and Building Societies will have no or little delay in increasing their mortgage rates for people with no fixed rate mortgages but really slow at increasing savings rates!! My Nationwide Instant Access ISA account is still on a pathetic 0.15 interest!