Bitter-Sweet Interest for Borrowers and Savers

With 0.5 per cent cut in the interest rate down to 1.5 per cent, the lowest in the Bank of England's 315 year history, the news will be bitter sweet to several members of the public.

Mortgage holders, will be happy as for many, this lower rate can see their repayment debts, falling drastically, with some even coming down to by as much as 50 per cent.

However, savers will be feeling the pinch as the lower interest rate will leave them with lower revenue, coming into their accounts. Some may even fall into debt as their savings may be their only source of income, with job losses becoming increasingly frequent.

Bitter-sweet interest rates
Another key group is pensioners, some 12 million who rely on interest from their savings to top up their pensions, will be seeing their source of income, creeping up at a much slower rate. For example a pensioner with £5,000 in savings will be likely to see their yearly interest fall by £111 to just £71.50.

Gordon Lishman, Director General of Age Concern said: ""There will undoubtedly be many older savers left feeling penalised for their prudence. Many older people who rely on the interest from modest savings to top up their income will be anxiously counting the cost of recent cuts; particularly as so many are already struggling to pay high household bills."

Mr Lishman added that: "Older savers should ensure they are making the most of their money by checking they are not over-paying the tax on their savings and shopping around if they feel they are getting a poor deal."

Some of the best savings accounts deals have already been removed from banks and building societies, and economists are warning that if the rate continues to fall, savers could soon be paying banks to look after their money rather than gaining interest on their hard earned cash.

Many instant access accounts already pay less than one per cent, while according to a financial statistics from a finance website, the average rate on savings account has fallen to 1.57 per cent - down from 3.83 per cent last September.

Other options
In response to the fourth consecutive cut in the interest rate, Sharon Bratley, Chartered Financial Planner for a financial website stated that pensioners are going to be forced to consider other options to supplement their incomes and is not surprised that the equity release market is expected to grow.

She said: "Pensioners, are finding that their finances are being squeezed so many are looking for ways to boost their income, and equity release is one of the ways in which older homeowners can do this."

"By opting for an equity release plan, whether it be a lifetime mortgage or a drawdown plan, homeowners can start benefiting from the capital they have locked up in their homes without actually having to move.

She concluded by saying: "Falling house prices will of course affect the amount of money available, but equity release remains a popular option, which for many people makes perfect financial sense, especially now."


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