Interest rates

Interest Rate update as at December 2020

Possible negative interest rates

We continue to live in unprecedented times in the UK! The Bank of England checking with the High Street Banks to see if they have the systems to in place for negative interest rates (we believe some haven’t….).

Impact on savers

Negative rates could mean that savers are penalised for retaining funds on savings accounts, and borrowers pay even less for their money.

Not all borrowers will benefit

A number of lenders have a “minimum rate clause” in their terms and conditions, typically a base rate of 0.75%. It may be a good time to look at refinancing these loans given base rate is now at 0.1%(and possibly falling further?)

Fixed rates

Again, like variable rates, these are at record lows. Now could be a good time to lock into super low rates, although as mentioned above variable rates could still fall further and go into negative values.

Current fixed rates

As at 16th October 2020, a typical high street Bank was offering fixed rate cost of funds as set out below. Note that the lenders margin (typically 2% to 4%) still has to be added to these rates:-

Term Margin plus Change week on week
1 year 0.30% -0.03%
2 years 0.26% -0.05%
3 years 0.26% -0.06%
4 years 0.27% -0.07%
5 years 0.29% -0.08%
6 years 0.31% -0.08%
7 years 0.33% -0.09%
8 years 0.35% -0.09%
9 years 0.37% -0.10%
10 years 0.39% -0.10%

Future Rates

The markets think that rates are going to stay low for many years. Hence there is very little difference in the rates between one/two years and ten years in the table above. The big unknown however is inflation. Will the governments heavy borrowing and money creation schemes overcook things? Will we, somewhere down the line, end up with inflation? This would likely lead to a rise in interest rates. Alternatively we could end up in a Japanese spiral of deflation as consumers reduce spending and save more to protect their wealth!

Our view

We think a sensible way forward is to fix the rate on part of ones loans and leave some on floating rates. Hence one is managing exposures rather than gambling either way with rates by either fixing all your debt or leaving it all floating.  The approach that you take will also depend on how fast you want to pay down debt. Generally penalties will apply if you repay fixed rate debt early. This of course is all generic advice so please speak to one of our team to seek a view more specific to your circumstances.