Mat Megans, CEO at Hyperjar, examines current patterns of debt and spending and discusses how the status quo might be changed.
COVID-19 has impacted everyone in different ways. On an economic level, it was the tipping point that burst the bubble of expansion that started after the Great Recession ended in 2009. Now we are in a new recession caused by deliberate, but necessary, actions to try and prevent the rapid spread of the virus. Actions which have hammered the economy. Central banks around the world had to drop interest rates, often to as close to zero as makes no odds, to try and stimulate demand. The average UK consumer is facing this grim situation whilst sitting on a pile of debt even larger than the previous peak in 2008.
So, what about The Great Recession?
The Great Recession was a crisis of our own making that almost took down the global financial system. It caused such a scare that governments around the world implemented various regulations to try and prevent a repeat ever happening again. In the UK, one such regulation was ring-fencing, the set of rules that apply only to UK banks with more than £25 billion of core deposits. The main objective is to separate essential banking services from riskier lending activities – to try and avoid key banks dabbling in esoteric products like CDO-squareds and sub-prime mortgage securitisations. These indirectly led to people lining up in the street outside Northern Rock asking for their deposits back. Ring-fencing has definitely succeeded in making these deposits safer, but has also made it more difficult for many banks to earn attractive returns on capital.
This creates two side effects:
- There is less desire for aggregation of consumer deposits by many large banks;
- The big banks have increased levels of unsecured consumer lending compared to less profitable secured products such as mortgages.
Ring-fencing has definitely succeeded in making these deposits safer, but has also made it more difficult for many banks to earn attractive returns on capital.
What does this mean for the UK consumer?
I believe these conditions contribute to a number of trends seen over the past decade. Unsecured consumer debt has risen to all-time highs. Consumers are bombarded with offers for credit to buy almost anything, in almost every way imaginable – on social media, at the checkout till or online basket, in the post, at the ATM, on television. Fintech has also participated in driving innovation to make accessing credit easier and more prevalent with a strong increase in Buy Now Pay Later services at checkout.
The net result of this mountain of unsecured debt? Many people find themselves in very difficult situations as the expansion ends and recession sets in, leading to higher unemployment and increased personal financial difficulty.
Good debt and bad debt
Yes, we have a heavily indebted consumer. But debt isn’t always bad. In fact, some debt is a tool that creates significant happiness and wealth, for example: mortgages. A small deposit can help buy a house, and even modest levels of price appreciation over the long term can net attractive returns, or allow for mortgage repayments which are lower than the rent for an equivalent property. I call this good debt, debt used to generate positive returns and outcomes. Then you have other forms of good debt which arise through unplanned necessity, for example debt used to buy a car that’s essential for work, or a broken boiler that needs to be repaired.
Bad debt is none of this. It’s debt used to buy depreciating assets such as a nice pair of shoes or the latest gadgets that do not generate real, absolute or relative financial returns. Problems can often arise as bad debt accumulates, sometimes on top of necessary good debt. What inevitably happens is those with the smallest financial buffer have the worst debt, and this means they suffer more in a recession.
What can we do?
It’s not all dark and gloomy. We can do a lot. It has become a cliché, but in this case, we really can build back better, and not just as a political slogan. Perhaps we can rewire society’s relationship with spending and debt:
- Lockdown has made many appreciate the simple things in life. A ‘gratitude attitude’. Time with family, friends, relationships and nature are increasingly valued personal ambitions – maybe this may make us a little less susceptible to buying material objects for instant gratification, and a little more cautious about taking on debt to buy things that we cannot really afford.
- Economic uncertainty has led many people, who have the ability to do so, paying down debt and increasing savings at unprecedented rates. To play on the infamous words of ex-Citibank CEO Chuck Prince, many people recognise the music has stopped playing and it’s time to stop dancing. They’re building buffers.
- A younger generation is growing up and joining the workforce in extremely difficult times and they have different attitudes to debt and excess conspicuous consumption. Sustainability is one of their driving forces and this applies not just to carbon footprint but also to their finances.
- Near 0% interest rates on current and savings accounts is becoming front page news and a topic people are thinking about and discussing. It offers the opportunity for other stakeholders besides banks to step in and help give savers attractive options. The topic of financial literacy is becoming more prominent and there now exist many popular Instagram influencers who talk about personal finance. Being responsible with your money is becoming cool.
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These factors set up an opportunity to reset and to think about fintech business models which are designed around savings, not around debt. At HyperJar we are working with a group of forward-thinking retailers to offer attractive rewards to consumers who can commit funds that will be spent with them in the future. The funds are safely held at the Bank of England until our customers are ready to spend it. On top of the rewards, which grow dynamically over time when money is allocated, you’re less tempted to spend on things you don’t need. A win-win between shoppers and the places where they shop. That’s a future we think is possible and worth trying to build.
When the recent pandemic happened, one area that was notoriously affected was businesses. Restaurants closed down. Airlines ceased from operating. Malls, fashion boutiques, function halls, and beauty salons stopped functioning. Perhaps the only business establishments that stood the awful pandemic predicament were grocery and drug stores.
Fortunately, with the recent development and precautionary measures conducted, the businesses have slowly resumed their operations. But sadly, others have lost so much money that they will need to start from scratch and obtain corporate financing.
Hence, elaborated below are the tips to get a personal loan with the lowest interest rates to help business owners start all over again and regain what was once lost.
Personal Loan Defined
The loan that the business owners will obtain can be a personal loan. It is defined as a type of unsecured loan that will help these entrepreneurs with their financial needs, such as recovering from a terrible loss or survival.
So if you are a business owner, with this type of loan, you will usually not need any collateral or pledge within which to secure your loan. And your lender may provide you the flexibility to utilise the funds or resources according to your needs. However, although you are not obliged to post any security for your loan, you will still need to pay the agreed interest rates, as mentioned in the loan contract.
What is an Interest Rate?
Of course, it is suicide for lenders to lend a loan without imposing any interest rate at all. Interest rates are indispensable in the lending business. Why? Because it is the amount due to the lender. They could not use their money since it was given to someone else like the borrower. Meaning, they could not enjoy and use their cash because they lent and gave it to someone else.
Imposing an interest rate is the remedy to that situation. Thus, an interest rate is an amount proportionate to that borrowed in which the lender charges the debtor and is mostly expressed as an annual percentage.
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How To Find the Lowest Personal Loan Rates
Follow any of these methods, and your business will surely recover and flourish:
1. Maintain a Spotless Credit History
As a business owner, you need to find the lowest interest rate personal loan. Your lenders will assess your credit history before lending you a loan. Thus, you must have maintained as spotless a credit history as possible so they will not hesitate to provide you the funding that you need. But if you have a low credit score, you must improve it to be lent money in no time.
2. Make Inquiries
You must make inquiries and shop around when it comes to looking for the most favourable lender for you. Choosing a lender requires a lot of research and planning to find the lowest interest rate. Ask around. Compare the terms and conditions. And study the rates and repayment schedule fees.
3. Find a Co-signer
You must find a co-signer with an excellent credit history and reliable income when you apply for a personal loan for your business to increase your chances of getting approved at a lower interest rate. The reason is that your co-signer will guarantee the payment of your loan if you miss it. With that, your lenders will not hesitate to approve your loan application because they can run after your co-signer if you do not pay.
Importance of Lower Interest Rates
Indeed, you need lower interest rates for your business needs. Why? The reason is crystal clear. With lower or even flat interest rates, you can quickly obtain corporate funding and other products cheaper than they usually are. It also means that most of your money is applied to the principal instead of the interests when making monthly payments, making it easier for you to pay the whole unpaid obligation.
With lower or even flat interest rates, you can quickly obtain corporate funding and other products cheaper than they usually are.
Corporate Finance Explained
It is common knowledge that businesses need money to earn money, increase their revenues, or recover from a mishap like the pandemic. But because all their business income had been utilised to survive, they would have to seek financing. And that is what corporate finance or funding is all about.
So, what is corporate finance? Corporate finance is akin to corporate funding, which is a means to provide money and resources for businesses. This means that a lending corporation, bank, or partnership involved in lending will provide capital, otherwise known as money, to the business owners for the latter’s survival, business expansion, improvements, or income-generating activities.
In short, corporate financing entities lend money to these business owners or grant loans but with interests for their benefit.
Takeaway
With all these tips and knowledge, you will not find it difficult to bounce back and resume your business. You need only to be determined and strong-willed to thrive again and for your business to thrive even in these difficult times.
During a webinar held on Sunday, Bank of England governor Andrew Bailey said that interest rates below zero were generally most effective during periods of economic recovery, according to the BBC.
“Our assessment of negative interest rates, from the experience elsewhere, is that they probably appear to work better in a more wholesale financial market context, and probably better in a nascent economic upturn,” Bailey said during the event, adding that it was best for policymakers to act aggressively in the face of uncertainty rather than embracing caution.
Also during the webinar – hosted by the Group of Thirty, an economic and banking panel – Bailey said that he expected Q3 economic output to be 10% lower than at the end of 2019, though he noted that the influence of COVID-19 meant that “the risks remain very heavily skewed towards the downside.”
The governor’s comments added to speculation that the BoE may soon move interest rates below zero. If this were to occur, the UK would be following the example of countries like Denmark, Switzerland and Japan, which have adopted negative interest rates in the past to spur economic activity.
While the BoE has sought to downplay expectations that interest rates might fall below zero, stating that the measure was merely an option was available and that they had “no plans to use it imminently”, the bank’s Monetary Policy Committee has gone on record as having discussed the viability of negative interest rates, and the BoE has more recently sent a letter to UK banks enquiring about their preparedness for sub-zero rates to be adopted.
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In late March, the Bank of England cut interest rates from 0.75% to 0.25%, and finally to 0.1% -- their lowest level in history. Rates have remained unchanged since then as the UK continues to weather the economic impact of the COVID-19 pandemic.
The BoE’s Monetary Policy Committee will next meet on 5 November, where they will decide to either alter current interest rates or leave them unchanged.
The Bank of England issued a letter to banks on Monday morning asking how ready they were for interest rates to fall to zero or negative values.
In the letter, titled “Information request: Operational readiness for a zero or negative Bank Rate”, BoE deputy governor Sam Woods told recipients that the bank was “requesting specific information about your firm’s current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these."
"We are also seeking to understand whether there may be potential for short-term solutions or workarounds, as well as permanent systems changes," if banks would face technological challenges from an interest rate inversion, Woods continued.
In March, the BoE cut its interest rates to a record low of 0.1%, where it has since remained, owing to the continued impact of the COVID-19 pandemic. However, there has been speculation in recent months that the rate could turn fully negative, with the BoE raising the possibility in internal communication but insisting that there were no plans to resort to these measures “imminently”.
The UK would be following in the wake of countries like Japan and Switzerland if borrowing costs were cut to such a low figure. It would also mark the first time in the BoE’s 326-year history that negative interest rates have been adopted.
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The BoE set a deadline of 12 November for recipient banks to respond to the letter – a week after its next monetary policy announcement.
On Thursday, the Bank of England’s Monetary Policy Committee (MPC) left interest rates at 0.1%, their lowest level in history, and maintained an outlook for the UK that was relatively unchanged from its August meeting.
However, analysts were intrigued by particular lines in the MPC meeting minutes which showed that the bank was looking more closely at policies for cutting interest rates below zero.
The minutes said that the MPC had “discussed its policy toolkit, and the effectiveness of negative policy rates in particular.” In addition, the minutes noted that the Bank of England intends to “explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates.”
“The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4,” the MPC minutes continued.
Earlier this month, Andrew Bailey, Governor of the Bank of England, said that negative interest rates were counted “in the box of tools” but added that the bank had “no plans to use it imminently.” The apparent change of tack revealed in the minutes quickly gained the attention of economic analysts.
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“They just opened the door further to negative rates not just next year, but for an extended period, potentially triggered by any negative economic shock,” remarked Robert Wood, chief UK economist at Bank of America. The Bank of England appeared to be “more prepared to use negative rates than we thought,” he added.
The pound fell sharply following the bank’s announcement on Thursday, weakening 0.6% against the dollar on the day, falling below $1.29.
But while cashback and reward cards give you the chance to get a percentage of what you spend back, you really need to do your homework before applying. You can apply for a credit card in many ways: you can use a comparison site, apply online, by post, over the phone or at a bank or building society. Below, Sarah Henshaw of Must Compare discusses why caution is necessary.
Firstly, with economies struggling around the globe and many nations already in recession, you should think twice before applying for any credit card. This is especially true if your job or income is looking precarious, or you're going to struggle covering your bills as a result of the current coronavirus crisis. Higher than usual interest rates mean these credit cards are generally best suited to customers who will pay the entire balance off in full every month. The moment you fall behind, the interest incurred on any remaining debt may start cancelling out the rewards you’ve earned. Plus, by dangling incentives to use your card, you’re more likely to ‘justify’ splurging on items you might otherwise have had the self-control to resist. If you’re trying to economise in this crisis, you’ll need to have the willpower to capitalise on cashback opportunities without falling into an over-spending trap.
Secondly, bear in mind that you’re cooped up at home right now, with limited access to high street shops. Although cashback on what you spend at the till might sound tantalising, if it’s not with a retailer you’d ordinarily visit, or you might not even be allowed to under lockdown rules, you're going to be waiting a while before reaping the benefits. Online shopping, unlike groceries and travel, doesn't generally yield the best perks on reward credit cards, so if your plan is to use it from your sofa make sure it’s fit for purpose first by looking at the small print.
If you’re trying to economise in this crisis, you’ll need to have the willpower to capitalise on cashback opportunities without falling into an over-spending trap.
When looking into getting a credit card, it is important to know the exact requirements needed to apply. Some card companies have been tightening their criteria due to COVID-19 and the new risks it poses, however many won’t announce any changes, so this will be another factor to look into.
If staying at home is giving you itchy feet, and you’re looking to stockpile travel points through your rewards credit card, bear in mind many hotels, airlines and cruise companies will be suffering at present. While this doesn't mean they won’t bounce back once movement rules are lifted, it could see some adjust their frequent traveller programmes and loyalty schemes to ride out the worst of it. You don’t want to be stuck with a pile of points you can’t use! Especially with the new updates on what countries you can and can’t go to without self-isolating for 14 days when you return. Remember, too, that once you've accrued them some rewards will have an expiration date. Another thing to check out before applying.
As well as the type of rewards on offer and where you can accrue them, there are countless other factors to look at when comparing cashback credit cards. Some providers offer a sign-up bonus that can boost your rewards – while others might charge a sign-up fee, uncompetitive interest rates, or an upper limit on the amount of cashback you can earn, which could make attractive headline ‘deals’ look altogether less appealing once you’ve read the T&Cs. Some cashback and reward credit cards come with minimum spending quotas before you're allowed to cash in your points, others have tough application criteria which, if you’re refused, could impact negatively on your credit score.
Additional support packages have been setup during this time of crisis, such as pay freezes on UK loans and credit cards, which aim to help people who are in debt and experiencing financial struggles due to COVID-19. The FCA (Financial Conduct Authority) have awarded those who have lost their jobs, or are receiving less income, with what they call ‘breathing spaces’ that allow them to request up to £500 overdraft for three months free of interest, or request a payment freeze. Make sure you keep up to date with these support offers as at the moment of writing this, customers have until the 31st October 2020 to apply. Many other sites have been covering the updates on financial help available, so it’s good to research your options.
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There are many websites that you are able to use to compare cashback and reward credit cards. Most will show you a wide range of cards available, from ones that pay a flat rate of cashback, to those offering different rates depending on how much you spend or where you shop. By looking at a big sample you should be able to better identify the card that’s best suited to your current spending habits or future needs.
It helps to have a goal in mind. Is there something that you are saving for? Selecting the right card for your goal can help you reach it quicker. Whether it is a 2021 luxury holiday that air miles can help you out with, or an all-out Christmas lunch with the family, you need to think about your goal and choose the best card for you.
If you’re still not sure whether reward and cashback credit cards are right for you, you can find more information about how they work, how to make the most of them and some common pitfalls online. You can also view information and advice on how to choose the right card and what to consider when applying in more detail. These cards can be a great way of making your money work harder but can equally turn into a real headache if they’re not used wisely. Always do the research first and you should reap the rewards as a result. If you are feeling financially worried or vulnerable, make sure you contact your card provider as they may be able to assist you.
The UK is on course for a V-shaped recovery from the damage wrought by the COVID-19 pandemic, according to the chief economist of the Bank of England (BoE), Andy Haldane, has estimated.
In an online speech on Tuesday, Haldane acknowledged the continued risk of high and persistent unemployment across the country, but “[his] reading of the evidence is so far, so V.”
Haldane, who was the only member of the BoE’s Monetary Policy Committee to vote against the expansion of its government bond-buying programme earlier this month, said that business surveys have indicated an economic recovery that will come “sooner and faster than any other mainstream macroeconomic forecaster” has thus far predicted.
Regarding his reluctance to see the bank inject another £100 billion into the UK economy, he noted a risk of creating a “dependency culture” where the country’s financial markets would become accustomed to the bank addressing all economic problems with cash solutions.
Despite his vote against expanding the bank’s asset purchase programme, Haldane voted along with the other eight members of the Monetary Policy Committee to keep interest rates at a record low of 0.1%. In his Tuesday webinar, he declined to comment on whether or not a negative interest rate was being considered.
A review on the subject would not be complete until “well into the second half of the year”, he said.
The Bank of England announced on Thursday that interest rates would be reduced to 0.1%, their lowest ever level, in an attempt to limit the economic damage of the ongoing coronavirus epidemic.
This latest cut to interest rates follows only a week after their reduction from 0.75% to 0.25%, and is accompanied by a raft of further emergency measures.
The Bank also announced its intention to increase its holdings of UK government and corporate bonds to £645 billion – an increase of £200 billion from its current holdings and a significant injection of money into the UK economy.
Dr Kerstin Braun, President of financing body Stenn Group, described the timing of these moves has come as a “a surprise”, as they follow only a week after Chancellor Rishi Sunak proposed a significant stimulus plan to shore up the UK economy, and three days after Andrew Bailey took over leadership of the Bank of England from its previous governor, Mark Carney.
“The Chancellor has only just announced a huge £330bn rescue package for businesses and it will be too soon to see any real effect”, Ms Braun said.
This sense of surprise has been shared by market observers. “Not since the Second World War have we seen so many emergency actions taken by the country’s leaders”, Paresh Raja, CEO of Market Financial Solutions commented.
The Bank of England’s statement acknowledged that the economic shock resulting from the coronavirus epidemic was likely to be “sharp and large”, but likely to be temporary.
“The Bank will issue further guidance to the market in due course,” the statement concluded.
It’s not just UK residents that would be impacted. While experts predict that a full-blown recession could be on the cards, it’s also believed that it will negatively influence various regions within the EU, with Ireland, the Netherlands, Belgium, Germany, and France most likely to feel the consequences. Indeed, even countries as far afield as America could be adversely impacted.
This means that it makes sense to have a plan in place – preferably, one that includes a financial safety net to combat any uncertainty or financial difficulties that come on the back of the UK’s exit from the EU.
With this in mind, here are a few handy tips to turn you into a post-Brexit super saver.
Draw up a preliminary budget
Budgeting is considered essential to good money management, but not everyone puts this theory into practice. There are very few of us who cut our costs as much as we feasibly could, but with the possibility of a no-deal Brexit looming, you’ll want to not only reduce your immediate expenditure, but identify any additional areas where you could decrease your outlay even further should this become necessary. With this in mind, we recommend that you spend some time drawing up a table of your incomings and outgoings, so you can work out what you could go without well in advance of it becoming a necessity.
Keep an eye out for more economical alternatives
Although UK PM Boris Johnson remains adamant that the UK will leave the European Union before the end of the month, the reality of Brexit remains little more than academic, but it’s unlikely to stay this way forever. Recession is a very real possibility, so even if you don’t want to go the whole hog immediately, you should already be looking to make small savings where you can. This doesn’t mean going without entirely; rather, it means swapping your Heinz baked beans for own-brand alternatives, and visiting comparison sites; for everything from travel, utility bills and iGaming. For example, in regards to online casinos, with a generous multistep welcome package, Dunder is a solid choice, giving you the chance to play the games you enjoy without breaking the bank, or sites like Compare the Market for insurance, and Trivago for travel.
Review your interest rates
One of the big difficulties with Brexit is that nobody can truly predict how it will affect the economy. This means that interest rates could do almost anything, either remaining low if the financial landscape worsens or rising along with inflation. However, there is one way to know for certain what your future spending on credit products will look like, and that’s by fixing your interest rates. Experts suggest that to safeguard yourself against what’s ahead, your best bets are to either switch to a lower rate or consolidate your debt so you can accurately plan ahead.
Isn’t it time you started making some changes?
Matt Robinson, Commercial Director at Ping Finance, believes that now is the right time for SMEs to borrow, and here takes Finance Monthly through the reason why.
Low Interest Rates
In the UK, interest rates are still incredibly low. Despite a 0.25% increase back in August 2018, bringing the interest rate up to 0.75%, the UK interest rate is still way below the average that it has been in the past, and this is only a good thing for those borrowing.
At one time, during the Thatcher leadership, interest rates rose to a staggering 17% to combat inflation. Interest rates continued to rise into the late 1980s due to the pressure of increasing house prices. The election of Tony Blair in 1997 gave the control of setting the base interest rate to an independent Bank of England. Interest rates then began to steadily decline, hitting 3.75% in 2003, before increasing again up to 5.5% in 2007. Since then, interest rates have dropped drastically due to the impact of the global financial crisis, falling all the way to 0.5% in March 2009, and then a further drop to 0.25% in 2016.
After the recent rise to 0.75% in August, Mark Carney, governor of the Bank of England, said there would be ‘gradual and limited’ interest rate rises in the future. With Brexit uncertainty on the horizon, predictions for the next couple of years are speculative at best. Therefore, there has never been a better time for the likes of SMEs to borrow. Even with the slight increase, we are currently experiencing one of the lowest interest rates in the UK’s history, and with the likelihood of increases on the way in the next couple of years, borrowing right now is a smart move.
There Have Never Been More Options
Nowadays, SMEs have the luxury of being able to be as picky as ever when it comes to their financing options. The alternative finance market has exploded since banks began to withdraw following the recession; traditional loans are no longer the only option for small businesses looking to borrow.
Crowdfunding, for example, can be an effective way to raise capital by allowing people to make small investments in a project or business. Online lenders can be contacted via online applications, and funds can be transferred into accounts in as little at 24 hours.
Peer-to-peer lending creates a form of borrowing and lending between individuals without a traditional financial institution being involved and can turn out to be a cheaper alternative to borrowing from a bank or building society.
Financial technology, asset-based lending, invoice finance and challenger banks are some other alternatives to traditional high street bank lending. These alternative lenders use algorithms and data manipulation to streamline the loan approval process from weeks down to days at most. With so many viable financial services available, there has never been a better time for SMEs to take advantage of all these different options.
Competition Between Lenders
In a similar vain to there being so many different financial options, there is also heavy competition between lenders. With so many lenders vying for your business, they are doing everything possible to make their services seem more appealing to potential clients. Lower interest rates in conjunction with reduced fees or no fees are just some of what’s being offered by many lenders in a bid to secure your business.
From the perspective of an SME, you have the power to shop around and discover the best deal for you. With so many lenders competing to provide the most enticing offers, SMEs can take advantage of this and get a better deal than they would if they had to go with the first offer they were quoted.
More Business Support
It has never been easier to start a business than right now. There is a lot more guidance and knowledge out there to help people bring their ideas and ambitions to life, and most of it can be accessed for free online.
One of the biggest barriers to starting a business has always been start-up cash, and whilst that is still the case, it’s not as much of a problem as it used to be. Online platforms not only create a global marketplace for SMEs, but it’s easier than ever to contact investors and lenders and start generating cash flow to get your business off the ground.
Obtaining funding is not the only barrier to starting a business; general business support is crucial for SMEs to become successful and be able to pay back their loans. Networking, paid mentorship, free courses, government led schemes, books and the wealth of information on the internet can all be utilised by SMEs to help grow a successful business.
Post-Crash Borrowing
Since the market crash in 2008, there has been a shift in attitudes when it comes to lending. There is a greater focus on lenders to look after borrowers, stamping out shady practices and creating a better environment for those who want to borrow. As 2008 becomes a distant memory, lenders’ appetites for risk has increased, and SMEs can take advantage of this current culture of encouraged lending.
After some time of speculation, the Bank of England confirmed interest rate hike last week, by 0.25%. Already we have seen some banks act fast in passing this hike onto the customer, in particular mortgage buyers, as opposed to savings rates.
In this week’s Your Thoughts, Finance Monthly has collated several expert comments from UK based professionals with expert knowledge on this topic.
Richard Haymes, Head of Financial Difficulties, TDX Group:
While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt.
Individual Voluntary Arrangements (IVAs) have reached record levels and we expect the rate of monthly IVAs and Trust Deeds to grow by around 17% this year. A rise in interest rates will make it much harder for people in these arrangements, and there’s a risk they’ll default on their strict requirements.
A large portion of people who are in personal insolvency hold a mortgage (over a fifth according to personal insolvency practice Creditfix), and a rate rise will obviously increase their mortgage repayments. Due to these people’s unfavourable credit circumstances, it’s likely that majority of mortgage holders in insolvency are tied to variable mortgage products, leaving them particularly vulnerable to a higher interest environment.
Holders of a £250,000 mortgage will have to absorb a monthly repayment increase of £31* as a result of this 0.25% hike. Modest as it may appear to many, for people in structured debt management plans or IVAs this could have a very significant impact, even resulting in their debt solution becoming defunct or in need of renegotiation.
Jon Ostler, UK CEO, finder.com:
This rate rise decision comes as no surprise. Our panel of nine leading economists unanimously predicted that the interest rate would rise by 25 base points, and this is a positive sign that the economy is growing stronger.
It’s particularly good news for savers, who have suffered ultra-low interest rates for the past decade. They can expect a rise to their savings, albeit a small one. Now is a good time to consider switching your banking products, as banks will be reviewing their rates. Make sure you keep an eye on which banks are offering the best interest rates as not all of their products will increase by the BoE’s 25 basis points.
On the other hand, borrowers and homeowners with a mortgage are likely to face extra costs. For example, those paying off the UK’s average mortgage debt with a variable rate mortgage face paying an extra £17-£18 per month, which adds up to an extra £200 per year or more than £6,000 over the life of a 30-year loan term.
Angus Dent, CEO, ArchOver:
While banks are likely to pass the rate rise straight onto borrowers, they will be less keen to pass it on immediately to savers. Aspirational borrowing such as mortgages and bank loans will get more expensive – so the man in the street needs to counter that with strong returns on savings. Only 50% of savings account rates changed after last year’s rise, so there’s good reason to be underwhelmed.
But this is certainly a step in the right direction for the cautious Bank of England. While such an incremental rise won’t shake the earth, and probably means business as usual, it nevertheless spells good news for the UK.
The country is still hungry for a stronger economy, ten years after the financial crash. Both savers and investors are now aware that to chase higher returns, they need to open the door to alternative opportunities. Alternative finance options that offer higher yields – without sacrificing security – offer savers a path to higher returns in a still-struggling economy.
Savings accounts still aren’t the safety net they once were. Despite this rate rise, savers still need to cast the net wide in the hunt for higher returns.
Markus Kuger, Senior Economist, Dun & Bradstreet:
This rate hike had been anticipated by the markets, despite inflation having fallen in recent months, as UK growth seems to have recovered from the poor performance in Q1. The effects of the rate rise will be minimal, given the Bank’s forward guidance over the past months. The progress in Brexit talks will remain the most important factor for companies and households in the near to medium term. Dun & Bradstreet maintains its current real GDP and inflation forecasts for 2018-19 and we continue to forecast a modest recovery in 2019, assuming the successful completion of the talks with the EU.
Max Lehrain, Chief Operating Officer, Relendex:
The increase in interest rates is a significant moment as it is the first time the Bank of England has raised interest rates above 0.5 in nearly a decade. However, for savers, this change should act as a wakeup call as it is not likely to have a material impact on their investment meaning that those stuck in standard savings accounts are still missing out.
This is in large part down to the rate of inflation far outstripping interest rates, even with today's increase. In simple terms this means that if your savings earn 0.75% interest they are being eaten into by the effects of inflation.
With traditional lenders offering low returns on their savings accounts and cash ISA products, savers who are looking to achieve higher rates of returns should still consider alternative options. Peer-to-Peer (P2P) lending for example, can offer substantially higher returns, giving a good income boost when interest rates are still relatively low.
Innovative savers will identity these options to take this interest rate rise out of the equation. In real terms, over a three year period investing £5,000 in a cash ISA is likely to render a return ranging from £15 to £113, whereas P2P providers offer prospective returns far exceeding that. For example, investing £5,000 in a provider that offers 8%, would see returns of approximately £1,300 over a three year period.
Nigel Green, CEO, deVere Group:
Hiking interest rates now – for only the second time since the financial crash – is, to my mind, premature.
At just above the Bank’s target of 2%, inflation is not currently a key issue. In addition, major uncertainty surrounding Brexit, the looming threat of international trade wars, and absolutely average economic growth, business and consumer confidence are on the slide.
As such, there seems little real justification to increase interest rates now.
Against this back drop, why is the Bank of England raising rates today?
Has the decision been motivated in order to protect reputations and credibility after the Bank’s Governor and some of the committee had effectively already said the rise would happen?
Whilst today’s decision to hike rates is unnecessary, I think that the Bank is likely to refrain from any more increases until after Brexit.
Paul Mumford, Cavendish Asset Management:
The decision on balance might be the wrong one. While all agree that rates need to return to normality eventually, panicking and doing it for the sake of it - or just because other countries are doing it - will only make things worse.
The idea, as in these other regions, is to start incrementally escalating rates in a managed way as growth and inflation tick up. But the UK is in quite a distinct situation. To borrow some terminology from the Tories, the economy is stable, but far from strong - and certainly not booming. Higher interest rates could have very disruptive effects on sectors such as housing, where it could trigger a rush to buy at fixed rates, and motors and retail, which are performing OK but contain a lot of highly geared companies. This does not look like the sort of economy you want - or can afford - to remove demand from. Meanwhile the pound is holding firm at its lower base, so there is no immediate impetus to shore up the currency.
And of course looming behind all this is Brexit. Interest rates may be needed as a weapon to combat sudden inflation from tariffs should the worst happen and we crash out of Europe without a deal. It would make more sense to save the powder until there is more clarity on this front, and we now what sort of economic environment we're all heading into. The last thing we want is to be in a situation where we are stuck with higher and higher rates to combat inflation, while growth remains anaemic or stagnant.
These things are all swings and roundabouts, of course - one big plus from rate rises is that they will ease our mounting problem with big pension fund deficits. Whether this will make it worth the risk remains to be seen.
Stuart Law, CEO, Assetz Capital:
It looks like savers will be disappointed once again. Although the rate has risen slightly, this is unlikely to be passed on to savers, with many banks having form for just applying increases to borrowers.
What’s more, the Bank of England's statement that future increases will be at a 'gradual pace' implies that savers won't see returns that outstrip inflation for months - and potentially even years.
Rob Douglas, VP of UKI and Nordics, Adaptive Insights:
Ultimately, it is the companies that do not currently have sound financial planning processes in place that are likely to be impacted when changes like this occur, as it can upend budgeting and forecasting, making it difficult for finance and management teams to develop accurate financial plans and make business-critical decisions.
The 0.25% extra interest rate is being announced at an already uncertain time, when many fear the long-term effects of a possible no-deal Brexit or a potential trade war with the US on their business, organisations across the country will need to once again adjust their financial plans accordingly. To do this, companies must plan in real-time, with current data from across the organisation, so that they can mitigate potentially damaging consequences, such as a negative impact on profit margins.
The interest rate hike, while expected, is a reminder why businesses need to be able to continuously update their financial forecasts in real-time. Manual spreadsheets and processes simply don’t cut it anymore and finance teams need to be able to respond to economic changes such as this efficiently and effectively. With a modern, active approach to planning and forecasting, businesses will have the foresight and visibility to make better decisions faster, minimising the impact of unexpected government, regulatory or economic changes.
Paddy Osborn, Academic Dean, London Academy of Trading (LAT):
As widely expected, the Bank of England’s Monetary Policy Committee (MPC) raised the UK base rate by 0.25% today, stating that the low GDP data in Q1 2018 was just a blip, the UK labour market has tightened further and wage growth is increasing. This is the highest level of interest rates in the UK in more than nine years, and the MPC’s vote to raise rates was actually 9-0, against expectations of 8-1 or even 7-2.
There was also an unanimous vote to keep the level of government bond purchases at £435 billion, although the MPC remains cautious about the potential reactions of households, businesses and financial markets to future Brexit developments.
Assuming the economy develops in line with current projections, they stated that any future increases in the Bank rate (to return inflation to the 2% target) are likely to be “at a gradual pace and to a limited extent”.
In currency markets, GBP/USD spiked 50 pips higher from 1.3070 within 10 minutes of the announcement, but has since collapsed back below 1.3100. The longer term view for GBP/USD remains bearish, although there are a number of political and fundamental factors which may affect Cable in the coming weeks, namely Brexit developments, the developing trade war, and US interest rates.
The stock market, having fallen over 200 points since yesterday morning, failed to find any solace in the MPC comments and is currently trading at its 1-month lows around 7550. Higher interest rates mean higher cost of debt for companies, and this will often encourage investors to take some money out of their (more risky) stock market investments.
Feel free to offer Your Thoughts in the comment box below and tell us what you think.
Following the Bank of England’s (BoE) decision not to raise interest rates last week, Finance Monthly has heard from a few sources who have provided expert commentary.
Richard Haymes, Head of Financial Difficulties at TDX Group:
The decision is good news for those living in debt or teetering on the edge of financial difficulty. We expect the level of monthly Individual Voluntary Arrangements (IVAs) and Trust Deeds to grow by around 17% this year; a rise in interest rates would have a significant impact on the ability of these individuals to meet repayments and ultimately stay within the strict requirements of these debt solutions.
Figures from Creditfix, the largest provider of personal insolvencies in the UK show that 20.2% of its customer base holds a mortgage. It’s likely, due to their credit position, that most of these customers will have a variable mortgage that would have left them particularly vulnerable to an interest rate rise. A 0.25% hike would have left holders of £250,000 mortgages with a monthly repayment increase of £31*. This may appear a modest rise but for people trying to manage debts through IVAs or Debt Management Plans it could have a detrimental impact, rendering debt solutions unviable or in need of renegotiation.
While a continuation of the low interest environment is bad news for people holding pensions, investments and living on savings – reducing their earning potential compared to periods of ‘normal’ monetary policy, a static interest rate provides relief and stability for those in financial difficulty or on the brink of difficulties.
Stuart Law, CEO, Assetz Capital:
This change in thinking for the Bank of England following an expected rate rise is hardly surprising given the economic uncertainty and poor GDP growth figures. We expect that any increases that do happen over the next year would simply be a short-term measure ahead of Brexit, in case there is a need to drop rates again next year.
Even if interest rates do rise slightly later this year, it’s likely to only be by a small amount. Despite the predicted drop in inflation, this announcement is likely to receive a less than warm reception from high-street savers, who are seeing the value of their hard-earned money decreasing each day through inflation – and of course, many banks will not pass all or any of this rise on to savers.
Angus Dent, CEO, ArchOver:
With Britain’s GDP growth at just 0.1%, it’s no surprise that the Bank of England has kept interest rates stagnating at 0.5%.
Just last month a rate rise seemed a foregone conclusion. Today’s decision is yet another result of the uncertainty surrounding the UK’s financial health. And keeping rates so low means savers lose out once again.
Savers leaving their cash languishing in savings accounts in the vain hope of a rate rise will be sorely disappointed. With the economy in the doldrums, it’s time for a serious rethink – crossing your fingers and hoping for the best does not equal a productive savings strategy.
The news that the majority of banks didn’t pass November’s rate rise on to their customers adds more fuel to the fire, showing that even an historic rise didn’t have the desired effect on savers’ pockets.
Savings accounts are no longer a safe bet for decent ROI. Consider alternative financing options that can offer higher yield without compromising on security. Optimism is all well and good – but we all need a healthy dose of realism if we’re going to make our money work harder.
