Movin’... property
Every issue we look at what’s happening in the economic world and ask the really important question: What does it all mean for me? This issue we take a look at interest rates and how they affect homeowners. Interest rates are all around us; however, if you’re borrowing money in any way at the moment, then you’ll be particularly aware of the interest charges in this economic climate. But it’s worth noting that it’s not just the public and businesses that have to borrow money and incur interest charges; banks themselves have to make sure that they can also borrow enough money to have readily available cash to continue running their business of lending money to people. When a bank needs money though, they borrow it from another bank that has a surplus amount. Banks therefore have their own interest rate system, called the London Inter-bank Offer Rate (LIBOR), which determines how much interest banks should pay to each other when borrowing money. This means that the interest rate that they offer to us will also be dependent on the LIBOR. The LIBOR, then, must be relatively low so that the banks themselves can make a profit by lending that money on to us.
Banks have their own interest rate system called the LIBOR The interest rate that we all hear about as consumers is set once a month by the Monetary Policy Committee (MPC) at the Bank of England. They have the difficult job of choosing a figure that is low enough to encourage people
to borrow money, but is also high enough so that people will be encouraged to save money and make people’s cash grow, with the hope that they will then spend this money in the economy at a later date. It’s reviewed and reset every month and is currently set at 0.5%*, which is extremely low compared to recent times. In doing this, the MPC is trying to encourage the public to pump money back into the economy by making items less expensive to buy in the first place. Also, by trying to put people off from saving their cash with the prospect of low interest rates on their savings, consumers should be more likely to spend their money. Interest rates and mortgage holders As a mortgage is a loan in its basic form, if you’re a mortgage holder then you’ll be similarly affected by interest rates, just as the rest of the public are. While the public are at the mercy of the MPC in the way mentioned above, mortgage holders do have means of predicting the future, helping them to save money by choosing a certain type of mortgage. If you decide to ‘fix’ your mortgage, this means that you’re choosing to pay the same interest rate for a certain time, rather than pay whatever the MPC sets as the current interest rate. Alternatively, if you decide to ‘track’ the Bank of England’s interest rate, your monthly repayments on your mortgage will either go up or down in line with that rate. At the moment, those who chose to track their mortgage with the Bank of England are paying less interest on their mortgage. Consumers must be careful though, as interest rates will indeed rise again in the future, meaning so will their mortgage repayments!
% Interest rates
Confidence and interest rates No matter which option you choose for your mortgage, it will always be a gamble, as no one can predict the future. Looking back through history will give you an educated guess but, ultimately, the future will be shaped by global events that affect the public’s confidence. Basically, if people are confident about the future, they’re willing to borrow more money and generally spend more because their job is secure and the value of their house is rising. This is why, every so often, we end up with booms and then busts. A boom arises out of the
Always make sure that if you do borrow money that you can afford to pay it back public’s confidence in the good times lasting forever, whereas busts occur when confidence has been shaken and the future looks uncertain. Regardless of whether the economy is in boom or bust, always make sure that if you do borrow money that you can afford to pay it back. That way, you’re doing everything you can to ensure that, whatever the future holds for our economy, your money and your assets can be as safe as houses. *
Correct at time of print
July–August 2009 | Issue 3
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