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Interest rates

If I look back over the 30 years that I’ve been trying to help people make the most of their money, has anything much really changed for customers?

Perhaps three things. One is internet banking. The second is competition. Many think things are stitched up by the big banks but, look around a bit, and you can probably buy every financial product you may need from a much smaller provider (although that small provider may well end up losing money on you if you then shop around at renewal and go elsewhere).
 
But the third change has had by far the most profound impact - interest rates. These affect borrowers, savers and investors.

There are two aspects to interest rates, both of which have changed utterly. Bank base rate has been 0.5% since early 2009. Following the Monetary Policy Committee decision last Thursday, it has come down further to 0.25. It doesn’t really matter much because, compared to what interest rates were, we are living in a different world.

At the end of 1979 they were 17%; through the 1980s they moved around 10%; in the 1990s they started to fall towards 5%; and then into the noughties they fell to just below 5%. Then we had the financial crash. Many commentators kept expecting rates to go up in due course but they haven’t. We’ve ended up like Japan, where they
have had very low rates for decades.
Interest rates
At the same time, longer term interest rates, the premium you get or have to pay for money longer term, have fallen as well. Twenty years ago, the cost to a bank or building society of swapping short-term deposits (called three month LIBOR) into 10 year money, for example to provide a 10 year fixed rate mortgage or to pay a 10 year savings bond, was 8%. Today it is 0.8%.
 
So the cost of money has fallen dramatically and the cost of money for the longer term has also fallen dramatically. See the chart. The 30 year swap rate today is just over 1%. So, tie up money for 30 years rather than three months, and a bank gets less than 1% extra. That is how little your savings are worth today to deposit takers. This has been a complete nightmare for savers, especially for those who needed the income to live on. They have either had to live off the capital or try something riskier.

But for borrowers it has been a boon. Mortgage rates are at all-time lows. A couple of years ago nobody would have thought this would happen. 

By Mark Bogard
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Family Building Society
Ebbisham House
30 Church Street
Epsom
Surrey KT17 4NL
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