Five-Year Low Interest Rates Means 'You're A Mug To Save' - Experts

'You're A Mug To Save'
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The Bank of England's five-year policy of rock bottom interest rates has sent out the message that "you're a mug to save", experts have said.

But while savers have seen the returns on their rainy day pots "virtually disappear", many mortgage borrowers have found themselves hundreds or even thousands of pounds better off than they might have been.

According to analysis from financial services firm Hargreaves Lansdown, £1,000 saved in an average account in March 2009, when the base rate dropped to its historic low of 0.5%, would have edged up slightly to around £1,040.

But the impact of inflation, with the Retail Prices Index having risen by 20% over this time, means that in real terms this pot would be worth just £870 now.

Independent financial expert Ros Altmann believes rates have been kept "far too low for far too long", leaving savers with severe income shortfalls, many of whom will be pensioners.

She said: "The policy stance has rewarded borrowers and punished savers - the message being sent is, 'you're a mug to save'."

Dr Altmann acknowledged that borrowers are enjoying the benefits of mortgage lenders' best ever deals, but she warned: "Keeping rates so low is merely prolonging an illusion of affordability and there are fears that many will not be able to afford even a small rate rise. This could damage growth in future years."

Financial information website Moneyfacts probed the impact on rates for savers scouring the market for the best deals.

According to Moneyfacts' calculations, someone saving £1,000 in the best-paying instant access account on the market today would be around £19 a year worse off than someone doing this five years ago, before tax.

Five years ago, the "best buy" instant access account was the Egg Savings Account with a rate of 3.35%. Fast-forward five years and the top-paying deal is Britannia's Select Access Saver, which has a rate of less than half of this, at 1.5%.

Sylvia Waycot, editor of Moneyfacts.co.uk, said that a saver would now need to lock their money away for seven years to get a similar rate to the instant access deal five years ago.

She said that the base rate, combined with the Funding for Lending scheme, which has only recently been diverted away from households, means savers have seen their returns "virtually disappear".

Funding for Lending boosted the mortgage market last year by giving lenders access to cheap funding, but the scheme was blamed for making savers' plight worse by making banks less reliant on having to offer decent savings rates to attract their cash.

Waycot said: "The only time savers will get better rates is when banks need savers' money. The problem is we can't bank on when that might be."

Moneyfacts also looked at the lowest mortgage rates available in March 2009 against those now.

It found that someone who has a 40% deposit and needs a £150,000 home loan would save nearly £800 over two years if they took out the lowest two-year fixed-rate deal currently available, compared with if they had taken out the best deal on offer five years ago.

People with the lowest deposits, such as first-time buyers, are the big winners to have emerged out of tumbling borrowing costs, according to Moneyfacts' analysis.

Someone with a 10% deposit taking out a two-year fixed deal would be more than £5,000 better off over the two-year period with the lowest rate currently on the market than they would have been in 2009.

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