Interest rates: Guide to a year of record low interest rates | Personal Finance | Finance

Twelve months on from its decision on August 4, 2016, rates remain at record lows with the Bank, whose Governor is Mark Carney, freezing them again last Thursday.

Low interest rates helped prevent economic meltdown after the financial crisis by cutting borrowing costs, but may be doing more harm than good today, as savers struggle and cheap money encourages consumers to pile on more debt.

WINNERS 

Mortgage borrowers are the big winners over the past 12 months.

A year ago the average two-year fixed-rate charged 2.47 per cent, while today it stands at 2.24 per cent, according to MoneyFacts.co.uk, a drop of almost 10 per cent.

Similarly, average five-year fixed rate deals have dropped from 3.08 per cent to 2.80 per cent.

Banks and building societies are enjoying fat margins on lending to loyal customers, because incredibly, today’s average standard variable rate (SVR) of 4.60 per cent is more than 18 times base rate.

Rachel Springall, finance expert at MoneyFacts, says borrowers must fight back by switching to cheaper rates: “Somebody with a £150,000 capital repayment mortgage who switched from the average SVR to a five-year fix at 2.80 per cent would save around £146 on their monthly repayments.”

This adds up to a total saving of £8,789 over the five-year term, minus any mortgage set-up fees.

“This cash could be put to better use as living costs continue to increase,” says Springall, but she warns that not everyone will be eligible for today’s record low deals, as they must first pass stringent affordability checks.

“If you cannot afford a future interest rate rise, you could end up as another mortgage prisoner.”

LOSERS 

Low interest rates may have bailed out borrowers, but savers have footed the bill. Springall says last year’s cut gave banks and building societies yet another excuse to slash savings rates.

The average easy access savings account paid a meagre 0.55 per cent one year ago, but today savers get an even poorer 0.39 cent.

Somebody who paid £10,000 into the average five-year fixed bond five years ago at 3.79 per cent would have earned £1,047 more interest than savers are getting at today’s average rate of 1.92 per cent.

She says the new breed of challenger banks are the only ones seriously competing to win savers’ business: “Rates are unlikely to bounce back for years, even if base rates do rise slightly.”

TAKING STOCK 

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