Little sign of purse strings loosening as big freeze continues

Published on Friday 25 December 2009 18:59

IT MAY have been an eventful 12 months economically, but precious little has changed in the past year for Scottish households battling to improve their finances or just stay afloat.

At the outset of 2009, savers were coming to terms with falling interest rates, while borrowers were getting little joy from lenders unless they boasted clean credit records and could offer a healthy chunk of equity. For the majority, that still applies a year on.

Whether you're looking for savings, personal loans, credit cards or mortgages or you are just trying to cut your energy bills, the outlook for the coming year is mixed at best. Here's the current state of play and what you can expect in 2010.

SAVINGS

A year in which the Bank of England cut interest rates to an all-time low of 0.5 per cent was predictably lean for savers. Pensioners relying on their savings to provide vital retirement income were hit hard as variable rates plummeted.

The average no-notice account now pays 0.81 per cent, compared with 2.55 per cent a year ago, while savers can secure a mere 1.14 per cent from the typical notice account, well below the amount needed to beat inflation and compared with 2.5 per cent this time last year, according to Moneyfacts.

The rates on tax-free cash individual savings accounts (Isas) have also fallen, although the average rate of 2.06 per cent just about produces a real return.

Andrew Hagger, head of communications at Moneynet, said interest rates on variable rate products had fallen so low as to take away the incentive to save. "Someone with 5,000 in an average instant savings account at 0.8 per cent will have accrued a measly 32 after tax."

What next? Savers are in for a barren few months, with interest rates unlikely to rise significantly, if at all, in 2010. The good news is that the increase in the tax-free cash Isa allowance to 5,100 that kicked in for over-50s savers in October will be available to all from April. But savers need to be quick to take advantage of a likely rash of new Isa offers around the turn of the tax year.

Fixed-rate savings bonds will continue to be the source of the best savings rates, although they are unlikely to move considerably higher than the current average of 3.1 per cent (one year) and 4.63 per cent (five years).

MORTGAGES

The mortgage market began 2009 at rock bottom, with banks reluctant to lend to each other or to borrowers without substantial deposits. There have been signs in recent months of lending criteria easing slightly, with more competition for borrowers with deposits of between 10 and 20 per cent.

But margins remain high despite record low interest rates – the average two-year fixed rate is currently 4.93 per cent, while two-year variable rates average 3.71 per cent.

Katie Tucker, technical manager at Mortgageforce Scotland, said efforts to stimulate the market, such as the temporary extension of the rise in the stamp duty threshold from 125,000 to 175,000 and the injection of government capital into the system, had helped. Lenders continue to struggle, however, having had "capital adequacy" regulations imposed upon them, forcing them to stash away any money they do have, said Tucker.

What next? Borrowers on tracker and variable rates have plenty of time yet to take advantage of low interest rates to overpay on their mortgages.

For both fixed-rate borrowers and first-time buyers, it's all about the amount of equity held, with deals above 80 per cent loan-to-value considerably more expensive than those below. There is hope that the end of the temporary stamp duty threshold increase will be offset by a gradual improvement in finance for first-time buyers, said Tucker.

"It's too soon for 100 per cent mortgages just yet, but by December 2010 some bright spark may well have convinced us that a 95 per cent mortgage with a 5 per cent personal loan is a good idea again," she said.

LOANS AND CREDIT CARDS

The average rate for a 5,000 loan has crept up from 11.6 per cent in January to 12.4 per cent now, according to Moneyfacts, while the average for a 10,000 loan for five years is up from 9.48 per cent to 9.94.

However, the biggest problem faced by borrowers is in securing a decent deal, with competition restricted and fewer loans available as rising unemployment deters lenders wary of incurring bad debts.

Since the end of last year, monthly lending through personal loans has fallen 28 per cent, yet there has been a 20 per cent rise in the number of people seeking loans, according to the British Bankers' Association.

"There are still some attractive rates topping best buy tables, but the reality is that number of customers eligible for these deals is shrinking rapidly by the day," said Hagger.

The same applies to credit cards, with pressure on borrowers needing good credit records in order to secure good rates. Barclaycard revealed in August that it rejects more than half of all credit card applications.

What next? This pattern is unlikely to change, forcing high risk borrowers to pay even higher premiums. Borrowers will need to be smart in shopping around for rates, remembering that multiple applications can damage their credit record, regardless of the outcome.

Hagger said: "Lenders are struggling with high levels of bad debts and as a result have adopted an ultra-cautious approach to lending and whether it's a 200,000 mortgage application or a 2,000 loan request, you'll need an impeccable credit history to be considered a safe risk and qualify for the best rates."

CUT YOUR ENERGY BILLS DOWN TO SIZE

WHOLESALE prices have fallen sharply this year, but Britain's energy suppliers have passed little of the savings on to customers hit by 2008 electricity and gas bill hikes of 28 and 47 per cent respectively. However, big savings are available for households paying their supplier's standard tariff and paying on receipt of quarterly bills.

It is estimated that by switching to the best online deal and paying by direct debit, households can chop up to 300 a year off the average energy bill, with small suppliers including First Utility sparking an online tariff price war.

The best online deals for Scottish households are currently from npower, at about 914 for households with the average energy usage. In contrast, ScottishPower's standard tariff is the most expensive on the market, averaging 1,361.95, says Money supermarket.com

What's next? Energy market regulator Ofgem has already warned that bills will rise again next year after suppliers indicated that despite lower wholesale costs they are unlikely to cut prices. The onus will remain on households to shop around for better deals and to improve the energy efficiency of their home. Pressure is growing on suppliers to reduce the costs faced by low income households on pre-payment meters, with more than a dozen MPs supporting a new bill that would make it unlawful for energy companies to charge their poorest customers high rates.