Are you quids in after a decade of record low interest rates?

It's been a decade since interest rates were increased by the Bank of England. In July 2007, rates were increased from 5.5 per cent to 5.75 per cent, but since then there has been a series of rate cuts.

Typical mortgage rates have fallen from 5.8 per cent in July 2007 to 2.6 per cent by this month, according to Hargreaves Lansdown.
Typical mortgage rates have fallen from 5.8 per cent in July 2007 to 2.6 per cent by this month, according to Hargreaves Lansdown.

So what’s been the impact for savers and borrowers – and how could you improve your financial situation?

Hargreaves Lansdown has carried out analysis into the impact of descending rates, which has left the Bank of England base rate at a record low of 0.25 per cent.

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For cash savers, the paltry returns available mean £1,000 stashed in a typical instant access account over the past ten years would be worth just £878 in today’s money, once the eroding impact of inflation is also taken into account.

And £179 billion is sitting in accounts earning zero interest, up from £23 billion ten years ago.

In contrast to the situation for cash savers, the same £1,000 investment in the UK stock market in July 2007 could now be worth around £1,323 after adjusting for inflation, Hargreaves Lansdown calculates.

Borrowers, meanwhile, have seen the cost of their repayments kept relatively affordable, with 0 per cent credit card deals and typical mortgage rates having fallen from 5.8 per cent in July 2007 to 2.6 per cent by July 2017, according to Hargreaves Lansdown.

Bank of England figures have shown consumer credit, which includes credit card, personal loan and overdraft borrowing, has been growing strongly recently.

This has fuelled concerns that, as living costs rise, people could become over-reliant on credit. As a result, the Bank of England has told lenders to prove they are not taking on too much risk.

Around eight million Britons have never seen an interest rate rise by the Bank of England in their adult lives, and Alec Pillmoor, a personal insolvency partner at audit, tax and consulting firm RSM, warns: “This new generation of borrowers could well get a nasty wake-up call.

“Those who have been tempted by attractive loan and credit card deals, car finance offers and low-rate mortgages may well find that any such rise could leave them with less cash being available to meet repayments when they fall due. Those who are struggling now would do well to consider reining in any additional borrowing.”

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says savers can take action now to make their money go further:

 Shop around for the best rates. It’s easy to leave cash in your current account, but chances are you could be doing better from a savings account.

 Make sure your cash is held tax efficiently. Low interest rates and the new savings allowance have made people question the purpose of a cash Isa, but interest rates can rise and a cash Isa offers some future-proofing for savings.

 Consider a stocks and shares Isa if you don’t need the money soon, and can leave it invested for at least five to ten years. Rates of return are higher, but so is the risk so you need to be willing to accept the ups and downs of the market.

Meanwhile, Khalaf says borrowers should make sure their debt is affordable even if interest rates rise, so they should work out whether they have some slack in their household budget which could be used if repayment costs do start to increase.