Your Money: Savers feel the strain but borrowers benefit

IT is now a decade since the last time interest rates were increased.

Rates rose from 5.5% to 5.75% in July 2007. Since then, there has been a series of cuts.

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

Savers have been hit hard…

Hargreaves Lansdown has analysed the impact of descending rates. For cash savers, the paltry returns available mean £1000 stashed in a typical instant access account over the past 10 years would be worth just £878 in today’s money, once the eroding impact of inflation is also taken into account.

…but borrowers have benefited

While savers are feeling the pinch, borrowers have seen the cost of their repayments remain relatively affordable with 0% credit card deals and record low mortgage rates in recent years.

The typical mortgage rate has fallen from 5.8% in July 2007 to 2.6% by July 2017.

Consumer credit growth raises concerns

Bank of England figures show credit card, personal loan and overdraft borrowing has been growing strongly recently. This has fuelled concerns that, as living costs rise, people are becoming too reliant on credit.

So what are the options for savers and borrowers?

Laith Khalaf, a senior analyst at Hargreaves Lansdown, says savers can potentially make their money go further by:

shopping around for the best rates
making sure their cash is held tax-efficiently
considering a stocks and shares Isa.

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

Laith says: “Paying down debt is also advisable, starting with the balances on which you pay the highest interest first.”