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Should we be Spending, Saving or Both in 2021?
What you get charged on your mortgage and what you earn on your savings in a deposit account is related to something called the Bank of England Bank Rate. As the Bank of England says on its website:
“Bank Rate determines the interest rate we pay to commercial banks that hold money with us. It influences the rates those banks charge people to borrow money or pay on their savings.”
I know from personal experience how this relationship works in real life. Many years ago, I can remember when my variable rate mortgage on my first property, a one bedroom flat, hit the dizzying heights of 15% - it may have been more but the memory is so painful that I have (almost) expunged the memory.
To make ends meet, my wife sold double glazing in the evenings and I did bar work at the weekends.
That bit I do remember.
Fast forward a couple of decades and we have a Bank of England Bank Rate of 0.1%.
The principal aim of this historically low rate is to get people spending. Releasing cash into the economy to stoke the engine of recovery, stalled by an economic down-turn driven, of course, by the pandemic.
Why put it in a deposit account when you earn diddly squat? Instead the Bank of England asked us to spend, spend, spend!
But something else has happened. With many businesses allowing their staff to work from home (no more M&S sandwiches, fuel bills etc, etc) and with the uncertainty of the course of the pandemic and many still on furlough, a significant proportion of us quite prudently decided to pull up the drawbridge and hold on to our cash – quite the opposite of what the Bank of England intended.
According to the BBC, £125bn more was squirrelled away in UK savings accounts last year. That’s a lot of lunch money not doing very much. Outstanding credit card debt has fallen by 18%.
What has also become apparent is that having added to their savings pot, many of us want to be able to have easy access to it, on a ‘just in case’ basis. It’s the trade-off between a slightly lower rate you can earn against locking it away for a month, or a couple of years. That’s the difference between a notice or fixed rate bond and an easy access account.
According to Moneyfacts, in May this year, fixed rate bonds are what most people are looking for when searching for new accounts, however a sizable proportion of searches (13%), are for instant access.
The Bank of England Bank Rate may be 0.1%, but there are still some worthwhile online accounts out there paying more. A bit of research can unearth some accounts that may offer more value. Our easy access, variable rate Online Saver currently pays 0.25% for example. You will find all the legal bits here but as it’s opened and operated online, it may be a more attractive (and safer) option than stuffing it under the mattress.Happy hunting!
Written by Alistair Nimmo, Director of Marketing at Family Building Society