Interest rates: Winners and losers revealed following a year of record low interest rates

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 

The collapse of cash has pushed many otherwise cautious investors into the stock market, where they have been amply rewarded over the past 12 months.

New figures from Fidelity International show that if you had invested your full £15,240 Isa allowance in the FTSE All Share on August 4 last year, it would now be worth £17,462, giving you an extra £2,222.

In the average savings account it would have grown by a measly £23 to £15,263.

Maike Currie, investment director at Fidelity, says investors need to look to the stock market to generate an inflation-beating return: “While stocks and shares are more risky than keeping your money in cash, history shows that over the long run equities have significantly outperformed.”

The danger is that with markets riding at record highs, your capital could be at risk from a sudden correction.

DEEP IN DEBT 

The Bank of England’s low interest rate policy is forcing savers to take unwarranted risks on the stock market and is also fuelling a consumer credit bubble, with debts topping £200 billion for the first time since the credit crunch.

David Brown, policy and advocacy adviser at Positive Money, says the Bank has made itself powerless if there is another downturn, because it cannot cut rates any lower: “After years of cheap money, it is sleepwalking towards disaster.”