Saturday, February 07, 2009

The effects of last thursday's base rate cut

As soon as the cut was announced, we had the usual commentators saying, "this will prompt savers to stop saving and withdraw their money, and then banks won't be able to lend", or words to that effect.

But the rate cut creates a new potential source of capital for the banks, other than savers. Many borrowers on tracker mortgages, standard variable rate mortgages, and those who have just come off fixed rates onto the SVR, have experienced big cuts in their monthly mortgage payment, increasing their disposable income.

HSBC have spotted the potential and have written to all their mortgagees on tracker rates, encouraging them to use their freed up money to overpay their mortgages. It's good advice - this is a unique opportunity for homeowners to shed their debt. Once rates rise again, their disposable income will shrink too, unless they've taken advantage of current circumstances to reduce their loans. Current conditions are highly unusual, low interest rates will last a year to eighteen months at most. And when rates go up, they will go up fast, as the BoE seeks to avoid the mistake Greenspan made in 2001-2004. If people want to permanently increase their disposable income, remembering that you pay tax on what little interest you earn, whereas overpaying the mortgage gives you a gross return, paying off the debt is a no-brainer.

But it would be really good for HSBC too, if their tracker mortgagees overpaid debt. They'd be getting capital, just as surely as if they had received increased savings deposits. And they can then either lend the capital back out to business at rates which are more lucrative than getting base rate plus 0.5% or 1%, or keep some of it back to shrink their loans to capital ratio. Given that on the retail side loans to capital are about 8 times, persuading people on variable and tracker mortgages to overpay is more lucrative than attracting savings.

I'm surprised more banks arn't taking similar action, especially those who were silly enough to offer deals where the tracker was below base rate. Some newspapers such as the Daily Mail and some money forums such as MoneySavingExpert are trying to get people to overpay mortgages, but the industry itself needs to start publicising the benefits.

As an aside, the real excess lending was done on the investment banking side, where loans of about 30 times capital were made. Unfortunately they'll be less able to get their clients to repay, as the hedge funds and buyout firms etc they lent to are broke.


Anonymous said...

You should be asking the question of when will a base rate cut actually make a difference?

If the idiots in government had adopted the Tory bank guarantee policy last November,some of the current carnage could have been avoided.

Meanwhile manufacturing output declined at fastest rate since 1981,in December it fell 10.2% from a year earlier.

Plus business insolvencies up 52% and personal insolvencies up 18%.

snowflake5 said...

broncodelsey, it's already starting to make a difference, see the previous post about house prices twitching to life. Of course you are desperate not to believe it, but that's another story...

And I note that when talking about insolvencies you use the percentages rather than absolute numbers. I guess saying that "personal incolvencies are up by 18%" is a better shock headline than "personal insolvencies are 19,100 out of an adult population of 40 million".

Anonymous said...

"I guess saying that "personal incolvencies are up by 18%" is a better shock headline than "personal insolvencies are 19,100 out of an adult population of 40 million"."
So do you pledge only to use the base figures in future. No more percentages? No, I didn't think so.

On insolivencies your previous complacent posts from August suggested you didn't see the crash coming.

Now you are wiggling, trying to down play the facts. There is a nice graph comparing the rise in comany insolvencies to 1989-1993 on Coffee House. We are going the same way for at least as a severe recession.

You have been complacent, you downplayed this crisis. You only see green shoots, not the 10 inches of snow on top of them.

Anonymous said...

Another thing. the figure of 19,100 for Q4 08 is only for personal bankruptcies, not for all personal insolvencies, including IVAs. The total number of individual lives hit by insolvency in the final 3 months of last year was 29,444. Don't try Brownies, they ill become you.

snowflake5 said...

Deconchap - 29444 is still a small amount, given the adult population is about 40 million - too small to have an effect, even on the margins. It's what happens to the ones not affected that will decide what happens.

Tories and headline writers know this - that's why the headline was "insolvencies up by 18%" not "insolvencies are now 29,444".

Anonymous said...

Are you trying to sound callous or stupid? The total number of personal insolvencies in 208 was 106,544. That is over 100,000 lives that have been hit massively for the worse. It is the highest number ever. And the recession is only just beginning. You could say that 3 million unemployed wouldn’t be a terrible tragedy, 90% of us still have jobs and are doing fine. When we had that in the 1980s and 1990s lives were destroyed. Many people never recovered. Your people castigate Thatcher for her callous responses and you are exhibiting exactly the same attitude. I guess because you think these people going bust are all Tories so they can suffer. Well they aren’t. They are normal people who will look at the party in power and hate it with the same venom the Conservatives received in the 1980s.

And even if we disregard writing off 100,000 people how about the company insolvencies. Liquidations up 51%, Receiverships up 183% and distractions up 251%. These really do matter to the wider economy.

Anonymous said...


Back to percentages,are you still confident in Darling's pre-budget report of just 10 weeks ago that UK GDP will decline by 1% in 2009?

snowflake5 said...

Devonchap - no, not trying to be callous, just making an observation. Bankruptcies are tragic, but they also offer relief to those who go through them. I understand your wife deals with these cases - ask her about it. The people involved struggle in terrible turmoil before the bankruptcy (usually due to debts incurred from business failures) and after the bankruptcy, they can at least start over, albeit without being able to borrow any more, but at least they arn't sinking under debt payments or being continually harassed. The "victims" in these cases are really the creditors who don't get their money back. Bankruptcy offers relief, being made unemployed plunges you into despair, and is the greater evil.