Monthly ArchiveJanuary 2009
News Tristan on 31 Jan 2009
As the recession has hit hard over the last few months, we have seen the Bank of England lower the base rate to an astonishing and all time low of 1.5%, meaning that many of us on tracker rates are now paying less than half the amount of interest that they were this time last year.
But what if the base rate were to go any lower? Well, there is widespread speculation that it will go lower, I even wrote about my interest rate predictions for 2009 / 2010 in an article not long after the last base rate announcement earlier this month, and predicted it to reach 1% in the first half of 2009.
So if the base rate does go any lower, perhaps down to 1% in next week’s announcement, what effect will this have on many borrowers? Well, according to The Times, there will be a small percentage of people whose tracker rates are at a margin sufficiently below the base rate, that their lenders should actually have to pay the borrower money each month.
In the article, it states that some Cheltenham & Gloucester borrowers are on tracker deals which are base rate, less 1.01%, so if the base rate goes down to 1%, then there interest rate drops to -0.01%.
However, the lender has stated that there is a zero floor on this deal, and in fact it’s computer system cannot cope with not charging interest, so these customers will in fact have to pay a pathetic 0.001% interest, or equivalent to £1 per year in interest, which is a shade over 8p a month. I wonder how many of these lucky customers will get giddy with the extra money in their pockets or simply over-pay the capital on their mortgages?
Interest Rate Predictions John on 30 Jan 2009
The Bank of England Monetary Policy Committee meets again next week (5th Feb) to determine what level to set the base rate at. Like many I’m now keenly following the latest news on interest rates as it’s having a noticeable effect on my monthly outgoings, so I thought I’d share my predictions on what the bank of England base rate is likely to be in the coming months.
In January many economists and business leaders were expecting the Bank of England to drop the interest rate by a whole 1%, instead however they elected for a 0.5% drop, which I believe is a sensible choice. Yes we still need a lower rate to stimulate the economy, but too many drops that are greater than 1% could harm what little confidence is left in the markets and perhaps more importantly we will reach 0% very quickly, at which point the only option left is printing more money, which if it comes to that, will probably do more harm than good.
Therefore my bank of England base rate prediction for February is a drop of 0.5%. I predict we will then see a drop of 0.5% or even 0.25% in March, followed by a possible further 0.25% drop in April taking us down to a low of 0.5%. I don’t believe the MPC will wish to take the interest rate below 0.5% if it can be avoided. Over the longer term I still more or less agree with Tristan’s earlier interest rate predictions.
If my predictions are right it’s more bad news for savers, but great news for those of us with tracker mortgages.
So, what do you predict?
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News Tristan on 30 Jan 2009
I read in The Times today that Barrack Obama, the newly installed US President is angered by the amount of money, reported to be $18.4 billion (around £12.8 billion), that has been paid out in bonuses by Wall Street banks.
I’m not surprised Obama is angry about it, the current economic woes of the world are to be placed firmly at the feet of greedy bankers who made a complete hash of the financial system, so exactly what have they got to be congratulating themselves for by paying such lavish bonuses?
It doesn’t surprise me though, I’ve never been a corporate animal, always choosing to be self employed and therefore self reliant. I bet that most of the bankers who are getting these bonuses are puffed up self important idiots, that think they deserve it, but also probably can’t live without it, as they’ve most likely got used to absurd amounts of money passing through their fingers.
It doesn’t just stop with the corporate world though, in this country the government is just as bad. They’ve had 11 years under Gordon Brown where money was no object, so they’ve never stopped and thought twice about overspending as that just means a bigger budget next time.
I went to the doctors today and couldn’t help but think that the local council have spent a fortune building a brand new medical centre, it’s all very nice and shiny, but what was wrong with the old surgery? It seems to me that the attitude in most areas of business, be it large corporate or even state, seems to be spend now, make everything nice and shiny and worry about the cost (and the burden of paying the cost over decades doesn’t come into the equation).
It begs the question, will anyone learn from the credit crunch? Or will we all just go back to borrowing money without thought for the consequence once the banks ease the constipation of credit that has happened since they all lost lots of money by lending to people they knew would never be able to pay it back?
I plan to never use credit again, as I wrote about in my article life without credit. So far I’ve managed six months without borrowing any money. Admittedly I’ve not made any major purchases, such as a new car, holiday or house, but I’m starting to feel a shift in my attitude from being someone that was used to having the ability to buy on credit, to now thinking carefully about what I spend my money on. I just hope that the credit crunch will alter the attitudes of some of the people of this country, otherwise we will simply cycle between boom and bust in perpetuity, no matter what Gordon Brown thinks…
News Tristan on 29 Jan 2009
I take a keen interest in petrol prices these days as I do a lot more driving than I used to and earn a lot less money thanks to the credit crunch. I read in The Times that oil prices will soon rise because OPEC members need the price of a barrel of oil to be over $50 for it to be worthwhile exporting it.
This does beg the question, why did they let it drop to a price below what it was worth exporting it in the first place? Surely what they are doing is akin to closing the stable door after the horse has bolted. They would have been better thinking about levels of production when the price was at $60 a barrel, and seeing a downward trend, restricting supply and thus keeping the price above $50 a barrel.
The head of BP told the opec panel that the price of a barrel needed to be between $60 and $80 a barrel for the OPEC countries to balance their budgets and invest in social programmes. He also went on to say that this higher price was needed to sustain investment in new oil fields, he said will be needed to sustain demand in India and China who are consuming more and more oil.
Where is the acknowledgement that some of this money needed to be invested in finding alternatives to fossil fuels? I predict that there will be a lot of money made from whoever creates a viable, but similar alternative to fossil fuel, which is sustainable and economically viable.
Money Management Tristan on 23 Jan 2009
This is a somewhat amusing story that I was told today by a colleague who has recently moved offices. The chap in question had gone to look at some potential new office space to let, along with a fellow director of the business.
The landlord’s representative in the matter happened to be a very young man who happened to be the landlord’s son. When the office had been shown to the prospective buyers, the rep asked them what they thought.
The prospective tennants responded in a positive manner, but happened to mention that with the credit crunch and economic downturn, it must be harder to let offices at the moment. The rep responded by agreeing with them, and then proceeded to tell them that the building was fairly empty and that they would be glad of having any new tennants at the moment.
This then led onto a discussion about the rent for the offices, which as you can probably imagine was a little one-sided, given how much information the naive rep had let on to the prospective tennants.
From what my friend tells me, the rep initially stated that the rent was £2,500 a month. One of the directors was about to jump in and accept, when the other one (the guy I spoke with) interjected and simply stated that it was a bit pricey.
The rep at this point caved in completely and immediately lowered his price to £2,000 a month. Again, one director was almost about to accept this until the other (somewhat canny) director stopped him and reiterated to the rep that it was still a lot of money, and they had seen similar offices going for less.
Eventually, after a bit more negotiation, my friend was able to get the rep to agree to let them the rooms for £1,300 a month, with free telephone line rental thrown in for free, and the rent capped at that rate for three full years.
It just goes to show how useful a bit of information is, and why you should always play your cards close to your chest.
News Tristan on 22 Jan 2009
I read in The Times today that British Gas are planning a 10% price cut which will save the average household £84 per year. The cut is to be introduced on the 19th February and British Gas are to be the first major gas supplier to reduce prices following pressure from the regulator, in response to falling gas prices on the wholesale markets.
What I find interesting about this is that according to British Gas, the average gas bill in this country is £840 - by definition if £84 is 10% of the average. I’m sure that I don’t spend anywhere near that each year on gas, most likely £600 a year at the most, and I live in an above average size house.
So how can the figures be so skewed? My only explanation is that there must be a lot of people who use a lot more gas than I do - the elderly perhaps who have their heating on all day, every day, even in the summer.
News Tristan on 19 Jan 2009
I read the main story on the front page of The Times today, about the hundreds of billions to bail out the banks again and was utterly bemused.
The banks have already had £37billion pounds just three months ago (October 2008), how on earth do they now need more funding? According to the article in The Times the government are planning a £200billion bailout, which will include a new £100billion mortgage guarantee scheme which to underwrite inter-bank lending.
In another story, the part state owned Royal Bank of Scotland is set to post a UK record loss of around £28billion, as reported on The Times online here. The government is also set to increase its stake in the bank from 58% to 70%, rasing questions about whether it will eventually be nationalised.
The majority of the losses seem to have been caused by RBS’s exposure to US sub prime loans and the acquisition of ABN Amro, which also had a large exposure to US sub prime loans. The share price has fallen to a 24 year low of 19.8p. Might be worth taking a punt on this bank at that price, though I wouldn’t expect to receive a dividend on it for a while…a long while.
Cost Of Living Contented Dad on 18 Jan 2009
In one of Tristan’s recent posts he discusses ways of reducing your shopping bill to free up cash for investment.
One way to identify those items that are probably best suited to the “own brand” type of saving are those that are everyday commodities.
What do I mean by this? Well think about what we generally mean by a commodity.
Anything that is a basic product or feedstock and that is difficult to differentiate is typically a commodity. Think of oil, metal ores, coal, grains and such like.
What has this to do with our shopping?
One of the best examples of everyday commodity purchasing has always been washing powder. The chemicals contained within a box of washing powder are typically no different from one brand to another.
How can you be pretty certain about this?
Take a look at the effort and budget that the various manufacturers put in to trying to convince us that their product is better than their competitors’. The bigger the budget, the smaller will be the real difference between competing products.
One more reason to go with the “own brand” offering – the only real differentiator in this range of products is price!
The same logic can be applied to an amazing variety of products from those as complex as cars or electronic goods to cosmetics.
I can remember the days (long ago), when the cognoscenti used to make disparaging comments about the early Japanese car imports to the UK. Those few that actually looked at them from an unbiased viewpoint soon realised there was a great deal to be said for them in terms of value for money. Where are the great marques of those long ago days? Mostly just a memory, or like Mercedes languishing low in the reliability surveys in comparison to these upstarts.
What is the point of this?
Simply that the size of the marketing budget is a good, if not infallible, pointer to the lack of differentiation between competing products.
Finally, I well remember an erstwhile colleague, who in the process of buying a new car drove us all mad interviewing us in depth about the relative merits of the current offerings and our own experiences with particular models. When it came to my turn to be interrogated, I simply told Joe that he was wasting his time and ours – he was going to buy the car that he found attractive, that fitted his budget, that made him feel good about himself, and was big enough to carry his ever expanding family. Was I right?
Of course I was, that’s what we all do with very few exceptions. Be that exception and save yourself some of your hard won cash!
Money Management Tristan on 18 Jan 2009
This is a good question - it should be a fairly straightforward answer, however in the current financial climate, the answer will depend on a number of important questions:
- Do you have adequate equity?
- Do you have adequate income?
- Is your credit rating acceptable?
- Will a remortgage actually save any money?
Let’s take a look at each of these questions.
Do you have adequate equity?
With the property market having already fallen by 16.2% according to this post, and with predictions of more falls to come this year, it is wrong to assume that your property is automatically worth more than your mortgage. Clearly, if you have a tiny mortgage compared to the value of your home, then this will not be an issue, but for those that bought a property recently with a fairly small deposit, chances are you are now in negative equity.
Do you have adequate income?
Gone are the days when lenders would lend four to five times your income. Income multiples have been reduced by most lenders. This mean that if you took out your mortgage a few years ago on, for example, four times income multiple, and your income has not altered significantly whilst simultaneously you haven’t made much of a dent in the size of your mortgage, you may well find that lenders will not consider you on the grounds that you cannot afford the mortgage.
From what I read, the self-certified market is suffering, which means if you have trouble proving your entire income, the lender may only take into account the portion of it that can be proved.
Is your credit rating acceptable?
Before the credit crunch, it was quite easy to find lenders willing to lend to people who had numerous County Court Judgements, defaults, arrears and even a bankruptcy (as long as they were discharged for three years). However, the way the market has changed means that it is now nowhere near as easy to obtain finance if you have not taken care of your credit rating. It may be that you will have to pay a much higher rate of interest, or simply not be able to obtain finance at all.
Will a remortgage actually save any money?
With the Bank of England base rate dropping again last week, there may be a huge number of borrowers who are now paying far less interest than they could ever hope to pay on a new mortgage if they switched. This is because new mortgages are being offered on interest rates that are typically 2% - 2.5% above the base rate, while if you are currently on a tracker or variable set at 1.5% - 1.75% above base rate (as many revert to after an initial discount period), it would be more expensive in terms of interest repayments - never mind the fees - to switch lender.
So if you have adequate equity, sufficient income, good credit and can find a deal that is better than your current variable rate or tracker, it should take you between two to three months to remortgage, however, I doubt there are many people that would be better served by remortgaging right now, better to wait a while and see if the base rate gets any lower (as I predicted here) than rush into things, this is going to be a long recession, so what’s the rush?
News Tristan on 16 Jan 2009
Public Sector Hit:
I read in the times yesterday that there are to be widespread job losses in the public sector, most notably local council offices. It was reported that in the region of 7,000 redundancies would have to be made.
The reasons for the bulk of these redundancies was the collapse in the housing market, which has led to a fall in fees from property developers, land searches and domestic planning applications. I found this interesting that even though the state is responsible for these functions, there does seem to be some common sense operating within these departments, in so much that a decrease in the workload has led to a reduction in the staff needed.
Maybe I’m just too cynical, but I just assume that most people that work for the state do so because they expect a nice easy life, with an above inflationary payrise each year and a nice pension at the end of it - oh, and job security. I had never really considered that, as in private enterprise, these departments would have to effectively be self funding, and thus employ at a level that is sustained by the current level of activity.
Private Sector Hit:
I heard on the BBC news at lunch time that Honda in Swindon would have to stop production during April and May of this year. This is on top of a proposed shutdown in February and March, which would mean they are unproductive for 1/3 of the year. This is quite incredible, and what’s more so, is the fact that they are not laying people off, they will be keeping them, but won’t have any work for them during this period.
There were some mutterings during the bulletin about how the government was going to have to bailout the car industry in this country. I don’t see why they should, the car industry is probably bloated and inefficient in this country and could probably use this recession to transform itself into a more competitive sector. And if it can’t, then what’s wrong with importing cars? No doubt they would be cheaper - you can already buy a European right hand drive car in Europe for far less than you can in the UK.
I suspect there are probably import duties for non-EU manufactured cars, a way of the government protecting the interests of the UK car manufacturing industry - which last time I checked, was not British at all, Ford is American, Honda & Nissan are Japanese, Jaguar Land Rover is Indian, Rover is Chinese, and any other manufacturers tend to be small sports cars and not mass market cars.
So it does beg the question, should the UK government really be bending over backwards to help foreign owned UK manufacturing concerns? And in fact, wouldn’t the government serve it’s people better by increasing the competition and thus lowering prices substantially, such that we all wouldn’t be so reliant on credit to make a new car purchase? As it is the lack of credit and economic uncertainty that has caused such a drastic drop in demand for new cars at the moment anyway.