Banks failing to pass on advantages of low interest base ratePosted on: 26 October 2009 by Gareth Hargreaves
Independent financial advisor Peter McGahan isn’t impressed with the bank’s failure to pass on the advantages of low interest base rates.
We all know the banking sector is one of the biggest cash cows for the government in terms of tax. The banking sector has however really let itself down. The phrase 'a job in the bank, is a job for life' sits firmly along with that of 'bricks and mortar boy, bricks and mortar' and 'I'd love a night in, and a fine conversation with Jordan and Peter Andre whilst watching Strictly Come Dancing’.
The banks however, have to be protected or the impact on the UK would be immense in terms of that tax loss. This has been evident in the Bank of England's stance it has taken on interest rates. We have been told time and time again that the reason for lower interest rates and quantitative easing is to free up money markets and force the banks to lend again.
In my meeting with the Bank of England a year ago they made it clear that banks would be forced to lend again and a body was there for them to ensure it happened. Mmmm? Well then? Let's look at the evidence?
Today banks have taken advantage of the situation they have caused to conveniently create an extra margin for themselves. Whilst base rate is sitting at 0.5%, my commercial department tell me that commercial lending is in the main sitting at 4-5%. Banks are creaming off a margin of 3.5% to 4.5%.
Because the banks are in control of supply and demand they have slowed lending to a virtual halt, whilst telling us all they are still 'very active', they have also been able to slam in other little gems. For example they are introducing not only extortionate fees to the borrower at the outset, but they are also putting extortionate exit fees on contracts.
Commercial borrowers should also be aware of the potential for a cute little line put into their offer which allows lenders to look for additional security on your other assets if the value of the property they have loaned money on falls below a certain level. What? So where is the risk to the bank? You get your interest and you can't lose! If you can’t lose, you shouldn’t be charging a premium, it should be a discount.
Interestingly, residential borrowers have been hit just as hard. I typed in best mortgage rate to Google, found Moneyfacts, and there was HSBC at the top, offering 1.99% with a fee of £1,199, and all this for a customer who is borrowing only 60%.
What a shambles. What a complete shambles. If base is at 0.5% where does 1.99% come from, and I really hope for my £1,199 I will be getting some fine wine, a meal with Rick Stein, a massage and a weekend in the Caribbean to consider my mortgage proposal.
To further cap their cheek, they place a redemption penalty for the first two years! Redemption penalties are there to protect the bank when they have given you a special deal. While this is special, it's only special for the banks. And so what have the bank of England or FSA done about that then?
Quantitative easing is there to create money flow. The BOE buys assets back such as Gilts, the cash is then placed via the previous owner in banks and used in whatever way needed. The idea is that the bank then uses the extra cash in its balance to free up moneyflow and begin to lend, allowing the commercial world and residential world to refinance and then use that extra cash to spend in the retail world (another big win for the UK tax regime).
The cash however is now constipated firmly in the UK banks.
And so what would be the right thing to do now to the banks? Apply negative interest rates on banks reserves (you and I would call that a tax on the reserves banks are holding). Seems easy.
I was always taught that to understand someone, you should judge the action, not the individual.
Mervyn King recently announced he had no plans to charge negative interest rates on bank reserves!! One can only puzzle at the motivation. Judge the action.
By Peter McGahan
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Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email email@example.com.
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