Drew Wagar

Apologies for another financial post, but it’s topic du jour right now…

A thought occurs. What’s going to happen to all those people who buy a house at the bottom of current price crash when the economy recovers?

Those on fixed rates wont be affected of course, but despite the low BoE rate, the best fixed rates still require a very low LTV to get the best offers. If you’ve paid off lots of your mortgage you might be able to get 2.5%. Typical borrowers are likely to be able to get 4.5% if they have an LTV of 60-70% or so. If you’re higher than 70% you might have to settle for 6.5% – which isn’t great at all.

What about a tracker or SVR mortgage then?

Right now these look ok. BoE rate plus 2.5 or 3.5%. A better deal than the fixed rate. But if the economy recovers, inflation will sore and the BoE interest rate will have to increase sharply.

If it rises back to where it was this time last year, these people will suddenly have a 8.5% or 9.5% mortgage. Not good at all.

This might cause more repossessions than the credit crunch itself…

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You work hard, you save, you pay off your mortgage, you get your gold plated pocket watch and retire. You’re not expecting too much, just a comfortable retirement. You expect a reasonable return on your savings.

Sorry, you’ve been credit crunched.

My last mortgage related post said we were in uncharted waters. We’re past that now, we in ‘here be dragons’ territory.

Interest rates have never been this low before. Not even in the midst of the first and second world war or the 1930s great depression. How did we end up here? No one seems to know what’s going to happen next.

Quantitative Easing is the latest buzzword. The ‘generation’ of £75 Billion worth of ‘new’ money. I’m no economist, but even I can see the dangers of hyperinflation and a run on the £.

But it’s the plight of the savers we need to be worried about now. If you had £10,000 in a pot for your retirement and were getting 6% on it a few months back you’d have been getting £50 a month income from it. At 0.5% you’re getting £4.17. That’s a drop of 92%.

There are 12 Million people in the UK over retirement age, who are depending on their savings. Every single one will have less money at the end of the month now by a huge margin. These people have been made considerably poorer. Many will be wondering how on earth they are going to survive. Even the better off ones won’t be spending.

Trouble is – these are the prudent, the smart, the sensible ones. These are the ones who we need to help the economy back to health. People who have (had) real money (not debt) and previously were able to spend it on a new car, some luxuries, a holiday. Will they be doing that now? Obviously not.

By slamming down the interest rates we have effectively taken almost all of these people out of the economy. They’ll be spending on essentials only – if they can afford those.

What are they going to do? Sensible shoes says don’t spend your equity (savings) as you’re robbing future interest income. But if you need to switch the heater on what choice do you have?

The banks are clearly not going to be lending much more, even with quantitative easing – and the last thing we need is more debt – haven’t we got that message yet?

It would have been better to give the cash directly to people who have a savings balance bigger than their combined debts and tell them they have to spend it this financial year or it will go away again. Bypass the banks, bypass those already saddled with debt and give it straight to the deserving.

Finally a reward for the prudent.

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Well, lucky old Sir Fred. Must be nice to look forward to £693,000 per year for the next thirty years. You’re only 50, and you can comfortably expect to be in rude health for another 30 years, probably more. Nevermind that you were in command whilst your bank collapsed and had to be rescued by public money…

I’d not get on well with this chap anyway. I’ve never been a fan of profits at the expense of jobs and livelihoods. I’ve had my share of downsizes, rightsizes, mergers and acquisitions. They are not fun for the individuals in the middle.

The UK public at large is justly outraged by this chap getting, per year in disgrace and as a pension, a sum of money which most of us will struggle to earn in our entire working careers. It’s outrageous, despicable and the man is rightfully being pilloried by the media. If there is a legal way to get this pension back, lets employ them. To use a word reserved for this kind of behaviour – Fred is the embodiment of egregiousness.

But there are more significant issues here. People seem to be unable to separate the moral from the legal. Witness calls to have ‘retroactive legislation’ brought in to strip ‘Fred the Shred’ of his pension. Wo-ah.. hang on a minute.

Retroactive legislation is never a good idea. If the man was legally allowed to have this pension then it is right and proper he should have it, however morally obnoxious that is. We need to learn lessons from this and stop it happening in the future.

Retroactive legislation could do anything; make it an actual crime to own a car with a big engine for the last 10 years (rather than just a moral one), mean you have to pay make any bonus you enjoyed, devalue your house (even further). I think we’d all call that unfair.

Yes, Fred is an example of the worst that our failed banking system has produced. Yes, of course he shouldn’t be rewarded for failure. It is outrageous that he is paid this extortionate sum. He should give it up/fall on his sword etc…

But… if we believe in a society governed by laws, then we should defend his right to legally draw his pension, as unpalatable as that sounds.

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