Kickstarting the economy

Innys

Hi

I dunno if this idea has been discussed previously and if so, please accept my apologies for raising it again.

Generally speaking any homeowner with a mortgage is likely to have some (non ISA) savings too, set aside for a "rainy day". In the past, they would have put up with a difference between their savings and mortgage interest rates to allow them the flexibility to call on the rainy day money at a moment's notice.

However, as savings rates plummet and mortgage rates don't budge, this differential is widening so much it cannot be ignored. Surely, then, it makes even more sense now to pay off your mortgage with some of your rainy day money than have it languish in an e-saver getting next to nothing in interest.


I think this is likely to be an unintended consequence of cutting interest rates. It won't boost spending on consumer goods, merely reduction of debt. While this is a good thing for lenders, I doubt GB and Co feel it will benefit the economy much.

What does everyone else think?

Milarky

Innys wrote: »

I think this is likely to be an unintended consequence of cutting interest rates. It won't boost spending on consumer goods, merely reduction of debt. While this is a good thing for lenders, I doubt GB and Co feel it will benefit the economy much

It depends of the net effect of the two factors pulling in opposite directions; most borrowers probably have nilish savings in the first place, so will 'spend' all discretionary income - other things being equal. Anyone with a mortgage with (largish) savings would either have not noticed the interest rate differentials - or else would have arranged to be in this situation anyway - by having an offset mortgage.

And different mortgage types benefit differently (how confusing!)

Best off: Tracker customers (btw, how long before their tracker rate ends?)
Next best off: Variable rate customers (traditionally, the 'cinderella' group - with low quite old mortgages and tradiotional outlooks. These are now being swelled by other mortgage customers coming off deals)
Worst off: Fixed rate customers

Given all this, the precise outworkings of a given cut in BOE interest rates can't be predicted (Indeed it would not be unlikely that no real research exists because the about-face approach is so new)

Gov't could have made the bribes more self evident; shopping vouchers instead, or cheques to pay a bit off the mortgage of everyone- or a sliding scale amount.

..It's just a big economics laboratory out there!

SavingSteve

Well some of us (I mean me!) have a very lucky tracker mortgage, which means at present, even after tax, my savings are earning me more than the interest on my mortgage.

So I'll keep milking this situation for a while!

Reaper

I agree that many will seek to pay off debts, however that is not necessarily a bad thing for the economy. Lenders are all too aware they have lent out too much so it is now hard for people to get new mortgages and hard for buisnesses to get much needed loans. As people pay off their mortgage debt it will hopefully allow lenders to feel more secure and start lending again.

It won't be quite that simple though. Lenders will absorb some of the repayments first to make themselves less exposed so there will be a lag before they start lending again, causing a shrinking of the money supply.