In this blogger’s humble opinion: not much!
On August 5, the Bank of England announced a reduction in it’s base rate, bringing it down to a historic low of 0.25%. Buyers and borrowers may be set to rejoice but in reality we may see that it will not make much of a difference in the lending industry as far as banks are concerned. Looking at what the banks “might” do and the harsh realities of the country’s present economic situation, crowdlending still remains the best option for first time house buyers, borrowers of business loans and the hard-hit savers.
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Why the rate cut?
The prevailing low rate of 0.5% was set in 2009. After seven years, analysts and banks had been expecting a change in rates but more likely upwards. Brexit and the falling pound reshaped all that. This recent cut is just part of a slew of monetary measures aimed at stimulating the country’s economy. Mark Carney, governor of the Bank of England, is hoping that the announced measures will “reduce uncertainty and blunt the economic slowdown”. The BoE’s governor has made it clear that he expects banks and building societies to pass on the cut. The invention of a new term funding scheme is further meant to ensure this.
But the new rate will reduce banks’ margins and so it is not sure they will ride with it, and offer cheaper mortgage deals for example. The rate cut also penalizes savers and investors.
What borrowers should expect
A 50% reduction in the base rate is only a 0.25% fall and that will not, in itself, make much of a difference. Banks can chose what to do with their standard variable rates. If a mortgage rate is pegged at 2% above the base rate, it will be cut by 0.25%. But most lenders don’t link their standard rate to the base rate. If you take on a lender’s standard variable rate, which averages 4.4% APR across the ten big banks, you’ll still be paying a lot for your mortgage. You can’t assume you’ll automatically pay less now until you see which lenders drop the cost for customers that opt for a standard deal.
Sure, we may see an increase in lending activity but that still won’t change the structural and practical aspects. First-time buyers will still need to put down a deposit, ideally 17% of the purchase price, and with saving rates being what they are now, this will take even longer to accrue than it did before.
Where crowdlending steps in
Non-traditional lenders have been targeting recent graduates from law, business and medical schools, young people with little savings and perhaps a lot of debt, by offering jumbo mortgages with relatively low down payment requirements and then selling those loans on to investors. LendingClub, which is a public company and the biggest platform in the P2P universe, is a good case study. They offer lower rates to borrowers and far higher returns than from a bank to fixed-income investors.
In the current financial climate, with growth expectations at a mere 0.8% for 2017, banks will be reluctant to lend to business borrowers at this low rate, despite the Funding for Lending Schemes intended to facilitate lending to SMEs.
Crowdlending is the only recourse for small businesses seeking a loan. Ideally, the Bank of England should extend FLS’s to P2P companies who are today greatly expanding their SME lending. The economy needs businesses to invest and grow!
And for savers
Finally, this rate cut is bad news for people who want to put money aside, save or invest. Further drops in the bank rate will mean negative interest rates, normally translated into higher banking fees on savings. That’s where crowdlending comes in. Savvy savers can turn to the alternative finance market, which has matured and grown out of the effects of the last financial downturn, and finally get decent returns on their capital.
The rates offered by P2P lending sites are determined by supply and demand, by consumer behaviour and not monetary policies. With more savers turning to crowdlending platforms to invest, the supply of funds will increase and rates may fall. Good news for the borrower, of course, drawing more and more people to P2P making it good news for the investor who will continue to have a relatively safe (any investment involves some level of risk) investment at returns much higher than anything a bank can offer.
Whatever you choose, always remember to read the fine print.