Nationwide Building Society may be the largest building society in the world, and have 15 million customers but it’s not doing some of you any favours!

This is because it has said it will not pass on any further interest rate cuts to those of you with tracker mortgages, even if the Bank of England reduces rates again next Thursday. 

A clause in the contracts of 250,000 of you who have a tracker with Nationwide,  means it does not have to lower its rates when the Bank of England's rate falls below 2.75%.

While it did not enforce this when the base rate dropped to 2% in December, it now says rates will fall no further. Nationwide’s rationale is that it is doing this to protect savers from sharp interest rate cuts.

Nationwide also says it will pass on any further cuts in the Bank Rate in full on its standard variable rate (SVR) which currently stands at 4%.

• Striking a balance

Senior Nationwide executives are braced for criticism but say they must hold rates to protect the position of savers, who outnumber those of you who borrow by seven to one: 

"We have to balance the interests of our 1.4 million borrowers with the interests of our 10 million savers and so we will set a floor of 2% on our trackers, whatever the Bank of England may say next week."

The decision will add to controversy about tracker mortgages, which are marketed as home loans which track or follow the base rates. But Nationwide, like many other mortgage lenders include a clause in their tracker contracts, reserving the right not to follow base rates below a fixed level or "floor" on these loans.

However it did not enforce a clause which would have enabled it to ignore base rates falling below 2.75%, when the Bank of England reduced rates to 2% last month. This left some of its tracker mortgages, which charge 0.76% below base, costing you just 1.24%.

• Enough is enough

Now Nationwide has decided enough is enough. A spokesman said:

"Following December's base rate cut, we have had to reduce returns to savers by an average of 0.87%, with effect from January 1. But, if we were to cut mortgage costs further, we would have to reduce our savings rates even more aggressively."

The freeze on cuts will only apply to those of you with a collar of 2.75%; it will not affect those of you who have taken out mortgages since November with a lower collar of 1%.

However, Lloyds TSB and its mortgage subsidiary Cheltenham & Gloucester have set no floor on their tracker mortgages,  nor has HSBC, although that bank reserves the right to do so. Pressure from the Government to force banks and building societies to pass on rate cuts may hasten regulatory intervention to ensure we all benefit.

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• Tracker collars unenforceable?

Last month, the Financial Services Authority (FSA) said some tracker floors would prove unenforceable if we were not warned about them sufficiently clearly when our mortgages were arranged.

Jon Pain, FSA retail markets managing director, told the Council of Mortgage Lenders' annual conference:

"While tracker interest floors can be a legitimate term of a mortgage, this can only be if it is clear and unambiguous to the consumer and is consistently and prominently spelt out in the initial offer document. If it is not, you run the real risk of both breaching our disclosure requirements and having an unfair contract term you can't enforce.''

But Melanie Bien, a director of mortgage broker Savills Private Finance, said mortgage lenders needed discretion to cope with very low interest rates:

"Otherwise, you could have the ridiculous situation where a borrower is on a tracker at say 1% below base and, if base falls below 1%, the lender would be paying the borrower for the mortgage."

So, while its not great news for those of you with a Nationwide mortgage, it is of benefit to you if you have savings with them.

What do you think of Nationwide’s decision not to pass on any more interest rate cuts?

Does it make sense and do you think more lenders will follow suit?

Let us know in the comments below.

(Please note that articles on Money Hospital do not constitute regulated financial advice. The articles are intended to provide general personal financial information, and are based on journalistic research. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. All rates are correct at time of printing but are subject to change without notice.)

We asked one of the country’s top futurists, Dr Patrick Dixon, to take a look at the year to come, and answer five questions on what should be in store for us…

 
1.       In the UK economy?

“Well, these are exceptionally hard times.  We are probably around half way through the current crisis – which has been going on already over 18 months.  So we can expect a tough 2009 and things to start picking up in 2010.  Companies that shed staff early and have conserved cash will do well in the upturn:  lean and fit and with finances available to buy up other companies or assets at knock-down prices.  A lot of fuss has been made about the fall in the pound but this will be really good news for any company that sells goods or services outside the UK, and will also mean that people spend more at home – whether on holidays or other things.”

2.       The UK housing market… should we sell up or stay put? Is renting a good option right now? Will housing become realistically affordable again?

“Each person’s situation is totally unique but here are some general thoughts.  The house market is likely to continue to fall sharply, but will eventually bottom out.  The lower the falls are, and the lower mortgage interest rates go, the more likely it is that we will see a rebound and a strong recovery, as many people decide to come back into the market or to enter for the first time.  A lot has been written about mortgage markets changing forever, but that is unlikely.  The fact is that the mortgage market will eventually settle down, and will become attractive and competitive again.  Once lenders become convinced we are in the early stages of a long and strong property price recovery, we will see loan to value ratios become more relaxed, and the return of 90% mortgages.  Home loans are the largest and most important financial transaction most people do in their lifetimes apart from personal pensions, and so will become once again a very important part of retail financial services.

“There is no point in selling a property at the moment unless you are forced to – especially while lending is in such chaos because it means even if you find a buyer, they may not be able to complete purchase.  Mortgage rates are continuing to fall and some people on trackers are already paying less than 2%.  Even if the Bank of England base rate remains the same for the next 3-6 months it is likely that mortgage rates will continue to fall because the normal adjustment mechanisms linking base rate to mortgage rate are broken and will take another 6 months to fix.

"Remember that the cost of selling and buying again is high with legal fees, stamp duty and the rest.  Rents have not fallen as fast as house prices yet in many areas so renting is more expensive than you might think. Housing is already more affordable than for years – we have seen salary inflation of 3.5% or more in the last 2 -3 years, while actual property prices have also fallen up to 15%.  Put the two together and you have around 25% fall in costs – and that is before the mortgage rates started falling, already by 30% in some cases. When you look at the whole picture it seems likely that in 6 months time we will see some wonderful bargains, with an actual cost of ownership per month of less than half what it was just 18 months ago.  But first time buyers will still need a larger deposit than in the past.  Remember too: most people own to live in a home and not for a 2-10 year investment.  It is vital to take a long term view in all property decisions.”

3.       The UK job market.. what kind of industries are the most likely to make drastic job cuts?  What are employment chances like right now if you lose your job?

“Retail jobs will be very hard hit in January to June as the reality begins to hit home.  McDonalds, Lidl and others trading towards the bottom of their markets will continue to do very well.  The jobs market in many sectors is surprisingly strong with 850,000 vacancies that are officially known about in December 2008.  In previous downturns it has been unusual for well motivated and talented people to remain out of work for more than a year.”

4.       The credit/borrowing markets… will we be able to wean ourselves off our addiction to cheap credit? Will we learn the lesson and start to save more?

“These things are just cycles.  We are just about to enter a new cheap credit boom, fuelled by the lowest borrowing costs in living memory.  The result in the medium term is likely to be another overshoot, high inflation, high interest rates, eventually leading to another crash which could happen by 2015.  As we have seen – swings can happen very fast from one end to the other.”

5.       The world economy… what affect will the world economy have on us all? What about £ sterling and our travel/work abroad?

“The global economy will continue to lurch from event to event.  All eyes will be watching the price of the dollar.   Despite the massive US crisis the dollar has retained or increased value against many currencies, as billions of dollars of US investments in other nations are brought back home to service debts and other urgent commitments.  Eventually these massive return flows will slow down.  When that happens the big question is who will still want to buy dollars?  Countries like China have bought over a trillion US dollars and are holding them for now.  But what if they start selling?  They cannot sell too much or they will force a dollar crash and the rest of their assets will be worth a lot less.  But they could sell enough to force a gradual dollar decline.”
 

Dr Patrick Dixon is Chairman of Global Change Ltd, author of 12 books including Futurewise, and has been ranked one of the 20 most influential business thinkers alive today (Thinkers 50 2005).  For more see Globalchange.com – 11 million visitors and 1 million video views.  Also youtube.com/pjvdixon

So, what do you think of these predictions for 2009?  And what do you think will or won’t happen next year?  Why not add your reflections, and your own predictions, in the comments…

Whatever happens, let us wish you a peaceful and prosperous New Year!

As a pensioner, you are probably trying to make ends meet at the best of times. Therefore, the financial meltdown of this year won’t have helped much.

As a result, nearly 1.7 million of you are relying on property to fund your old age.

Sadly, if you are in this group, you have already seen almost £45 billion disappear from your retirement fund in just 12 months as the average house price has dropped almost £30,000 to £158,872.

This property reliance is also rife amongst the next generation of retirees with more than 1 in 4 of 55-64 year olds following suit and almost half of 25-34 year olds. This suggests that today’s property slump is going to hit the next generation of retirees hard as well.

In addition, almost three million of you already retired could also take a hit as you are relying on shares to fund your old age. You may have to wait several years for that part of your retirement fund to recover from the current stock market cash.

These are just two of a number of factors leading to the reality that, today, almost 1 in 10 of us in the UK admit we simply cannot afford to retire; 18% of these are over 65 years old.

This is clearly a problem as 37% of those of you already over the official retirement age of 65 feel you will need to work up to the age of 77 in order to maintain an acceptable standard of living!

• Unprepared in the face of unemployment

It would appear today’s working population will be even worse off as only 13.8 million working age adults are either paying into or are part of a pension scheme; that’s only 39%.  This leaves 61% of us reliant on the state pension which is just £4,732 a year.

With unemployment expected to rise from 5.8% to 7.1% next year, it is set to affect an additional 406,016 of us. This could result in an extra £438 million worth of lost pension savings in 2009 as these people are unable to put money away and employers no longer contribute to their pensions. 

• Not saving enough?

While life expectancy continues to increase year-on-year, the amount that we are saving is at its lowest level for almost 20 years, indicating a very uncertain future for the next generation of pensioners. In 2006, the average working person saved £1,288 per annum, but in 2007 this plummeted by almost 40% to £776 due to the increasing pressure of the economic crisis.

As it stands, half of us who work are saving less than £100 a month for our retirement and 56% of us currently contribute nothing whatsoever.

This leaves more than half of us completely unprepared for retirement. Almost 20% of us haven’t even started making provisions for our retirement with just under 22% of these aged between 25-34. There remains a reasonably high percentage of us (17%) in the 45-54 age bracket who are still not saving, despite the fact that we are nearing retirement age and should therefore be putting aside even more than the younger generations!

Need to put some money aside? Compare the best savings accounts.

Ann Robinson, Director of Consumer Policy at uSwitch.com, says:

“The economic slump has certainly scuppered the best laid plans of people nearing retirement. Consumers are faced with falling house prices coupled with a stock market crash and low savings rates; these factors combined seem to cut off every possible life line to fund a happy retirement.

“The outlook for the next generation of pensioners is more serious than it’s ever been, especially for those who aren’t making the right provisions to see them through retirement. It’s unrealistic to think that consumers will be able to make hundreds of pounds worth of savings every month, especially in the current climate, but there are steps they can take to ensure a more comfortable retirement. Even though times are tough, it is important that people review their financial position in order to invest what they can to secure a better future. Every penny really does count.”

• Recommended saving

In the current climate, an average 25 year old should be saving £129 a month in order to survive on the minimum wage through retirement. This age group will now have to work until the age of 68 as the State Pension age for both men and women is to increase from 65 to 68 between 2024 and 2046.  Delaying these savings by ten years would mean the same person would have to contribute £208 per month. Those who rely solely on the state pension who retired in 2008 will still need to find an additional £7,186 a year, just to be living on the minimum wage of £11,918 in retirement.

Even today, the average working person is expected to live for almost 22 years past retirement, and by 2050 the average life expectancy will have shot up to 95; an increase of more than 5% from today. It’s no surprise that nearly 72% of us who work are worried that we won’t be able to support a decent quality of life for themselves in old age.

Monthly saving needed to survive on minimum wage in retirement

Current Age                       Retirement Age
                    60           65            66            67           68
    25            £251.30    £172.32    £157.96    £143.60    £129.24
    30            £323.10    £215.40    £193.86    £179.50    £165.14
    35            £430.80    £272.84    £251.30    £229.76    £208.22
    40            £588.76    £359.00    £330.28    £301.56    £272.84
    45            £847.24    £495.42    £445.16    £402.08    £366.18

• Ignorance is bliss

Outside of the financial pressures we are all facing, there is also a distinct lack of knowledge in the UK about how much we need to survive throughout retirement and what we should be investing in as the financial situation continues to worsen. In fact, almost 47% of us that work have no clear idea have a clear idea of what their retirement income should be!

In the last 20 years, there has been a shift in where we are investing our money with over a third of us paying into ISA accounts as a source of income through retirement. A more risky option, apparent amongst older generations, is investing in shares with almost a quarter of over 65s relying on today’s turbulent markets.

• What people are relying on for retirement

Source: Research Now data 2008

• Considered equity release?

If the thought of investing in ISAs, bonds and shares to fund your retirement is a bit daunting, the maybe you should consider equity release?

Equity release is a popular way of borrowing for those of you 55 looking to cash in on the huge growth in value of your homes.

It's a lifetime mortgage product that can provide a lump sum or regular payments in return for taking out a mortgage on a property, which does not have to be repaid until you die or sell your property.

Thanks to rising house prices, equity release schemes are becoming more popular. They can give you a lump sum, a regular income or both. The lump sum could be tens of thousands of pounds, or the income boost might be a hundred pounds a month or more.

Also, money released from the value of the principle residence is tax-free (although if the cash is then invested, there may be tax to pay on any income or growth).

Read our Equity Release guide

You can get impartial Equity Release advice here.

Dr Tim Leunig, Professor at the London School of Economics, says:

"Relying on the state to look after you in retirement is a recipe for poverty in old age so starting to save as young as possible is good advice for everyone. The current downturn in tax revenues and big increase in Government borrowing makes it even harder for the Government to fund the pension promises made in good times. Future state pensions could be lower than people expect, increasing the benefits of private saving.

“People who lose their jobs lose not only their wages, but also future pension entitlement, which means today's recession will have repercussions for many years to come. The increase in life expectancy and changes in the pension age means that a person needs to save around a third more now than they would have done 30 years ago, just to get the equivalent of the minimum wage.”

Information © uSwitch2008

Relevant links:

Struggling with other debts?

  We all need somewhere to call home but with the property market crumbling around our ears and the UK entering recession is property the best thing?

Right now, investing in bricks and mortar may seem more like a life sentence than the time-honoured way to get rich slowly!

The news that 11,300 homes were repossessed in the third quarter of 2008, (a rise of 12% on the second quarter) was just the latest piece of bad news.

Mortgage lending also fell 44% in October compared to 2007 and 2.5 million of us could be in negative equity by the end of 2009.

Altogether, these are a timely reminder that buying a home isn’t necessarily the best option for everyone!

Jim Hodgkins, managing director of CreditExpert said:

“As a nation, we are a bit obsessed with owning our homes. Around 70% of houses in the UK are owner-occupied, which is a much higher proportion than in the rest of Europe.” 

“But there are other options out there. The important thing is not to make hasty decisions and be sure you are prepared financially for any new commitments you take on. Checking your credit report is a good place to start because it gives you a snapshot of what credit you currently owe and how you are coping with the repayments.

“If you are already a bit stretched, you may find that you are better off delaying your move until you have cleared some of your existing debts and are in a stronger position to finance your new home.”

To rent or not to rent?

The most obvious alternative to buying your home is renting; But the big question is, will you be any better off without a mortgage?

According to Abbey, unless you live in Northern Ireland, West Scotland and the North-East of England, the answer is no; and the gap seems to be widening.

Abbey’s June 2008 Rent Vs Buy Index shows that, over 25 years, the cost of a mortgage is around £10,000 less than renting in most parts of the country; whereas six months before the difference was just £5,800. This compares with a differential of £135,000 in favour of home-buyers back in 2001.

While these figures take into account the cost of home maintenance and inflation-fuelled rent rises, they do not allow for changing property values or take into account the fact that a buyer ends up with an asset. They also do not show that the picture is changing.

In August this year, the Royal Institution of Chartered Surveyors (RICS) declared that rents were rising at record pace as those of you who are planning to buy who couldn’t get mortgages drove up demand.

But towards the end of the year, estate agents reported that rents were falling because so many of you trying to sell were taking your homes off the market and becoming landlords instead.

So, the real answer as to whether rental is cheaper than purchase must be…it depends.

A fair exchange?

Council house tenants and holidaymakers have been doing it successfully for years, and now it seems the credit crunch has opened the door to home-owners swapping their properties.

In the US, an increasing number of people are using house swaps to relocate cost-effectively. Over here, estate agents are using the same principles to manage a game of musical houses for up to three owners at a time.

Not surprisingly the technique works best when all the parties are in the same locality and have flexible views on prospective new homes.

Be warned that this is not a way to beat the system; you will still have to pay all the usual costs, such as legal and professional fees and stamp duty.

If you can’t beat them, share with them

Desperation is forcing some of you into unusual measures to offload your existing homes or, when that’s not possible, finance your move. One high-risk strategy is to operate a prize-draw for the property by selling tickets at a few pounds a time; a legally-fraught marketing technique that has left some of you in very hot water.

A safer option being explored by a growing number of you is to hire out rooms separately in the style of an old-fashioned boarding house. That way you get rental income from individual tenants and can keep a room or two for yourselves. The downside is that the rental income is taxable if you rent more than one room for more than £4,250 a year, although there is no capital gains tax to pay if the property is sold within three years.

The homeowners survival guide to the credit crunch

If you want to move but are not sure whether to take on a mortgage, these tips will help you plan.

• Do your research: find out as much as you can about all your options and work out what it’s all going to cost before you make any major decisions.

• Sort out your finances: work out how much you can afford and start looking for ways to cut back on everyday spending.

• Check your credit report regularly: lenders usually look at it when they decide whether to make you an offer and prospective landlords can also ask permission to see it, so it should be up-to-date and reflect your circumstances accurately. Credit monitoring services such as CreditExpert offer a free trial that lets you see your credit report online and give advice on improving your credit rating.

• Be realistic: know what you can afford and don’t waste your time targeting deals that are clearly not suitable for your situation. You’ll only be disappointed and will leave tracks on your credit report that other lenders will see.

• Save, save, save: moving house has lots of hidden costs so try to save as much as you can for the big day.

• Wait for the perfect home: it’s a buyer’s market and not expected to bottom out for another year, so don’t rush to put down your deposit.

Wait to fall in love with a home and tell yourself that it’s a place to live, not a speculative investment; that way you’re less likely to be disappointed when it doesn’t shoot up in value.

• Don’t be afraid to haggle: it may not seem very British, but haggling is becoming the norm post credit crunch. Do your research first, keep calm and get a better deal on everything from your new furniture to your rent.

So, with the way the housing market is right now, what do you think you should do?

Are you planning to rent, buy, swap or share? Let us know in the comments below.

We have gone back to 1951!

In a move that was widely predicted, the Bank of England has cut interest rates by 1% dropping the rate down to 2%; the lowest level since that year... 

The radical action by the Bank’s Monetary Policy Committee (MPC) followed hard on the heels of last month’s surprise 1.5% rate cut that reduced rates to a 54-year low of 3%. .

The latest move came as the MPC stepped up its newly aggressive campaign to stave off the threat of a severe and prolonged recession. The MPC said it was worried about stalling business investment and consumer spending as well as falling house prices.

Earlier today the Halifax reported that house prices had fallen by 2.6% last month from October, the biggest drop since September 1992 and one which took prices down a record 16% on a year earlier. Other news showed car sales had collapsed by 37% year-on-year.

Some of the major mortgage lenders are yet to announce whether they would pass the rate cut onto you.  

The Royal Bank of Scotland said it would be passing on the cut in full to its small business customers, while Lloyds TSB said it would be passing on the rate cut to its small business and mortgage customers.  Before the interest rates decision, the Halifax said those of you with existing tracker mortgages, would benefit in full from any cuts.

• What will the the rate cut mean for your mortgage?

Tracker mortgages

Existing customers: Your interest rate should be reduced by 1% as a result of today's base rate cut.

Example: If you have a £150,000 mortgage tracking 0.5% above the base rate, your repayments will fall by £78 a month to £673. Most mortgage lenders will not pass on the change straight away; expect to have your repayments to be reduced from January 1.

However, there is a big caveat!

Some tracker mortgages have collars; this is a minimum pay rate attached to the deal.

At Nationwide most trackers are collared at 2.75%, which means that if, for example, your rate is 0.5% above the base rate you will never pay less than 3.25%. Similarly, if it is 0.05% below the base rate you will still never pay less than 2.75%. Skipton and Yorkshire building societies have collars of 3%. Halifax has said it will pass on the cut in full. 

It is estimated that between 500,000 and 600,000 of you with tracker mortgages may not benefit from the full cut.

New customers: A flurry of interest in tracker mortgages following last month's 1.5% rate cut led most lenders to pull their deals. Most have now relaunched them with higher margins. This week, Nationwide became the last of the big lenders to come back into the market with a deal priced 1.99% above the base rate; currently 4.99%. The collar on this deal has been set at 1%, so the lowest it can go is to 2.99%.

Lloyds TSB has pulled its tracker deals again, which are also available through its C&G brand. It said the move was temporary and that it would launch new deals as soon as it knew what impact the base rate change would have on wholesale funding costs. It had been offering deals at 1.79% above the base rate, a margin that could increase when the deals are relaunched.

Fixed rate mortgages

Existing customers: No change. Your rate will remain at its current level until you reach the end of your deal.

New customers: Expectations of a base rate cut today have already pushed down short-term swap rates on which 2 and 3 year fixed rate mortgages are based, which means lenders should soon be offering lower-priced loans.

Longer-term fixed-rates are unlikely to fall although by the end of the month it could be possible to fix for 5 years at 4.5%. Current fixed rates are upwards of 4.65% on 2 year deals and over 5% on 5 year deals.

Variable rate mortgages

Existing customers: If you currently pay your lender's standard variable rate (SVR), or a rate linked to it, you will have to wait to see if it opts to pass the change on; unless you are with Lloyds TSB or C&G, where the SVR is guaranteed to be no more than 2% above the base rate. If you have one of these mortgages , you will see the SVR cut to 4%.

Last month, mortgage lenders came under pressure to reduce their SVRs and most responded; 87 out of 95 lenders with an SVR cut their borrowing costs.

However, 57 did not pass the cut on in full and some only reduced their rates by 0.25%. It is thought that fewer lenders will cut their SVRs by the full amount this time; most reductions will be between 0.25% and 0.5% and you will have to wait till at least January 1 before any SVR changes come into effect.

New customers:

Lenders who reduce their SVR following a base rate cut usually offer the reduced rate to new customers straight away. Traditionally, SVRs were higher than the early special offer rates offered by lenders and were only paid by those of you who had come to the end of a deal, and they still only represent around 10% of lending.

However, SVRs have fallen so low they have started to look attractive to those of you that are new borrowers; particularly as most deals do not have early repayment charges or much in the way of upfront fees.

The majority of lenders have also pulled discount mortgages linked to their SVR, although some small building societies do still offer them. These rates will only fall if those lenders choose to drop their SVRs.

• No more useless rate cuts please!

The reduction in the cost of borrowing has been widely flagged, but most of us don’t want any more reductions.

64% of us say another cut in rates will not help, according to a poll by money website Fool.co.uk which also showed:

• People aged between 18 and 25 are least likely to benefit from a rate cut.
• Only 1 in 7 of us believe the rate reduction will help.
• Those aged 58 and over are also sceptical about another cut in rates.
• 8 out of 10 of us say more rate cuts will not help.

David Kuo, Head of Personal Finance at Fool.co.uk, says:

“The 1% cut in rates has brought the cost of borrowing down to levels not seen since World War II. However, it is unclear whom the rate cuts are supposed to benefit.

  “It won’t assist people with fixed rate mortgages, pensioners, savers, those with store card and credit card debts, first-time buyers who are hoping to get on the housing ladder, and people who are about to buy annuities.

“But it is important that consumers do not take their eye off inflation in these difficult times. The value of sterling has fallen 30% against the US dollar, making imports more expensive. So any gains they may make from the interest swings will be lost on the inflation roundabouts.

  “Consequently, it is vital at this time to ensure that any savings you have are properly invested. Ironically, the stock market is always thought of as being risky. But when the risk associated with insuring UK Government debt is higher than debt issued by a chocolate maker, then it’s time to re-think where you want to keep your money.”

So the interest rate may be at its lowest since the Fifties, but it seems that a good number of us are either unaffected by it or don’t think it will make a difference to our current situation!

Do you think the rate cut will be effective or will it not make any difference to our current situation?

 Let us know in the comments below.

(Please note that articles on Money Hospital do not constitute regulated financial advice. The articles are intended to provide general personal financial information, and are based on journalistic research. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. All rates are correct at time of printing but are subject to change without notice.)