'Savers are going to have to step up to the risk plate at some stage'

'Savers are going to have to step up to the risk plate at some stage'
The real prospect that rates will fall to zero is a nightmare scenario for those that rely on savings income to bolster their day-to-day living expenses.

By Paul FarrowLast Updated: 7:31AM GMT 11 Dec 2008
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It is hard to imagine savings rates at nil - but it happened in Japan, where savers had no choice but to deal with the harsh reality of not getting a return on their money.
Take a look at this excerpt from the newswires in July 2006 when the Bank of Japan decided to raise rates for the first time in six years from zero to 0.25pc.
"Mizuho Financial, Japan's second largest bank, said last week it would raise interest rates on six-month time deposits for the first occasion in almost six years. It raised the rate for six months to 0.1pc from 0.02pc and the rate for three month accounts to 0.06pc from 0.02pc from July 10. Smaller Sumitomo Mitsui Financial also raised rates on time deposits on Monday.''
Apathetic savers are already getting a pittance on their cash - many of Halifax's savings accounts pay 0.5pc or less already.
For the proactive saver, as Emma Simon reports on page 1, there are ways to get a return on your money over and above 2pc. But you will have to get your skates on to grab a decent deal.
As one commentator remarked last week, savers are going to have to take on a little more risk if they are to get their just rewards. With rates around 6pc, the decision to hoard cash in savings accounts made perfect sense, but the landscape is changing.
As I mentioned a fortnight ago, corporate bond funds offer a decent yield as do many equity income funds. They are by no means a substitute for cash but, if rates languish at such low levels for too long, savers are going to have little choice but to step up to the risk plate at some stage.
It is a different ball game for borrowers, however. When interest rates reached 15pc in 1990, I was green with envy of my bosses at Coutts. The longest standing managers at the Queen's bank were fortunate to have fixed rate mortgages of just 2pc. A perk if ever there was one.
It seemed inconceivable at the time that I or anyone else could pay a miserly 2pc on a home loan - until this week, that is. True, many borrowers won't be paying anything like 2pc. For starters, around half of mortgages are fixed-rate, while more 10pc of home owners are on their lender's standard variable rates and they range between 4pc and 7pc.
However, some lucky borrowers will be paying less than 1pc. C&G, for instance, was offering a two-year tracker discounting base rate by 1.01pc. One can only assume that these borrowers now paying 0.99pc will pay zilch interest if rates tumble to zero. Many lenders were predictably slow to react, or did react but failed to pass on the full one percentage point cut.
But it made a welcome change to see a lender put its customers first for once. Nationwide decided not enforce its collar on tracker mortgages. A collar allows lenders not to pass on interest rate reductions once base rate falls below a certain level - in Nationwide's case, it was 2.75pc. Mind you, I'm fortunate enough to have a two-year tracker from the building society at 0.03pc above base rate. I'll leave it to you to do the maths.

http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/3690421/Savers-are-going-to-have-to-step-up-to-the-risk-plate-at-some-stage.html