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Money Express with Jill Kerby - Bad times to save and borrow

Inflation remains stubbornly low in the Eurozone, the United States and even in the UK where it does exceed that magic, plucked from the air, cost of living target of 2%.

Inflation is so low – and price deflation such a threat – that there is even talk of banking institutions charging their customers for allowing them to keep their money on deposit.

Why is that? Because banks that are desperate to pass upcoming tough EU stress tests, that still have huge numbers of bad loans to write off, that are losing money on trackers and are not doing enough lending… need to find income somewhere.

High bank charges and jacking up the interest charged to existing borrowers is as good a way as any. Desperate times require desperate solutions.

So far a deposit charge is just talk. However, one troubled Irish bank, Permanent TSB, did break ranks and increased its mortgage rate last week by 0.16% to 4.5%. PTSB has a large book of loss-leader tracker mortgages with many customers in arrears or unable to pay their entire loan, so this rate hike is no surprise. They will argue that a 4.5% interest rate is pretty much the going one for standard variable rate borrowers right now, and they are correct.

For someone on a 30 year SVR mortgage of, say, €250,000, this 0.16% hike will increase their monthly repayment by about €16, from €1,243 to €1,259 a month, or an additional €192 a year.

Given that the total annual interest and capital repayment was nearly €15,000 per annum before this latest increase, the additional €192 is not disproportional for a bank with the kind of mortgage problems that still plague PTSB (or all the other banks.)

Charging someone with €250,000 in a deposit account a sum of €192 for the privilege of that account might not be a deal breaker either. (Especially since only €100,000 comes under the deposit guarantee!). However, when such a charge is added to the to the huge 41% DIRT loss on the interest paid, it could make plenty of savers think twice about deposit accounts as a suitable home for their money.

Let’s do the sums: A €250,000 deposit (again, not recommended in a single account because of the €100,000 guarantee limit) can earn 1.85% in variable rate interest from PTSB’s 40 day notice deposit account. This amounts to €4,625 before tax. After paying the 41% DIRT this sum reduces to €2,728.75.

A €192 deposit charge – if it ever happened - would lower the interest return to just €2,536.75 or little more than a 1% return on the original €250,000.

Even if you believe the government’s official inflation figures that the cost of living is going up by just under 1%, there would effectively be no real return for anyone with €250,000 in savings.

If your personal inflation rate is much higher than 1% - just think about how much extra you have paid in the past year for heat, electricity, health care, transport and even many food items this past year – you will be losing money.

The mortgage borrower is even worse off: that 0.16% increase is making your fixed capital repayment more expensive on a property that is still worth less than the mortgage and (outside of Dublin) possibly still falling in value.

Is it any wonder that home-buyers and savers are in despair?

Those who have found affordable homes (probably outside of Dublin) cannot raise mortgages because the banks still need to clear bad loans before they can replace them with good ones.

Savers meanwhile are not just being poorly rewarded for their good and prudent money habits are also being punished with crushingly low yields by deposit takers, who must squeeze every penny out of customers to remain afloat.

Indebted governments and central banks are keen on people with cash lump sums to spend it, and not necessarily in the high street. Instead, they want you to buy property or stocks and shares where higher share prices help to feed their message that a ‘feel-good’ economic recovery is actually happening.

You need to take your time and examine all your options.

Start by comparing all the mortgage and savings rates at: www.nca.ie and www.bonkers.ie.

 

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