Belfast Telegraph

Friday 1 August 2014

Golden era of cheap credit an illusion

Credit is now cheaper than it was in 2007. Yes, you read that right, best-buy loans and mortgages are less expensive than they were prior to the financial crash. In fact, you can now fix your mortgage at a rate below inflation for two, three or five years.

In effect, this is giving you money because over the course of the loan – provided inflation stays where it is or increases – then its value will in part be eroded by prices.

This is the first time I can remember that being the case and in the main it is the Bank of England's Funding for Lending Scheme, which is pumping billions into lenders' coffers, that is to thank or blame – depending on the view you take of credit.

But the headline rate is only part of the story. The reality is that these super-cheap loan and mortgage rates are only available to the chosen few and many of these people frankly don't need to borrow. If you aren't in this elite, credit suddenly gets a lot more expensive – if you can get it at all.

Funding for Lending has done very little for small businesses – they are still finding it difficult to get money to expand – and this will have major implications for the UK economy as a whole as the recovery gathers pace and inevitably sucks in imports because domestic firms can't expand to meet demand. Overall, there has never been a greater difference between the borrowing rates paid by those with a good credit score and everyone else, including business.

Incidentally, this is a reason why Help to Buy does actually fill a gap.

The mortgages aren't that cheap – around 5% – but at least they are there to be had.

In short, this golden period for borrowing is a bit of an illusion for most – in the same way that the house-price boom we keep hearing about doesn't apply above the Watford Gap.

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