Base Rate Cut - Analysis for UK dentists

The Bank of England cut interest rates on 5th February to 1% - down from 5% only last October – the lowest level in its 315-year history, as it sought to head off the worst economic crisis since the Great Depression.

The Monetary Policy Committee (MPC) made a statement accompanying the half percentage point reduction, saying its actions, combined with the government's tax cuts and the weaker pound, should provide a "considerable stimulus" to the UK economy.

Dental Practice Finance
Many principals will have borrowed money at 1%-1.5% above this base rate at some point over the last few years and will now be enjoying savings of thousands of pounds per month. For example if you had borrowed £750,000 at 1% above base last year, you would have been paying £3,750 per month, but your monthly interest payments would now be down to £1,250, a saving of £2,500 per month.

This saving in interest payments may be crucial in terms of keeping private practices afloat if patients are staying away or deferring treatment, especially as the MPC pointed to a severe and synchronised downturn…. job cuts and weakness in consumer spending.

The experience of many of my principal clients including private, NHS and mixed practices however is that turnover has not been affected and the appointment book is still full. In addition with the likes of patient payment plans such as Medenta which help to spread the cost of treatment over several months, this latest reduction in rates provides several opportunities.

For example now might be the time to expand the practice, borrow some money cheaply and complete the extension, additional surgery or even buy another practice. Alternatively with the monthly savings you could be safely putting that aside in high interest savings accounts, paying off your residential mortgage, or increasing your pension. Finally you could take this opportunity to enjoy the cash and simply spend it.

However, although most clients I speak to hardly need the cautionary advice, don’t forget that all markets are cyclical and you never know what’s around the corner.

Some dentists will have fixed some or all of their loans to provide financial security, but with rates as low as they are now, this cautious approach has now proved to have been an expensive option.

Residential Mortgages
Following the latest base rate cut, some mortgage lenders announced they would be passing on the rate cut in full to their standard variable rate (SVR) customers.

With the government putting pressure on lenders to reduce their standard variable rates in line with the bank rate reductions, lenders such as Nationwide, Britain's biggest building society, Skipton Building Society, Lloyds TSB, Cheltenham & Gloucester and Halifax, part of the Lloyds Banking Group, Woolwich, owned by Barclays, and Abbey were quick to commit to passing on the full half-point cut in the base rate to borrowers on variable rate deals to rates as low as 3 – 3.5%.

Northern Rock however, now wholly owned by the government, appears to be consistently failing to pass on the rate cuts with a SVR of 4.84%.

If you are nearing the end of an introductory rate with your current lender and have between 25%-40% equity in your property then there are some fantastic fixed rates available, now as low as 3.49%. If you are not in this position then staying on the standard variable rate may be a good short term option.

About 1,500 customers who took out a tracker mortgages pegged at 1.01 points below the base rate with Cheltenham & Gloucester (C&G), will be paying no interest at all on their home loans from next month. This is the first time that a mortgage lender has been forced to reduce the interest on their home loans to zero.

Savers
The other side to these rate cuts is that attempts to revive the economy by slashing interest rates are leaving pensioners and others dependent on savings with a lower standard of living.

Savers – who outnumber borrowers – have seen their interest payments drop by 83% since July 2007.

The Bank of England also published figures last month which showed that interest paid on notice accounts, tax-free ISAs and bonds in December was the lowest since records began in 1995, while the average return on instant access accounts was just 0.81%.

Many self employed dentists have significant cash savings in preparation for their tax bills in January and July every year. If you have a mortgage aswell, offset mortgages are an excellent way to take advantage of any additional savings you have, as the money is guaranteed, the rate is higher than you’re likely to get in any deposit account and you won’t have to pay any tax.

The Economy and House Prices
The UK economy officially shrank by 1.5% in the fourth quarter of last year – the biggest contraction in almost 30 years.

But the government is confident that the latest announcement with previous rate cuts, combined with the weakness in the pound, will eventually have a “significant impact” on aiding the economy.

A recent report from the Halifax that house prices unexpectedly rose by 1.9% during January, ending 10 consecutive months of falls brought hope that the worst of the house price declines could be over.

But the Halifax itself warned that the rise was likely to be a statistical blip, as the market remained under severe downward pressure. Last week, the Nationwide reported that house prices had fallen by 1.3% over the same period.

Conclusion
Although the economy does appear to be spiralling uncontrollably downward and investors will be nursing some heavy stock market losses, the recent base rate cuts are on the whole excellent news for the majority of dentists. This year, could really be the year to use the savings made on any borrowings and take advantage of some under priced assets.