The past year was a strange one for household finances: while savings rates plummeted to new lows, and many people saw their incomes slide, those who could keep working often stashed away large amounts of cash.
House prices rose and borrowers with big deposits were able to get very cheap mortgages, but lenders’ caution saw 95% home loans pulled and new restrictions on 90% deals.
Just as the rollout of vaccines raised hopes of bringing life back to normal, then came news of the spread of a new, more infectious coronavirus variant.
So what are the best, and worst, things, that could happen to our personal finances in 2021?
Last year saw a ban on excessive overdraft fees, two cuts in the Bank of England base rate and the impact of coronavirus – meaning some banks withdrew accounts, according to financial information site Moneyfacts, while others stopped offering cash incentives to new customers.
This year could see even more changes. HSBC has already warned that it could consider a charge on its standard current account, saying low interest rates have hit its profits on lending.
Other providers may be looking at their options, and, if the Bank of England base rate goes negative – and there is speculation that it might – that could make up their minds.
“At the moment, consumers have the choice of paying for a packaged account, that’s one that comes with other services, or a simple account that would only require a charge to be paid if borrowing in an overdraft or missing payments,” says Rachel Springall of Moneyfacts.
“This year, providers could apply charges to their banking range or increase fees on their most popular accounts, and we could see benefits capped or slashed.”
New challenger banks are continuing to enter the market with fresh offerings, but many of these now involve a fee. Last month Revolut launched a £2.99-a-month subscription offer which includes theft and accident cover, as well as purchase protection of £1,000 a year.
Best case There is a switching war between banks for a new customer’s cash; more rewards are launched to entice people to move.
Worst case: Continued cut in benefits and more fees.
Coming after one of the worst years on record for savings rates, it is hard to see how things could get worse, although a negative Bank of England base rate could lead to even further cuts to accounts.
Returns are sitting at historically low levels and there is no sign of whether there will be any improvement in 2021.
“It is hoped that challenger banks, and any new brands looking to enter the market, will offer the most lucrative rates. Savers would be wise to take advantage of any government initiatives, such as the Lifetime Isa or Help to Save, but also utilise its Isa allowance,” advises Springall.
Tax-free savings allowances are set by the government and Springall says it could decide to review the benefits it is offering.
She adds: “Regardless of whether the market becomes stagnant or worsens, savers would be wise to keep a close eye on the top-rate tables and switch to ensure they are getting the best possible return on their hard-earned cash.”
Best case: There is a rise in interest rates; new initiatives are introduced by the government to help savers; new challenger banks enter the market to try to acquire deposits.
Worst case: Further drops in interest rates; cuts in tax-free initiatives for savers.
While the stock market has dropped, not all pensions have suffered. The workplace pension for almost 10 million people, Nest, has gained more than 10% in the last year, partly through investment in US tech firms.
Many have seen the potential value of their funds fall, however, especially those who have not been able to contribute as much because of job loss or being furloughed.
Becky O’Connor, head of pensions and savings at Interactive Investor, is calling for the introduction of “wake-up” pension packs for younger people to encourage them to engage with their savings.
The packs – documents telling people the size of their pots – are now only sent out to savers who are 50, to prompt them into thinking about their plans for retirement.
“They are really popular, but would be even more effective earlier in life,” she says.
Working against consistent pension saving would be the reduction of pension tax relief for higher-rate earners which, she says, could see people shift their money into other savings vehicles, such as Isas.
“Any changes that disincentivise people to save for the long term, in a country where millions are already at risk of poverty in retirement, would be unwelcome,” she says.
Best case: Alerts for people at different times of their lives to keep saving; improvements in the stock market.
Worst case: Reduction of pension tax relief; markets worsen again.
First-time buyers were hit in 2020 by demands by banks for bigger deposits, while some buyers in England and Northern Ireland got a huge boost when a stamp duty holiday on homes costing up to £500,000 was introduced in July.
David Hollingworth, of L&C Mortgages, says the first three months of this year are expected to be busy as people rush to meet the deadline. “Those that are not already in-flight with a purchase should recognise that there have been delays throughout the process, and so there can be no guarantees for new buyers as the deadline looms,” he says.
The end of 2020 saw some improvement in the availability of 90% loan-to-value products, with Barclays, Halifax and NatWest all launching low-deposit mortgages.
That should hopefully pave the way for more lenders to rejoin that end of the market, and mean a gradual improvement in choice and hopefully in rates over time.
However, it’s worth noting that at the beginning of 2020 borrowers had a broad choice of 95% LTV deals and there’s nothing to suggest a rapid return to that position in the near term.
“Hopefully, there may be scope for a gradual return as the year progresses,” adds Hollingworth.
Lenders are also expected to focus on how borrowers will be able to repay their mortgages as a result of so many people’s finances being affected by the pandemic.
Best case: An extension of the stamp duty holiday for existing buyers; more lenders to return to 90%-plus loan to value mortgages.
Worst case: Price falls force banks and building societies to rein in lending again; construction remains slow due to coronavirus.