Are your savings gathering more dust than interest?

Funny things, human beings. And never funnier (I mean in the strange sense, not ha ha) than in our dealings with money. If you doubt that, then test which side of your brain is managing your money

We search for the cheapest jar of coffee in the supermarket, tutting at the 30p price difference per jar, then hand over £2.45 for a single cup in Starbucks.

We leave our savings to fester away gathering more dust than interest, while at the same time carrying credit card debt.

Do you know what you;re saving for?
This very specific pot is by terramundi

Behavioural economists call this illogical behaviour mental accounting – or treating money differently depending on its source or label, something I've discussed in earlier blogs about using the left brain a bit more. 

An example is our attitude to money we’ve saved and money that’s dropped into our laps (I know, but bear with me on this one)... 

Would you blow your savings on a big birthday party extravaganza? Probably not, unless that was what you’d be saving for. It would seem too… reckless? Irresponsible? 

But what if you got an unexpected tax rebate and had a big birthday coming up? Woohoo, champagne cocktails all round!

I got to thinking about all this while working on a campaign for first direct, the online bank, to do with offset mortgages. 

Apparently nearly all mortgages in Australia are offset. They originated there and it's what most people go for.

Yet a mere 6% of UK mortgages are offset mortgages. This is probably because this concept feels a bit alien to us. After all, when mental accounting, we Brits have kept our borrowing and our savings very separate. It doesn’t even occur to us that we could use one to offset the other. Mentally they are two disconnected amounts of money.

  

Of course another reason we shun offset mortgages is because we don’t even know what they are.  

Offset mortgages simply allow any savings or current account balances to be offset against the mortgage, with interest only being payable on the difference between the two.

o   e.g. if a borrower has a £100,000 mortgage and £10,000 in savings, they will only pay interest on the difference (i.e. 90,000).

Dead easy really. You use your savings to work for you, but still hang on to them. 

This makes real logical sense for anyone who has both savings and a mortgage, and now more than ever before. Savings interest rates are so abysmally low at the moment, the loss of interest on them would be more than outweighed by the reduction in mortgage interest.

For more info check out the first direct website http://www.firstdirect.com

How banks discriminate against female customers

Just imagine.

You’ve got an exciting and bomb-proof proposal for a start-up and approach your bank for investment. Later you find out that you were:

-       asked more questions

-       offered less money

-       ask to provide higher collateral

than a male applicant approaching the same lender. Because you are female.

I'm pregnant, not brain-dead.

That’s just one of the findings in a new report published today by Noreena Hertz who is based at Duisenberg School of Finance, RSM, Erasmus University and University of Cambridge. She also reveals how women are refused mortgages, and their business acument is called into question, if they are pregnant.

Professor Hertz’s key findings include:

-        Evidence in the UK of banks discriminating against pregnant women and women on maternity leave seeking mortgages. This seems to be an ongoing industry-wide practice, with a number of leading UK high street banks named.

-        Evidence in Europe of banks discriminating against women entrepreneurs. Research suggests women are being asked for more collateral than men for loans, being charged higher interest rates and being refused loans more frequently than men.

-        Evidence of gender stereotyping by bank loan officers internationally. Examples of this include women entrepreneurs being questioned significantly more often than male applicants whether they have undertaken sufficient research into their business, and pregnant women being assumed by lending officers not to return to work after having a child.

The report asks banks to think carefully about whether their staff may be negatively stereotyping women, either consciously or unconsciously, and to take measures to address this. 

And it points out that the UK government has a responsibility to investigate this type of discrimination, which contravenes the United Nations Convention dictat on the Elimination of All Forms of Discrimination Against Women and the Equality Act of 2010. 

In fact it states that the government is legally obliged to take action after the disclosure of such discrimination, and such action would mean prosecuting the banks found guilty of such practice and compensating those who have been discriminated against.

Recently David Cameron could be heard pontificating about entrpreneurship being the ‘only strategy’ by which the UK economy could achieve significant growth. 

He also highlighted the need for entrepreneurs to have access to credit from banks in order to thrive. 

I wonder if he was aware that such access would be strongly influenced by the applicant’s gender?

You can download Professor Hertz's full report here.