Banks fight for savers
Mortgage lenders have accused the government of limiting their ability to lend by “sucking” savers into Treasury-backed National Savings & Investments (NS&I).
The Council of Mortgage Lenders (CML), which represents banks and building societies offering home purchase loans, claims that the government’s current policy is fractured; it wants banks to lend more money to homeowners, but many lenders remain dependent on wholesale deposits such as savings accounts to fund such loans.
“Banks and building societies have seen savings ebb away to NS&I, which has a negative impact on their ability to lend,” explains Michael Coogan, director general of the CML. “Until funding improves, the capacity of lenders to lend will remain constrained."
The latest figures from the CML show that mortgage lending is now at its lowest level since 2001. Loans approved in February equalled just £9.9 billion, down 60% from the same month last year.
Although February is typically a slow month for mortgage lending, this sharp decline is indicative of the funding restraints that many banks and societies still face.
Coogan adds: "There are now fewer active lenders in the market, but the government wants them to lend more. At the same time, the government's own savings institution is sucking away the funds that would enable them to do so.”
NS&I is backed by the Treasury, meaning customers’ money is 100% protected. It offers a range of savings accounts and low-risk investment opportunities as well as Premium Bonds. In contrast, savers with privately owned banks in the UK are only protected up to £50,000 by the Financial Services Compensation Scheme (FSCS).
NS&I recently revealed it saw nearly £10 billion deposited by customers in the first nine months of 2008, largely as a result of Icelandic-owned banks collapsing plus Bradford & Bingley being nationalised and its savings division sold to Santander.
Ray Boulger, senior technical manager at mortgage broker John Charcol, says the government must do more to ensure lenders have access to funding. While quantitative easing measures and the Treasury's Asset Protection Scheme aim to increase the amount of money banks are able to lend, Boulger says these have yet to have an impact.
He adds: "Although, technically, savers are only protected by the FSCS up to £50,000, the government has made it clear that, in reality, it won't let a major bank fail and will refund savers let out of pocket."
Despite the guarantee offered to NS&I savers by the Treasury, it is far from the most competitive savings provider out there – especially as it has reduced rates in-line with the Bank of England base rate cuts.
Its two cash ISAs pay just 1.3% and 0.5% respectively, compared to best-buys of up to 3.61% AER. Meanwhile, its easy access savings account pays between 0.3% and a dismal 0.7%.
Earlier this week, NS&I announced it was ditching two monthly £1 million top prizes from its Premium Bond jackpot and introducing a new £25 prize category instead.
Citing falling interest rates as the reason behind the move, NS&I said that although people’s chances of winning remain the same, they are less likely to receive the bigger prize.
NS&I also announced it was slashing the rate on its premium bond fund from 1.8% to 1%. This means a smaller proportion of the total amount invested will be paid out to customers in prizes.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).