Savers suffer as borrowers benefit
Banks and building societies have been accused of offering cheaper mortgage rates to borrowers at the expense of savers.
Interest rates on mortgages have reduced over the past couple of months, according to data provider Moneyfacts. However, at the same time, savings rates have also been cut as lenders try to maintain their balance sheets.
For example, the average five-year fixed-rate savings bond currently pays 4.54% - down 0.23% since November.
In contrast, the average five-year tracker mortgage has reduced in cost by 0.16% during the same period.
“Savers’ money was in high demand during 2009, leading many banks and building societies to offer rates as much as 10 times the base rate,” says Michelle Slade, spokeswoman for Moneyfacts. “Providers must strike the right balance between savers and borrowers in order to maintain their balance sheets - no provider will offer market leading deals to both at the same time.”
Despite conditions in the mortgage market remaining tough, things have been slowly improving. The number of products available in on the up, rates are being cut and the average deposit required has fallen.
Slade adds: “The focus appears to have switched back to lending and as the demand for savers’ money reduces, so do the rates offered.”
Falling rates are the only issue facing savers. Inflation is expected to rise during 2010 – meaning the value of their money is being eroded.
“Many savers have just experienced their worst ever year’s returns and 2010 is not shaping up to be much better,” admits Slade. “The only benefit is likely to come from the forthcoming ISA season that will see providers battling it out to attract savers’ tax free allowances.”
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.