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.