Coalition lending fund has led to slashed savings

Competition in the savings market is starting to shrink as banks make use of the Funding for Lending cash

The Government's £80bn Funding for Lending scheme has been a disaster for savers. Since the launch of the fund at the beginning of August, rates offered by the best available fixed deals have declined by 10 per cent.

Easy access accounts have fared even worse: the best buy deals now offer returns worth 14 per cent less than they did when the scheme was launched in August. Insiders warned this week that "there's simply no need to offer decent rates as there's no competition in the market any more".

The problems stem back to the Coalition's attempt to kick-start the economy by giving lenders £80bn-worth of cheap money to lend to home buyers and small businesses.

That has improved things for borrowers, but has led to a fall in wholesale money market rates. It means banks don't really need to offer savers decent rates as they can borrow cheaper on money markets.

"It would appear that the providers have found an alternative source of cheap funds which could be attributed to the Funding for Lending scheme which was introduced at the beginning of August," said Anna Bowes of the rates analysts Savings Champion.

"Although many providers are denying that this is the reason for the fall in rates currently being offered to new savers, the timing is spot on."

She said savings rates peaked at the end of July. At that time the best easy access rate available was 3.25 per cent with the Coventry Building Society. "Since then rates have steadily dropped to their current level when the best easy access accounts are now paying just 2.8 per cent."

Savers taking advantage of the rash of higher-paying fixed rate deals that have appear this year have also been hit, says Charlotte Nelson of Moneyfacts.

""Returns on savings rates – particularly fixed rate bonds – are falling steadily, not only in terms of best buy rates but the market average as well," she warned.

Moneyfacts research shows that the best buy one year fixed rate deal available in July was the 3.6 per cent offered by the online bank Cahoot. Today the highest-paying equivalent deal is the 3.33 per cent offered by the State Bank of India.

"The Funding for Lending scheme may have an indirect link to the fall in fixed rate bonds we see today," Nelson said. "The money provided by the scheme means that the banks do not need to rely on savers to fund its mortgage book. Therefore, they are reducing savings rates as providers no longer need to be as competitive."

Longer-term fixed rate saving appear to have been less hit, with the same 4.5 per cent paying account from the State Bank of India still available now as it was in July. But few can afford to lock away their savings for such a length of time.

Industry sources suggest times will get even harder for savers in the coming weeks.

"Savers should stay vigilant in this turbulent market," advised Ms Nelson. "With good rates reducing or even being withdrawn daily savers must actively shop around for the best deal and act fast as the best deals tend to be oversubscribed extremely quickly."

At savingschampion.co.uk there's a free Rate Tracker service which tells you if the rates on your savings account change. "Anyone can add their savings accounts to their personal savings portfolio and let us track their accounts for them," said Anna Bowes.

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