Money Insider: Mutuals see end of Rocky road

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The Independent Online

Since the onset of the credit crunch, the wholesale money markets have become a less attractive and more expensive source of funding for many banks and building societies.

As a result, we have seen intense competition between financial providers as they strive to replace the once plentiful wholesale funding stream with increased inflows of retail savings balances.

However, with the safety of funds just as important as the rate of interest for many consumers, the battle for savings balances has been played out on an uneven playing field since Northern Rock was nationalised, and savers were given guarantees on 100 per cent of their savings by the state.

As a result, the savings market has been distorted as consumers with deposits in excess of the Financial Services Compensation Scheme's current limit – of £50,000 – have sought the security of "safe havens" such as Northern Rock and NS&I.

There is no doubt that building societies suffered in trying to compete against the 100 per cent savings guarantee and even though they were offering higher interest rates, some savers, mindful of the IceSave debacle of 2008, were happy to sacrifice better rates for the safety of their nest egg.

Statistics from the Building Societies Association illustrate the depth of the problems this caused with a reduction in total balances of £1bn in 2009 for the mutual sector compared with an increase of £19bn in 2008.

Hopefully the lifting of the Northern Rock guarantee will be confirmed very soon and enable building societies to compete fair and square with its competitors once again.

It is unlikely consumers will desert Northern Rock in their droves, particularly as fixed rate deposits retain their 100 per cent guarantee until the date they mature. However those with funds in excess of £50,000 in a variable rate account may soon be looking for a new home for some of their savings as they spread their custom in order to retain full FSCS coverage.

No sign of a speedy rate revival

With best buy savings deals being pulled on a frequent basis, the rate-cutting strategy used by the Bank of England to restore economic stability is continuing to hit UK savers hard.

Six consecutive cuts from October 2008 saw base rate fall from 5 per cent to a record low 0.5 per cent in March 2009, where it has stuck firm ever since.

Even when rates do start to pick up again, some providers will use the opportunity to restore their profit margins and won't pass the full benefit on to savers. It's going to take a lot more than a couple of quarter-point base rate rises for savers to see a meaningful increase in their interest income.

This unchartered territory for base rate is causing other problems: ISA benefits are now so small they are hardly worth the effort and, with rising inflation, it's also nigh on impossible to protect the spending power of your cash.

It's understandable that people are angry and frustrated with the current situation, but no matter how much noise they make, neither providers nor the government are in a position to offer beleaguered savers a quick fix.

To rub salt into the wound, swap rates for both two and five years have fallen by almost 0.4 per cent this year, and the chance of seeing rates on fixed rate bonds picking up is also looking increasingly remote.

Lenders take a long-term view

There were positive moves from mortgage lenders this week, with some attractively priced longer-term fixed rate deals starting to emerge.

For most people, a long-term fix means a five-year deal. But, this week, Britannia and The Co-operative Bank launched a 10-year product which may tempt those looking for long-term certainty and who don't want the hassle – and fees – of remortgaging every two years.

You can fix your rate at 5.29 per cent for the next decade – with a £999 fee up to 75 per cent loan to value. Even though that's 0.45 per cent above the five-year rate from the same lenders, it will still appeal to those looking for greater control over their budget.

Andrew Hagger is a money analyst at

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