Money Insider: Mutuals see end of Rocky road
Saturday 13 February 2010
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 Moneynet.co.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Pope Francis issues top 10 tips for happiness
- 2 Disney heiress Abigail disowns her share of family profits in West Bank company
- 3 The secret report that helps Israel hide facts
- 4 Now diplomacy has failed, boycotting Israel might be the only way we can protect the people of Gaza
- 5 Israel's propaganda machine is finally starting to misfire
The secret report that helps Israel hide facts
Land for gas: Merkel and Putin discussed secret deal could end Ukraine crisis
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Richard Dawkins tweets: 'Date rape is bad, stranger rape is worse'
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Boozy, ignorant, intolerant, but very polite – Britain as others see us
- < Previous
- Next >
iJobs Money & Business
£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...
£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...
£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...
Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...
Day In a Page
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000