Save and prosper? Not any longer

Banks are exploiting low interest rates to maximise profits, at the expense of savers.

BANKS AND building societies have taken advantage of falling interest rates and sharply stepped up the amount of money they make from customers. According to a report on the profitability of mortgage lending by a City investment bank, financial institutions are increasing profits by cutting savings rates by more than their mortgages rates.

The report, by the US firm Salomon Smith Barney, shows that between the last quarter of 1998 and the first quarter of 1999 UK banks pushed through increases of up to a quarter in "spreads" - a City term which roughly translates as the difference between the rates banks charge for mortgage loans and the rates they pay on savings.

Spreads are normally the biggest element of the profits made by mortgage banks and building societies: so the larger the spread, the more profit the bank will make on its interest rates. In March, the TSB widened its spread from 2.56 per cent to 3.11 per cent, an increase of 22 per cent in the spread, while Cheltenham & Gloucester boosted its spread by 16 per cent. Abbey National raised its spread by 13 per cent. Between 1998 and 1999, the Northern Rock stepped up its spread from a tiny 0.17 percentage points to 0.58 percentage points.

Even the building societies - which frequently boast of their ability to keep a narrow spread compared to the banks - have joined the trend. Nationwide's spread was up from 1.81 per cent to 1.93 per cent, increasing its margin by 7 per cent, while Bradford & Bingley's rose by 5 per cent.

Banks and building societies have cut both mortgage and savings rates in response to successive cuts in base rates. But last month, most mortgage lenders refused to drop their mortgage rates in spite of a quarter-point cut in base rates by the Bank of England. The decision broke with a two- year trend of tracking interest rates downwards.

The Halifax, Britain's biggest lender, dropped its headline variable rate by just 0.1 of a percentage point. At the time, executives justified the size of the drop by saying they now had to look after savers, who are experiencing some of the poorest pre-tax interest rates for the last 30 years. (Indeed, only the drop in tax rates on interest, which have come down from around 50p to 20p in the pound, has softened the blow for savers.)

However, the Halifax announced on Thursday that it was also lowering savings rates by at least as much as the mortgage rates. On some accounts, interest will fall by 0.1 points. On others the drop is 0.2 points.

Industry observers say that both banks and building societies are taking advantage of a pick-up in the housing market. Last month, mortgage lending hit a new record of pounds 1bn. By widening their spreads, they can improve profits - as well as gain some relief from the relentless squeeze on their earnings caused by competition in the mortgage market.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future