Savers pay price for loans war

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The Independent Online
INTEREST rates on saving accounts have plunged to their lowest level for more than 20 years amid accusations that building societies are making excessive profits and could afford to hold rates higher or start a new mortgage price war.

Savers have been paying for increasingly desperate mortgage price competition and the building societies' desire to keep tax-free Tessa rates up.

The latest cuts came last week from the Alliance & Leicester, Woolwich and Britannia building societies, along with Abbey National and National Savings. Savers with pounds 1,000 on instant access are now struggling to get 3 per cent from most high-street names. And that is before tax - interest is paid net of basic rate tax, leaving savers with closer to 2 per cent, or even less if they are higher-rate taxpayers. It's also less than inflation, so savers are losing money in real terms, and the dividend income available from shares.

Moreover, according to building society analyst Rob Thomas at UBS, societies have been shortchanging savers. They have made more than pounds 2bn of profits over and above what they have needed for their lending and general financial security in recent years, he says in research published last week. That money could have been passed back in the form of savings rates a percentage point higher for tens of millions of people. Or, says Mr Thomas, both savers and borrowers could each have had 0.5 per cent better rates.

The research, entitled Mutual Benefits: Time to Decide, comes as building societies are under pressure to shed mutual status and hand over pounds 500- plus windfalls to their customers. Many have fended off such demands by claiming that their traditional status has allowed them to pay better rates to both savers and borrowers. But Mr Thomas says of the profit levels he highlights: "It's quite an indictment [of businesses which claim to act wholly in the interests of their customers]."

One society, Bradford & Bingley, last week announced it would reduce profits of more than pounds 50m by cutting variable mortgage rates by 0.25 per cent and improving its average savings rate by the same margin.

But savers will not necessarily notice they are getting more interest, nor does the move mean that the B&B is paying the best rates. John Wriglesworth, its head of strategy, said the aim was to keep rates 0.25 per cent above competitors such as the Halifax and Abbey National - which in key accounts it already is - but that the society could not guarantee the rate premium for every comparable account. Rates could also fall further if such moves on the mortgage front sparked more loan rate competition.

Mr Thomas said the B&B could have given more, although the society said it was limited by City credit agency expectations. Mr Wriglesworth admitted that savers stood to benefit less than borrowers but promised further action aimed at improving rates on small balances.

The Yorkshire Building Society has already implemented a similar pounds 20m profits reduction, and further moves are promised by the Nationwide and Britannia.

But any improvements for savers may well seem marginal. A 0.25 per cent increase is only worth pounds 2.50 more a year on a balance of pounds 1,000. Savers' wider problems lie in the generally low level of rates and the fact that lenders have cut savings rates to pay for mortgage cuts. Savings rates are lower than in 1994, although base rates are higher. Furthermore, societies have no shortage of savings for their likely lending and therefore no reason to pay particularly high rates to attract more. Instead, a new mortgage price war is on the cards (see below) as societies yet again try to stoke some reaction from the housing market. Mr Thomas says if the excess profits he identifies were targeted only at borrowers, mortgage rates could fall another 1 per cent.

For savers then, the advice is shop around. For many of the best offers see Your Money's table of best savings rates on page 22.

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