Savers to pay for loan cuts

Personal Finance
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The Independent Online
JUST when you start thinking that yet another comment about mortgages might turn off your readers, along come Abbey National and Northern Rock. Apologies, therefore, for returning to the painful subject of home loans.

Both lenders' cut in their variable mortgage rates, down to 7.99 per cent, would not have happened were it not for the special circumstances they have each faced in recent months.

Abbey National has lost out in the competition for mortgages, as lenders react to a sluggish housing market by poach- ing off each other.

Northern Rock has hardly been flavour of the month with its borrowers since many found themselves paying 8.5 per cent on their loans, a record among the top 10 building societies.

Then there was that other bit of nastiness, when the Rock began using a little-noticed clause in its mortgage contracts to block people from switching their loans elsewhere.

Even so, the decision by the two institutions is good news for millions of borrowers. It is virtually certain that every other lender will follow suit within the next few weeks.

Ironically, as they do, the temporary advantage gained by the Abbey and Northern Rock will fade away, leaving every lender in the same position they were in before last week's announcement.

That is also good news. It means that the special offers - fixed rates, discounts, cashbacks - that have proved so attractive to so many people, cannot be whittled away so quickly.

But it is not good news all round. Both Abbey and Northern Rock are warning that a cut in mortgage rates means a drop in those paid to savers. In effect, we are being told that for Northern's 250,000 borrowers to benefit, its 1.3 million account-holders must pay. It is the same story for the Abbey's millions of savers.

It does not have to be that way. In the past two or three years, lenders have made huge profits. Repossessions, which cost them a packet during the early 1990s, have tailed off considerably.

If cuts do happen, savers should - except for keeping the minimum needed to stake any claim in their societies' potential de-mutualization bonanza - switch their accounts. A selection of the best rates will be available in the Independent on Sunday.

LITTLE-NOTICED, other than in the business pages of most newspapers, another saga was being lived out in the High Court last week.

The Investors' Compensation Scheme, a safety net for thousands of victims of fraud and bad advice, faced potential collapse following an insurer's legal challenge against a pounds 16m levy it was being asked to contribute. The ins and outs of the case are too detailed to go into. The end result was that the company concerned, Sun Life, lost the case. Big sighs of relief all round.

Except that Sun Life is now considering an appeal against the judge's decision, so the drama looks set to drag on for many more months.

It would be too easy to criticise Sun Life for its stance. Actually, the company's decision to use the courts is motivated by a desire to protect the interests of its policyholders. They would be none too happy if the company simply handed over their money without legal justification. But amid the cut-glass accents, the whigs, gowns and other paraphernalia of the legal system, the interests of thousands of investors seemed curiously absent.

All savers need to know is that if a crook makes off with their money or gives them bad advice they will be helped by some kind of compensation scheme. They also need to know that the scheme is properly funded and secure, unlike some of their investments.

The present compensation scheme is a mess and needs reform. Either that, or millions of savers will refuse to part with their money. And who can blame them?