Your Money: Real interest is overdue

WHEN interest rates were high it was easy for financial institutions to appear generous, giving away a few percentage points here and there for customers.

But now that rates have come down there is no room for any benefits that can be seen with the naked eye.

An example of this is interest payments on current accounts. When they were first introduced it seemed only right that the banks did not have the use of our money without paying something for the privilege - even if that something was way below money market rates.

With rates at their present levels, the payments on current accounts are silly. Lloyds Bank, for instance, will pay just 0.15 per cent net on sums under pounds 1,000.

The trouble is that we have been led to believe that giving the bank the use of our cash was ample payment for the current account service.

But the banks say that shuffling those cheques, standing orders and direct debits costs them plenty. One estimate puts the figure at about 7 per cent of average balances to run a current account. So you can see that there is a loss-making operation when interest rates are down at 6 per cent.

One high-street bank estimates that accounts with less than pounds 1,500 sitting in them - about 80 per cent of current accounts - are running up losses for the bank. Another says it costs an average of pounds 40 a year to run a current account.

It is difficult to feel sympathetic towards the banks. They have been keen to fudge the cost issue when it suited them. Now things are not so rosy they want to be more open and start charging us.

One small bank, Robert Fleming's Save & Prosper, announced last week that it would start charging customers pounds 5 for every month when there was less than pounds 1,000 in their account on the last day of the month.

It seems the others will not be far behind. But if the charges cover the true costs of providing the service, then we should at least demand real interest rates when we leave money lying fallow in accounts, or an automatic sweep to ensure that we don't.

ABBEY NATIONAL introduced discounts for first-time buyers back in 1990 when interest rates were a heady 15.4 per cent.

The discount amounted to less than a 1 per cent cut, and only served to make an appalling situation slightly less awful.

Abbey argues that now the basic mortgage rate is down to 7.99 per cent, a discount of 1.25 per cent - or 1.75 per cent for those who can find at least a 10 per cent deposit - is far too generous. Anyway, 80 per cent of first timers opt for a fixed-rate mortgage rather than ride out the variable rates.

So Abbey has rolled out a new set of fixed-rate offers specifically for first-time buyers: 5.99 per cent, or 5.59 per cent for high-deposit loans, until October 1994.

But a 2 per cent reduction on the current variable rate means that if and when rates fall, first-time buyers will not feel the benfit.

The fix only lasts for 20 months. Yet those who take up the offer have to pay a pounds 199 fee and promise to take Abbey's own buildings and contents insurance. In return they get two years' unemployment cover, so Abbey is assured of mortgage payments.

All the pointers at the moment indicate another cut is on the way. A short-term fix is a poor deal, and hardly worth having, even though it is unlikely that rates will shed another 2 per cent.

A COMPANY that deals in second-hand endowment policies is offering to give homebuyers an estimate of the value of their with-profits policy and show how it will measure up to the mortgage debt.

The calculations will be done using current bonus rates and with terminal bonus rates at half the present level.

The service costs pounds 10 and Max Rosen, managing director of Securitised Endowment Contracts, admits that he expects some of those checking up will decide to give up the policy and convert to a PEP, pension or repayment mortgage.

The company is not bound by the Financial Services Act rules, which dictate the performance that must be assumed when selling a policy. It is, after all, not selling the policy and does not proffer advice. While insurance companies have to stick to the official rates - soon to be reduced to 5 or 10 per cent - SEC is free to make any assumptions it likes.

There is clearly a danger that over-pessimistic forecasts would frighten people into cashing in perfectly sound policies.