Banks and building societies lift savings rates to fund mortgage deals

Published 11th Aug 2009

Interest rates on certain fixed-term savings accounts have increased by more than 50% since March

Savers are being offered rates of almost 5% above the Bank of England base rate as banks and building societies compete to raise cash to fund new mortgages and pay off wholesale borrowing they secured before the credit crunch.

Interest rates paid on fixed-term savings accounts have increased by more than 50% since March, figures from financial information firm Moneyfacts show, despite the base rate remaining at a historical low of 0.5%.

Over that period the average rate paid on five-year fixed-rate bonds has increased from 2.86% to 4.38%, while rates on four-year bonds have risen from an average of 2.89% in March to 4.12% .

Recent weeks have seen a spate of new fixed-rate bonds offering well in excess of the average quoted by Moneyfacts –with most of them offered by small and medium-sized building societies.

West Bromwich building society has launched a range of E Bonds, including a five-year bond paying 5.45% on deposits of £5,000, while Barnsley building society has online bonds paying 5.4% for five years and 5% for three years. Instant access accounts are also getting more competitive, with Egg raising its interest rate to a market-leading 3.25% last Friday.

Michelle Slade, spokeswoman for Moneyfacts, said lenders were increasingly looking to the retail market to raise funds. "Continuing volatility in the money markets is seeing providers increasingly having to use their savings books towards funding their lending activities," she said. "Most fixed rates investments don't allow early access, as this guarantees the length of time the funds are available to the provider."

Ray Boulger, of mortgage broker John Charcol, said there were a number of reasons smaller lenders in particular were turning to retail deposits as a way of funding mortgages. Some, including West Bromwich and Yorkshire building society, which last year rescued the Barnsley, have had their ratings downgraded by credit rating agencies this year, making credit harder and more expensive to obtain.

In some cases these downgrades could also have meant local authorities had to withdraw their money to comply with Treasury rules, he said.

"Some of the banks and building societies will also have wholesale funds coming up to maturity that they raised in the good times and now need to repay and retail funds will be the cheapest way for them to get the money in," he said.

As a result of these different pressures, Boulger said, competition in the savings market is higher than before the credit crunch. "There was a limit over which it wasn't worth paying for extra funds when lenders could raise money easily on the wholesale markets," he said.

Boulger said he expected lenders to continue to compete for savers' cash over the coming months. "I can't see the situation changing, bearing in mind that demand for mortgages exceeds the supply at the moment," he said. Slade agreed: "Banks are still wary of the money markets and as the base rate starts to go up that will push up rates on easy access accounts."

Source: ' Guardian '

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