Consumers no better off after bank rate cuts

Published 13th Apr 2009

Savers and borrowers have lost out, says financial-data firm Moneyfacts, so what are the best mortgage deals and accounts?


The Bank of England left interest rates on hold last week for the first time since October, signalling the end of sustained rate cuts and setting the stage for possible rises later this year, economists said.

However, thousands of consumers — savers and borrowers alike — have lost out in the six-month rate-cutting spree after banks and building societies failed to play fair, new research shows.

Abbey customers are among the worst hit, in particular, older savers with an account and mortgage at the bank, said Moneyfacts, the financial-data firm.

Those with savings in the 50+ account have seen a 4.65 percentage point cut in interest rates since October from 5.6% to 0.95% — 0.15 percentage points more than the Bank of England’s 4.5 point cut in rates over the period. This amounts to a £233 reduction in annual interest on a £5,000 balance.

Meanwhile, Abbey borrowers were deprived of the benefit of Bank rate cuts as the lender reduced its standard mortgage rate by just 2.85 points to 4.25% — £3,300 a year less for a borrower with a £200,000 loan than if it had passed on the full 4.5%.

A spokesman for Abbey said: “Any account paying more than Bank base rate should be considered a good deal.”

Customers with savings in Alliance & Leicester accounts fared even worse, according to Moneyfacts. A&L — taken over by Abbey in September — cut its Direct Saver by 4.95 points from 5.37% in October to just 0.42%, a £247.50 drop in interest on a £5,000 balance.

The average best buy no-notice account was cut by 3.08% over the past six months, Moneyfacts said.

Borrowers on A&L’s standard mortgage rate, now 4.99%, received just 2.2 points, withholding £4,600 a year from a borrower on a £200,000 loan.

Another top 10 high-street lender, Lloyds, passed on the full benefit of the rate cut to borrowers, but Halifax, taken over by Lloyds in January, held back 1 point, passing on just 3.5%.

Michelle Slade of Moneyfacts said: “With each base-rate cut George Buckley, the chief economist at Deutsche Bank, said: “The measures taken to stimulate the economy — including quantitative easing, or printing money — could cause the return of inflation. ”

Barclays Stockbrokers are forecasting a half-point rate rise next year.

We look at what savers and borrowers should do now.

BORROWERS

Brokers are advising borrowers to lock in to fixed-rate deals. Homeowners could save £1.900 a year if rates rise half a point by taking out a fix now, said Savills Private Finance.

However, some lenders have already started to pull their best deals. Last month, HSBC and Abbey were competing to offer the best five-year fix at 3.99% and 3.95% respectively. They have since withdrawn the rate.

There are still some decent deals around, though — the best is from the Post Office at 4.15% with a £599 fee, and monthly £692 repayments. Chelsea building society offers the cheapest three-year deal at 3.74% with a £995 fee and £623 repayments.

A borrower with a £200,000 loan on a 4% variable rate, will be paying £1,111 a month if rates do rise to 1% — £84 more a month than someone on the Chelsea deal.

However, Ray Boulger of John Charcol, the broker, said: “Borrowers with tracker mortgages priced below Bank rate can expect to continue paying little or no interest for most or all of the rest of this year, or until the end of their deal.”

The cheapest tracker mortgage is First Direct’s lifetime deal at 2.89% with a £799 fee available to those with a 25% deposit, with monthly repayments at £937.

Louise Cuming of Moneysupermarket, the comparison site, said taking out the tracker deal would be a “gamble”, especially as margins above Bank rate are now so high.

The average tracker rate is now more than 3% above base rate compared with 0.5% above 18 months ago, according to Moneyfacts. If rates rise by 2%, a borrower with a £200,000 tracker will pay £2,000 a year more on their loan.

SAVERS

There are still decent fixed rates on offer for new customers, though with interest rates poised to rise, savers are being advised to hold off locking into long-term accounts — even as providers keep the best rates for longer-term deposits.

For example, last week, Newcastle building society launched a best-buy savings account at 4.11%, though you have to lock a minimum £5,000 away for three years. Halifax pays 4.3% on a minimum £500 balance, but you will be penalised if you withdraw money within five years.

Andrew Hagger of Moneynet, another comparison site, said: “This is a trap for savers — with Bank rate only set to rise, savers could miss out on an opportunity to restore lost interest if they fix for too long.”

For shorter periods, Bank of Cyprus has the table-topping rate of 3.92%, fixed for 15 months on balances of over £1.

Bank of Cyprus, though, is only part-covered by the UK’s Financial Services Compensation Scheme.

Savers would have to apply to the Cyprus deposit guarantee scheme for the first ¤20,000 (£18,000) compensation, with the FSCS then topping that up to £50,000.

India’s ICICI offers 3.9% on a minimum deposit of £1,000 for one year or 4.18% fixed for two years. It is fully regulated by the UK authorities, with the FSCS guaranteeing the first £50,000 of deposits. viders have boosted their margins by passing on much bigger cuts to their savers than they have to their borrowers. Savers are experiencing some of the lowest rates ever seen, while many borrowers fail to benefit.”

Many economists predict the next move in Bank rate will be up, possibly hitting 2% by the end of the year.

Source: ' Sunday Times '

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