Banks are caught in a tug of war between savers and mortgage customers after the Bank of England cut interest rates by 1.5 per cent yesterday, bringing relief to borrowers but concern for savers who are already losing out from the high level of inflation.
A cut in the interest rate can be of benefit to the banks because their customers find it easier to meet their monthly remortgage payments. But in this instance, the Libor rate – at which banks lend to each other – remains at 5.56 per cent and would need to drop by at least one per cent to ease pressure on the banks as their tracker mortgages
fall in line with the base rate.
Meanwhile, savers stand to lose out as banks and building societies immediately began withdrawing their most competitive savings accounts yesterday after the announcement from the Bank of England.
Within hours of the announcement that the base rate was being cut to three per cent, a number of ISAs, bonds and fixed rate savings accounts were withdrawn, according to Moneyfacts.co.uk.
While mortgage customers often have to wait for lenders to cut their rates in line with the base rate, cuts which rarely reflect the full base rate reduction, savers have the opposite problem, with industry analysts expecting savings account providers to be quick to cut their rates, some by the full 1.5 per cent.
Martin Lewis, founder of MoneySavingExpert.com, urges savers to take advantage of this small window of opportunity and apply for a fixed rate savings account like the Halifax International Fixed Rate Web Saver, before they all disappear. "Fixed rates give you guaranteed interest for a set period, though you must LOCK your cash away. So don’t do this if you’ll need access to it." he said.
"Effectively by fixing right now, you’re taking advantage of the delay in banks pulling these rates, as no one was expecting such a severe cut, hence the urgency. So if you manage to get in ahead of time, you’ll be riding the wave of the old rates and locking in way above the expected future market rate – and with the trend being a heavy cut in rates, this could be a huge bonus."
In the last year, savers have enjoyed a wide availability of competitive savings accounts, as financial institutions have tried to boost their deposits and cut back on risky mortgage lending, but these days have come to an end.
Customers are now more wary of banks that offer higher rates, as they have shown that they might be more risky. This was evident with Icesave, the highly competitive UK savings arm of Landsbanki, the Icelandic bank which collapsed last month and took £4billion of UK savers' money with it.
Industry analysts and consumer groups are calling on the banks to cut mortgage rates to reflect the change in the base rate, but lenders will be hard pushed to satisfy both their savings and mortgage customers.
However, some savings account providers are seeing the gap in the market for high rate savings accounts and launching new products accordingly. Leeds Building Society, for example, has introduced new fixed rate bonds which offer to fix the interest rate at four per cent – one per cent above the base rate.
© Fair Investment Company Ltd