Funding for Lending scheme

07th August 2012

The Bank of England has a new tool to get the banking system working again.  At £80 billion, the Funding for Lending scheme (FLS), designed to kick start lending, isn’t cheap and some think it won't work either.  The banks can borrow all that extra cash at a super cheap 0.25% rate providing they then lend it on to home owners and businesses.  The new scheme is an interesting idea but it potentially opens up the floodgates for providers to heap more pain onto the already suffering saver.

Although its predecessor (National Loan Guarantee Scheme introduced earlier this year) seems to have already had some effect with providers on course for a mortgage rate war, these recent rates appear to be reserved for those borrowers with large deposits. The only glimmer of hope that savers have had in the last three years, while base rate has been at a record low, is that providers have had to offer hugely inflated rates, well over base rate, in order to encourage us to save. So it’s worrying that the new scheme, launched on the 1st August, could reduce the need for providers to compete for money.

What is infuriating is that many savers have finally seen some relief as inflation has started to creep downwards (making it easier for them to make a real return after tax and inflation). But if this new scheme (once again designed to help borrowers) means an end to the fierce competition, it is yet again the savers that will suffers.

Worst still is the staggering possibility of a further base rate cut!

Therefore it’s never been more important for savers to shop around for the best rates available as doing nothing can find them earning pence rather than pounds in interest.  And the good news is that savers can still easily achieve around 3% (before tax) at the moment, so they don’t need to be languishing in those appallingly poor accounts. For all those savers sitting in uncompetitive accounts, especially if they are earning less than base rate – currently 0.50% - now really is the time to get moving and accept that in the current climate you either fix or switch (each year) in order to make a decent return. Check out our best buys tables.

We will be keeping a very close eye on what providers are doing with their rates to see what the long, and short, term effects of this might be.  One thing’s for sure though, there certainly doesn’t seem to be any let up for savers.

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