One rule for mortgage customers and another for savers

09th March 2012

In this post-financial crisis world, the normal rules do not apply.   An increase in mortgage rates used to signal good news for savers.  I’m sorry to say, it doesn’t look that way right now.

As we know, the Bank of England sets the general level of interest rates.  This week marks the third year that it has decided to keep them at 0.5%.  This rate has been kept artificially low since the crisis began to keep money moving round the system. 

Although we would welcome the Bank increasing the base rate, it doesn’t look as though this will happen any time soon.  In fact, some economist types think rates could be stuck at this super low level for the next three years.  The boffins say increasing the cost of borrowing will hurt the economy.  If borrowing is more costly, we have less to spend so shops and manufacturers see sales drop.

Yet... The Bank’s base rate is also used by banks and building societies to set their savings and mortgage rates. So all that lovely cheap borrowing from the Bank of England has been good news for mortgage customers. We wouldn’t say they’ve ‘never had it so good’ - to echo the words of Prime Minister Harold MacMillan in 1957 - but they’ve certainly had three good years.

But.... Of course, what is good for borrowers is usually bad for savers.  If banks can’t charge lots for loans, they can’t pay out lots of interest to the rest of us.  Savings rates are historically low and also relatively low compared with the rising cost of living.  So that’s a double whammy for savers.

So news last weekend that Halifax, the country’s biggest mortgage lender, and Royal Bank of Scotland, are putting up mortgage rates would normally send SavingsChampion into a whirlwind of delight on behalf of savers.  Over one million homeowners will see their variable rates rise.  For Halifax, rates on its SVR for some of its customers will go from 3.5% to 3.99%.

This week sees Bank of Ireland following suit and today Clydesdale Bank and Yorkshire Bank have announced plans to also increase their SVR.

Under the normal rules we’d feel sorry for those homeowners, yet really pleased for savers - because when mortgage rates rise so do savings rates (although never in perfect step, a 0.5% jump in mortgage rate often means a smaller one for savers).

But in this case, we feel sorry for homeowners and jolly peeved at the banks. Don’t they know we’re in the middle of a depression-austerity thing?  Where are borrowers going to get the spare cash?

So, do we detect a massive rush in putting up savings rates? I think not. Although Halifax has a few best buys available what about all those customers sitting on the ironically named Liquid Gold account receiving an appalling 0.05%!!

So why are they doing this?

Simple, they say.  The cost of borrowing from other banks (based on the Libor interbank rate, not the Bank of England rate) has gone up because banks are worried about lending to each other.  Banks are also having to compete (they say this with straight faces) for new savings business.  We’re not sure Halifax’s new Junior ISA is going to be THAT popular, nor big enough to soak up all those extra mortgage payments.

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