These institutional rates were historically closely linked to households’
personal finances: as swaps went up or down, the fixed rate deals on offer on
mortgage and savings tended to follow.
But since the financial crisis that link has been broken, with commentators
blaming the flood of cheap money being made available to lenders through the
Government’s Funding for Lending Scheme. The scheme’s intention was to provide
banks with cheap finance to stimulate lending to businesses and households - but
one cruel consequence has been to depress rates paid to savers. This is because
with the Government’s cheap cash at hand, lenders do not need to attract private
savers’ deposits.
So savings rates have continued to drop during a period when comparable swaps
have risen. The best available two-year savings rate in March paid 2.45 per
cent, according to Savingschampion.co.uk - in June that has fallen to nearer 2.3
per cent. And five-year best-buy rates, which exceeded three per cent in March,
are now huddled around 2.75 per cent.
There is no indication that fixed deposit rates will improve, according to
Savings champion's Anna Bowes. She said: “The Funding for Lending Scheme is
having a stronger effect than swap rates. It is continuing to devastate returns
for depositors, and I can’t see that stopping.”
The outlook is different for mortgage borrowers, however - where there are
early signs of fixed rates being tickled upwards in response to the rise in the
cost of interbank lending. Mortgage broker London & Country in Bath reports a number of recent fixed
rate increases, including a recent rise by Skipton Building Society of its
five-year rate from 2.88 per cent to 3.19 per cent. Newcastle Building Society
increased one of its five-year fixed rates from 3.59 per cent to 3.99 per cent.
Other smaller lenders have withdrawn some fixed rates - presumably with the
intention of repricing them. London & Country’s David Hollingworth said: “Swap rates have been rising
gradually for some time but have recently increased very sharply. Five year swap
rates have been particularly affected and are now double the level of early May.
This will undoubtedly put upward pressure on lenders’ fixed rates. "Although the improved competition market has seen rounds of rate cuts in
recent months that trend looks set to halt and even reverse.” His advice to borrowers who can and want to switch to a fixed rate is to do
so quickly.
Jonathan Harris, director at London-based mortgage broker Anderson Harris,
said: “Despite the significant jump in swap rates it is important to remember
that lenders are not relying wholly on the money markets for funding. "Many are now accessing Funding for Lending cash and so rising swaps
shouldn’t affect this. The economy is still weak and we don’t expect interest
rates to rise in the near future - but borrowers looking for a fixed rate might
want to consider moving sooner rather than later.”
Other experts believe that banks will be keen to lend more, which could help
keep rates down. Mark Harris, chief executive of mortgage broker SPF Private
Clients, said: "Rates are very competitive and while we acknowledge that swap
rates have risen, a number of lenders are behind on lending volumes and are keen
to lend more in the second half of the year." Mervyn King used his final public speech on Tuesday to warn that
over-extended borrowers, mainly those in their thirties and forties, could
struggle if interest rates returned quickly to normal levels.
He said some households would find increased mortgage costs “unsustainable”
but added: “The idea we are about to return to normal levels of interest rates
is premature, precisely because so many households have such a high level of
debt.”
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