Banks win: savers face fresh cuts – but borrowers pay more
As rate rises look more certain, banks are moving to boost profits by passing on the increase to borrowers first, says Laura Suter
Banks are raising mortgage rates while continuing to cut rates for savers, Your Money can reveal, as they seek to capitalise at their customers’ expense from a wider economic shift toward higher interest rates. Analysis by Your Money of the latest Bank of England data shows that for the first time in recent memory the cost of a range of popular mortgage deals – such as those where the rate is fixed over two, five or 10 years – are all now creeping upwards.
This rising cost of borrowing was predicted in these pages in early November, when capital markets started to reflect higher borrowing costs between banks in the days following Donald Trump’s American presidential election win.
It is now starting to filter through into higher mortgages costs, with the biggest rise in rates applying to longer-term fixed mortgage deals.
Savers, however, are continuing to suffer cuts to payouts, with average rates on easy access accounts plunging below an average 0.2pc for the first time in history.
Banks are preying on the inertia from consumers, who broadly do not switch bank accounts to chase better interest rates, and it is not likely to get better.
“On the savings side, when rates start going up, I expect banks to continue to pay zero on deposits,” said Michael Barakos, a fund manager at JP Morgan Asset Management, who holds bank shares in his portfolios.
“As rates rise banks will continue to pay customers nothing even though they can reinvest those deposits at increasingly higher interest rates,” he said.
At the same time, banks have been increasing the margins they have been taking on their mortgage lending, said Mr Barakos. Before the financial crisis banks were lending out money on much smaller margins, but the interest rate cuts following the crisis allowed them to increase their profit margins.
Borrowers should remortgage swiftly to capture low rates, brokers warn.
But the outlook for savers is not entirely bleak. While average rates continue to drop, some smaller, lesserknown banks have begun to increase payouts.
Around 30pc of new savings accounts saw a rate rise in January, the highest proportion for a long time. However, these top rates are coming from banks most have never heard of, such as mobile-only provider Atom Bank or digital bank Masthaven. The high-street banks are not appearing on the best buy lists.
These newer banks are less encumbered with lending books, and need to attract customers to grow.
Tom Adams of advice site Savings Champion, said: “High-street banks haven’t had to work for savers’ cash.” Instead, he said, they rely on their name and branch locations.