Secret £130bn war chest that means banks WON’T raise savings rates
Thought interest rate misery was set to end? Don’t hold your breath . . .
SAVERS’ hopes of seeing a rise in interest rates are being dashed by banks and building societies who have built up a £130 billion war chest of dirt-cheap cash.
Money Mail has discovered that the big High Street names are stockpiling savers’ cash on which they pay no interest — and have seen it swell by a fifth in the past year.
As a result, banks and building societies are awash with funds and don’t need to do anything to pay struggling savers extra interest.
Our investigation has discovered that they have even been hacking back the best-paying deals in a New Year ratecutting frenzy. Fixed-rate bonds in particular have suffered huge falls.
Halifax, HSBC, Santander and Lloyds have cut these accounts already — and National Savings & Investments and NatWest have cuts to come soon.
THE COLLAPSE OF HIGH STREET SAVINGS RATES
IN MARCH, savers will have suffered five years of a rock-bottom 0.5 pc Bank of England base rate. they have had to endure a number of policies designed to get the economy back on track, which have pushed interest rates even lower.
the Funding for Lending scheme in particular, which gave banks a cheap source of cash to lend as mortgages, meant they no longer needed to fund these deals from savers — as a result, interest was cut on many deals.
Average rates on easy-access accounts were 1.24 pc after tax (1.55 pc before), including a bonus in June 2012 just before Funding for Lending launched.
Last month, the average had fallen to 0.66 pc (0.82 pc). One-year fixed-rate bonds have tumbled to an average 1.15 pc ( 1.44 pc), down from 2.2 pc (2.76 pc) in June 2012. that gives just £115 interest on each £10,000 invested, down from £222 — a 48 pc drop.
However, savers had begun to think the misery may be at an end.
In December, the Government ended cheap funds for mortgages, and this month positive economic news, including a fall in unemployment, led to hopes that rates would soon be on the rise.
But that dream was dented by Bank of England governor Mark Carney, who announced that a rise in the number of people in work did not necessarily mean rates would go up.
Even so, savers had hoped that at the very least banks would have to pay a little more interest on High Street accounts in order to attract money.
But recent cuts have put paid to any of these dreams. payouts on some fixedrate deals are down by as much as 30 pc in the past couple of months.
Most recently, Halifax cut its one-year rate to just 1.12 pc after tax (1.4 pc before). Its three-year deal is now 1.4 pc (1.75 pc), 30 pc down on the 2 pc (2.5 pc) on offer last October.
Santander also pays 1.12 pc (1.4 pc) on bonds launched this month while its two-year bond is down 20 pc since October, from 1.6 pc (2 pc) to 1.28 pc (1.6 pc).
Easy-access accounts have also been hit. Savers in NatWest Cash Isas face a rate cut this week and HSBC E-Isa from January 20.
State-run NS&I Direct Isa savers are in the line of fire next month. Halifax and Santander cut their Isa rates to new savers this month.
On bonds, HSBC already pays just 0.96 pc (1.2 pc) on its one-year fixed-rate deal or 1.16 pc (1.45 pc) for two years. Barclays pays 1.04 pc (1.3 pc) for one year and Nationwide 1.12 pc (1.4 pc).
WHY THE CRUNCH HAS COME
DESpItE the miserly payouts, the amount of money we hold in bank savings accounts has jumped by 4.4 pc in the past 12 months. Savers are so cautious and do not want to gamble the money they have spent a lifetime putting aside on shares.
Banks and building societies hold £1.1 trillion of our savings.
there are also worrying signs that savers are giving up chasing better rates of interest because the difference between the best and worst is so small. the amount in ‘non-interest bearing accounts’, which includes current accounts, jumped by £21 billion in the past 12 months to more than £130 billion, Bank of England figures reveal.
the amount in easy- access accounts has risen by £54.7 billion while savings in fixed-rate deals and notice accounts — which traditionally pay better rates — fell by £38 billion. An extra £14 billion has gone into cash Isas.
So dire are many fixed-rate bonds that savers can often do better in a standard easy access account. For example, Halifax pays just 1.12 pc (1.4 pc) to savers willing to tie up their money for a year. But they can earn 1.2 pc (1.5 pc) on an easyaccess account with Britannia.
Kevin Mountford, head of banking at comparison site Moneysupermarket, says: ‘Banks don’t need your money. they can pay low rates without losing customers because the competition pays poor rates.’ THE GREAT BANK RACE TO THE BOTTOM A MAJOR problem for savers is that banks and building societies can accidentally find themselves at the top of Best Buys tables and attract funds they don’t want. Savers cost banks money because they have to pay them interest. As a result, banks have found themselves in a race to the bottom of the savings tables.
When one name cuts rates, it puts another organisation at the top of the table. So, this company will then cut rates, which thrusts another bank to the top and so on.
As a result, top fixed-rate deals have been disappearing fast.
At the start of this year, you could earn 1.6 pc (2 pc) on a one-year fixedrate bond. the best deals are now 1.48 pc (1.85 pc) with State Bank of India — but move quick as the rate is set to drop on February 1 — or 1.47 pc (1.84 pc) with Britannia.
In January, Shawbrook Bank paid a top 1.92 pc (2.4 pc) fixed for two years. the rate dropped to 1.84 pc (2.3 pc) in the middle of this month and again to 1.72 pc (2.15 pc) at the end of last week.
Others top deals that have been cut since the start of the year include tesco, Investec Bank, FirstSave and Sainsbury’s banks.
And in a flurry of cuts on easyaccess accounts last week, the post Office closed its top-paying premier Isa, which paid a tax-free 1.8 pc.
Coventry BS shut the doors on its Online Saver at 1.28 pc (1.6 pc) while Virgin Money’s Easy Access Cash Isa for new savers fell to 1.61 pc from 1.75 pc. Its taxable easy-access rate dropped from 1.21 pc (1.51 pc) to 1.13 pc (1.41 pc)
And the picture looks even worse over the past year.
the top easy-access account is down from 1.68 pc (2.1 pc) to 1.2 pc (1.5 pc) — a drop of nearly 30 pc.
On one-year fixed-rate deals, the average rate is 1.15 pc (1.44 pc), while even those tying up their money for two years earn just 1.4 pc (1.75 pc).
WHAT WILL HAPPEN TO THE ISA SEASON?
tHE signs are not looking rosy for a good Isa season. With the approach of the end of the tax year in April, banks and building societies traditionally launch new accounts to attract savers.
But research from data analysts Moneyfacts reveals providers launched just 24 easy-access and fixed-rate cash Isas last month. In December 2012, there were 73.
So far this month there have been 27 new accounts, compared with 92 last January.
It could be that the banks are saving their top deals to closer to the Isa deadline in April. But with the Bank of England not expected to raise interest rates soon, savers may have to put up with low rates.
the average cash Isa rate on easyaccess accounts is just 1.09 pc including an initial bonus, 41 pc down on the 1.85 pc in December 2012. the best deal is 1.75 pc from Britannia, part of the Co-op, while a year ago savers could pick accounts paying 2.5 pc.
On one-year fixed-rate deals the average return is down from 2.16 pc to 1.5 pc over the past 12 months.
the message from experts is to avoid locking up your savings.
patrick Connolly, from Chase de Vere, says: ‘the general consensus is rates will rise by the middle of next year, but it could be sooner.
‘One-year bonds could be the best option. But don’t sign up for a bond where you are not rewarded for tying up your money. Instead keep it in an easy-access account so you are in the position to move when they start to rise.’
Justin Modray, from independent financial adviser Candid Financial Advice, says: ‘Shop around for the best easy-access accounts. Rates on fixed-rate bonds are awful.’