Savers Can Enjoy Increased Interest Rates
In an effort to fund new mortgages, building societies and banks have started to raise the interest they pay on savings accounts in an effort to raise the monies they need to be able to offer new mortgages to their customers.
While this may seem to be a counterproductive move on the part of financial institutions, the higher interest rates will entice people to start putting more money into their savings accounts, which can then be used as mortgage funding. Some of these financial institutions are offering rates at 5% above that of the Bank of England.
According to the data released by Moneyfacts, a financial information firm, interest rates have risen by 50% since March of 2009. At the same time the base rate for mortgages has remained at all-time low levels making it a very good time to borrow the money needed to purchase a home.
The average rate paid on five-year fixed rate bonds has risen from 2.86% to 4.38 %. Four-year fixed rate bonds have also seen an increase in the interest they earn rising from 2.89% to 4.13% as of March.
These percentages quoted by Moneyfacts are average percentages and there are small and mid-sized banks and building societies whose increases have been even higher.
For example, West Bromwich is now offering a range of E bonds to savers with interest of 5.45% on deposits of at least £5000. Barnsley is another financial institution offering higher rates of 5.4% on five year and 5% on three-year online bonds. Egg has also announced it is raising its rates on instant access accounts to 3.25%.
Lenders are looking to the retail market in order to raise funds, according to Michelle Slade, the spokesperson for Moneyfacts.
She said that, “Continuing volatility in the money markets is seeing providers increasingly having to use their savings books towards funding their lending activities. Most fixed rates investments don’t allow early access, as this guarantees the length of time the funds are available to the provider.”
This is something that is completely new to lenders. A representative of the mortgage broker John Charcol, Ray Boulger, says that one of the reasons for this move is that many lenders have experienced a downgrading of their credit ratings and are finding it harder and more costly to obtain credit on the market.
In some cases, the downgrading by credit reporting agencies forced local authorities to switch banks for their savings in compliance with the rules of the Treasury. As a result, the amount of money these banks and building societies had at their disposal was drastically reduced.
Boulger went on to say, “Some of the banks and building societies will also have wholesale funds coming up to maturity that they raised in the good times and now need to repay and retail funds will be the cheapest way for them to get the money in. There was a limit over which it wasn’t worth paying for extra funds when lenders could raise money easily on the wholesale markets.”
This means that competition in the savings market is much higher now than it was before the recession began.
Boulger expects that lenders will continue to offer higher interest rates as the competition for consumer business in the line of savings accounts increases. “I can’t see the situation changing, bearing in mind that demand for mortgages exceeds the supply at the moment,” he said.
Michelle Slade agreed with him saying, “Banks are still wary of the money markets and as the base rate starts to go up that will push up rates on easy access accounts.”
Tags: Financial services, funding, length of time, saving rates, repay mortgage