As we all know by now it costs money to borrow money. So as interest rates have gone up and up they have taken mortgage repayments with them.
On the flip side it pays to save. So as interest rates have gone up … savings rates have actually failed to keep pace with them.
Mind the gap
In fact the gap between mortgage repayments and savings rates have widened and continued widening.
The average easy saving account rates are 2.45% compared to the average two year fixed rate mortgage of 6.47%, according to Moneyfacts.
The situation has become so stark that the four major high street banks have been urged to raise their savings game by the Chancellor, Jeremy Hunt. Banks have also been summoned to a showdown on Thursday with the regulator.
That isn’t all he’s done. Gareth Mills, partner at law firm Charles Russell Speechlys, noted that Hunt had agreed an action plan with regulators to protect consumer interests at a time of rising inflation.
Mills said: “The Financial Conduct Authority’s (FCA) approach will be particularly interesting as its new ‘Consumer Duty’ framework comes into force at the end of July 2023 and will empower the FCA to set higher and clearer standards of consumer protection across the financial services sector and require firms to put their customers’ needs first. How they enforce those requirements is likely to form a large basis of this week’s discussions with the big banks”.
That sounds helpful for the nation’s savers but banks won’t be in any hurry to give savers more money because despite the pressure they are coming under by regulators and politicians, banks have every incentive to maintain low rates for savers.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said banks are keenly aware of the fact that we have a serious debt problem looming in our rear view mirror. The HL Savings & Resilience Barometer found that over the next 12 months 26% of mortgage holders will be at risk of arrears, an eventuality for which banks are also having to set aside money.
“When the high street banking giants are hauled over the coals by the regulator, they may make some small concessions, but there are several persuasive reasons why they might choose to stand firm. Fortunately, you don’t have to settle for the miserable rates they’re offering, because even if they don’t move an inch, you could boost your returns significantly,” Coles said.
Harsh Reality
The harsh reality is that banks don’t need our money because they are enjoying a combination of lockdown savings and cheap money from the money-printing era, Coles noted.
Meanwhile, the fall in mortgage approvals means they don’t need as much money for new borrowers, so there’s no real incentive to push up their rates and bring more funds in through the door.
The larger the gap between the savings and mortgage rates, the more money banks stand to make, which comes as a welcome relief for them after the years of imperceptible interest rates and competitive mortgage markets.
“The rise in rates has given them an opportunity to make up for lost time, so they’re busy filling their boots,” Coles said.
But Coles said that if banks were minded to give people any help they should prioritise borrowers rather than savers.
“They know that rocketing mortgage rates will mean more people start to struggle and may miss payments,” she said, adding: “It’s in their best interests to focus any support on ensuring people can keep paying their mortgage while rates are higher.”
