New data shows UK banks raised mortgage rates despite falling interest rates, making life harder for borrowers and savers alike.
Shortly before the Bank of England pushed interest rates to a fresh 300-year low early last month, a number of UK lenders chose to raise their mortgage rates, leading many commentators to call into question the benefit of the central bank’s action. Banks’ customers now face a two-pronged challenge – a near-zero return on their savings, and an unnaturally high interest rate on their mortgage.
This was not what the Bank of England had envisaged when it lowered rates – knowing that lower rates would hurt savers, it hoped that banks would pass on lower borrowing rates too, thereby providing a boost to economic activity and risk-taking.
Recent research by Moneyfacts tells a different story, however, despite Bank of England governor Mark Carney saying that lenders had “no excuse” not to pass the cut onto borrowers. Fewer than half of lenders have passed on the reduction to customers borrowing at standard variable rates. Worse still, some providers chose to increase their variable rate products. Two-year tracker mortgages were raised by an average of 0.12% on 1 August (versus a month before), three days before the Bank of England (BoE) announced a widely-expected rate cut.That shift allowed a number of mortgage lenders to then appear to ‘pass on’ the BoE’s rate cut – but without actually reducing rates much from their early-July levels.
Feeling the squeeze
The retail banks’ decision highlights the difficulty faced by the Bank of England in spurring consumers to borrow and spend more. But it also points to the squeeze on consumers that is obliging them to borrow at inflated rates while enjoying almost no return on their savings – once consumer price inflation is factored in, many savers are actually receiving a negative return.
In fact, with 388 rate reductions and just three rises, August was the worst month this year for savings rate changes, according to Moneyfacts. Moreover, around one in seven of the cuts were greater than 0.25% – even though that was the amount by which the Bank of England cut rates on 4 August. The average Cash ISA rate dropped from 1.12% to 0.82%. Savings rate reductions have now outweighed rate rises for 11 consecutive months.
In short, some banks are squeezing customers on both sides of the equation – diluting or ignoring the rate cut advantage for borrowers, and adding to the pain for savers. The hope is that the fresh pressure on savers will spur them to spend more, thereby providing a boost for the economy. Yet the reality is that many will simply continue to hold their money in cash and suffer the consequences of record low returns.
“It’s clear to see that savers have been left devastated by persistent rate cuts across the market,” Rachel Springall of Moneyfacts told media. “[They] will struggle to find decent returns for their cash in the immediate future.”
This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by St. James’s Place Wealth Management.
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As central banks around the world continue to emphasise their commitment to monetary easing, low interest rates remain a problem for those reliant on their savings to generate an income.
Amid much speculation about the direction of interest rates, what seems certain is that, once tax and inflation are taken into account, it will be some time before cash on deposit once again provides savers with an adequate level of income.
Cash is an essential element of any investment strategy, not only to meet short-term emergency and income needs, but also as part of a well-diversified and risk-managed portfolio. In the current environment however, it is clear that our money needs to work harder to provide income both now and over the longer term.
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