Jeff Salway: Summer revision beckons as money markets heat up

Published on Friday 3 July 2009 20:28

THE school holidays may be under way, but for savers and borrowers it could be time for a bit of homework. In many cases, brushing it under the carpet until the next school year could be a costly mistake.

When the Bank of England started chopping interest rates late last year, it was felt that lenders were too quick to take the opportunity to cut interest rates on savings to virtually nothing. At the same time, tracker rates and some standard variable rates on mortgages came down sharply, creating a perception that borrowers were getting a good deal from lenders at the expense of savers.

Borrowers were (and still are) benefiting from the lowest mortgage interest repayment rates in years as savers watched in horror as the interest on their hard-earned cash dwindled to virtually nothing. The claim was that lenders were quick to rip savers off in a bid to keep borrowers happy, despite their need for deposit-based funding.

Now, however, the boot could be on the other foot. It seems that with money-market funding still volatile, banks and building societies are finally returning to the fundamentals of attracting a steady flow of deposits with which to fund their lending. Hence the increasingly competitive fixed rates on offer, as the guarantee of having savings tied up for a certain period offers vital cash-flow certainty.

There are around 130 fixed-rate bonds paying 4 per cent or more, up from just three in March, and more bonds paying savers over 5 per cent – 4.5 per cent above the base rate – are on the way. It has been a bleak few months for savers, but with competition heating up again, the onus is on banks and building societies to attract new savers and keep their existing ones.

So the ball may return to the saver's court – if you want better interest from your savings, do your homework. For now, fixed rate savings are the way forward, but with rates likely to continue rising, it might be wise to keep the fixed term to a year or two.

Borrowers looking for new fixed-rate loans also face a bit of homework, albeit for different reasons. Fixed-rate mortgage costs are rising steadily, with the average five-year fix hitting 6 per cent this week, the highest since mid-December last year.

There may have been no change in the base rate, but the two-year money market swap rates on which fixed-rate mortgages are based have climbed sharply in recent weeks. If you're sitting on your lender's standard variable rate and holding off tying into a fixed deal, it's time to think about the deal you can get before rates rise much further.

THE government's consumer white paper, which proposes an overhaul of the credit and store card sectors, received almost unanimous support this week.

Rightly so too, although, as with so many of this government's announcements, the positives might be overshadowed by unintended conswquences.

The white paper proposed a raft of measures to improve the credit industry, with a particular focus on consumer protection.

The proposed ban on credit card cheques offered a timely reminder that banks have continued employing this stupendously irresponsible approach to selling credit.

Credit card cheques are used like normal cheques, with the amount spent added to the borrower's balance. But the interest charged on the cheques is usually far higher than that on credit cards, while handling fees are also levied for using the cheques.

Until banks were told to stop sending out unsolicited credit card cheques a few months ago, it was estimated they were making over 50 million a year by taking advantage of confusion among customers unsure as to what they were being charged, but seduced by the extra credit availability. That it took this long to ban the practice is astonishing.

But the proposals are not a win-win for consumers, as credit card providers, faced with new rules and regulations, will seek to recoup their costs elsewhere. The result could be reduced availability of credit and higher prices.

From the high street perspective, it could mean that instead of protecting people, the new rules inadvertently drive them into the arms of doorstep lenders and other, less scrupulous, alternatives.