Savers pay the price for banks’ cheap funding

By giving lenders access to cheaper funding in a bid to boost the mortgage market the FLS, introduced last August, has reduced the need for banks and building societies to attract deposits from savers.

But while the housing market is showing signs of recovery, savers have seen millions of pounds wiped off interest payments. And worse is to come, experts warn this weekend, with the FLS remaining in place and the Bank of England signalling last month that interest rates, at a rock-bottom 0.5 per cent since March 2009, could stay there for at least two more years.

David Black, banking specialist at Consumer Intelligence, said: “The FLS has further hammered savers, who were already suffering badly from the effects of the historically low bank base rate.

“There used to be a real appetite to attract savers but this has largely dissipated, with the former eagerness of providers to appear in the numerous savings best-buy tables reduced to a pale shadow of what it was.”

The highest easy access rate has plunged from 3.2 to 1.75 per cent since last August, according to Moneyfacts, lowering the average to just 0.67 per cent.

Banks and building societies slashed easy access rates more than 750 times in the first six months of 2013 alone, Bank of England data shows, wiping more than £800 million off the total interest paid to savers.

Cash Isas have been hit too, with the average rate tumbling from 2.44 to 1.67 per cent in the past year – a trend typified by the reduction in Bank of Scotland’s instant access cash Isa rate from 2.75 to just 1 per cent.

Those with cash in fixed rate savings accounts have seen  the biggest fall in returns. The typical one-year fixed rate  account now pays just 2.05 per cent, down from 3.45 per cent last August.

Savers reaching the end of their fixed rate deals face a drop in returns that will see the income paid on some products slashed by more than half.

A dramatic decline in the rate paid on savings products over the past two years is set to hit thousands of people who tied into terms of between one and five years in a bid to beat inflation, research shows.

Savers reinvesting their fixed rate pots into the equivalent products now will lose a collective £1 billion of income, according to HSBC. It found that more than five million fixed-rate products worth almost £93bn mature this year.

A plunge in the rates paid on fixed rate savings will leave many with no choice but to accept rates up to 2.4 per cent lower than those they took out previously.

Sylvia Waycot, editor of Moneyfacts.co.uk, said: “It’s the pound in our pockets that matters the most and FLS means that the average £108 interest available on a £10,000 easy access investment prior  to launch has reduced to just £67 a year.

“The same investor in a five-year fixed rate bond is looking at a loss of £146 this year as the average return has fallen £378 to only £232.”

Waycot warned that the  outlook for savers remains bleak. “FLS is set to be with us for a few more years, and unless the government comes up with a counter plan to help savers, such as insisting that lenders borrowing from the cheap FLS pot do so without causing detriment to savers, the unpalatable truth is that there are going to be meagre returns for some time.”

But while savers have suffered since the introduction  of the FLS, many borrowers have benefited from lower mortgage costs. “There have been winners, and these are primarily those who have recently remortgaged or taken out new mortgage deals, especially where there are undemanding loan-to-value requirements,” said Black.

Yet banks and building societies are accused of using the FLS to fatten their margins. They have taken £16.5bn from the FLS, according to Bank of England figures, yet lending by those using the scheme fell in both late 2012 and in the early months of 2013.

Richard Sexton, director of e.surv chartered surveyors, said: “Lending levels still fall short of the amount drawn down against the scheme by £1.8bn, but without the FLS, lending levels would be critically low.

“It has acted like a course of steroids for the mortgage market. It has also helped push house prices skyward, which is great for existing homeowners but a blow for first-time buyers struggling to build up a deposit.”