Changes in saving and mortgage rates to come.

Wednesday 11 March 2009

'he latest Bank of England report revealed that instant access accounts pay on average as little as 0.17%. Since the Bank has cut its cost of borrowing, both saving and mortgage rates have fallen dramatically. Although borrowers are happy that their payments have decreased by almost 90%, savers experience a very unpleasant shock. Everyone is now concerned with the question whether the rates will go down further. Professor Mervyn King, the governor of Bank of England says there's little chance that the rates will go under 0.5%; the majority of lenders and trade organizations share his opinion. Bernard Clarke of the Council of Mortgage Lenders (CML) believes that banks are at the floor and are unlikely to make any further discretionally cuts to mortgage rates. Moreover, building societies might suffer if decrease in rates continues because they raise up to 70% of mortgage funds from the savers. Some lenders, such as the Nationwide, Skipton and the Cheltenham & Gloucester, whose SVR deals are totally dependent on the bank's base rate, have already gone through the latest reduction to 0.5% to the borrowers. However, not everyone is so generous. Lenders need to cover up their expenses, such as increases in the levy to the Financial Services Compensation Scheme and rebuilding of reserves. Stafford Railway Building Society offers the cheapest SVR rate in the country, which equals to 3.69%. Society's chief executive, Mike Heenan, explains that their low rate is due to the simple operation of their business. He also says that the society gets a lot of extra funds from savers who believe that building societies are safer than banks. The highest SVR in the country, 6.29%, is offered by the Stroud & Swindon, the UK's 15th biggest building society. Its chief executive David Hill says that the reason for putting a floor to the saving and mortgage rates is increased competition among banks, which made it impossible for banks to borrow from each other; now each and every bank is competing for customers who have money to save. The February cut in rates was followed by one third of lenders; even fewer might do so this time. Brokers expect those who did not pass the cut last time to do it now. Short-term tracker rates, which have been very popular with borrowers in the last 2 years, are now priced at around 3.5% and are unlikely to fall; on the contrary, long-term fixed rates are expected to come down in price.