With many savers going Fixed rate will it cost Building Societies!

bobmo_2

Banks make money in many ways. Loans, credit cards, bank charges, overdrafts. I am not sure what proportion of their money is lent on mortgages but the rates they charge on other products will probably increase to offset the lower rates on mortgages.

nilrem_2

diveleader wrote: »

On a sort of similar note, as a saver I have virtually all of my cash in fixed rate accounts now. As a result, I have the feeling of 'less' free money to spend. So I wont be contributing to the 'spend our way out of the current dowturn' that the Government would like.

Same here, as someone who lives on the interest I have always gone for Fixed rate accounts with monthly interest, I have tied up most of what I don't need in various Fixed rate accounts paying fairly decent rates for about the next 12 months.

MarkyMarkD

nilrem's original question is interesting, and some of the responses are too. But there are some misconceptions in some of the responses which need correcting.

Mortgages

If you borrow using a mortgage at a fixed rate, the lender doesn't just "take a punt" on rates not going down. It hedges the risk, leaving its risk neutralised.

Putting it simply (and it's not very simple):

- you borrow for 2 year fixed at 5.5% plus a fee
- they hedge the risk by doing an interest rate swap whereby they pay the other party (say) 3.5% fixed, and receive LIBOR

Overall, the lender's income is LIBOR + 2% (the margin between the fixed rate and the swap rate) plus the initial fee.

Savings

Fixed rate savings work much the same way, but in reverse. So, you buy your fixed 2 year bond at (say) 5%. They swap it out by agreeing to pay 3.5% fixed and receive LIBOR. Overall, they are paying LIBOR + 1.5% to borrow that money.

But it's worthwhile for them to do so, because:

(a) they can't borrow much money from other banks or building societies right now;
(b) they know they don't need to pay the money back for 2 years, which helps them a lot in planning their cash inflows and outflows.


Obviously, if lenders are doing fixed rate savings and fixed rate mortgages, they can offset the two rather than actually hedging them with an external party, but the effect is sort of the same.

If you net off my two examples:

- borrow from a saver at 5% fixed for 2 years
- lend to a borrower at 5.5% fixed for 2 years

then the overall effect is that they make 0.5% and have no interest rate risk.


So, to answer nilrem's initial question, as long as the bank/building society has a strategy of fully hedging its interest rate risk, they don't have a problem with customers buying fixed rate mortgages or savings accounts.

The issue is far worse with tracker mortgages, as it's virtually impossible for financial institutions to track their savings rates down as fast as their tracker mortgage rates. And the savings rates will, in many cases, get close to zero first, meaning that there is nowhere left for them to go. And if they reduce savings rates very much at all, lots of their savers will leave them and move elsewhere. Which all adds up to another reason why many institutions are paying rates apparently over the odds for fixed rate bonds - they know the money isn't going to walk out of the door tomorrow, leaving them in the lurch.

bristolleedsfan

MiserlyMartin wrote: »

bristolleedsfan wrote: »

I don't see your point. Those products will be mainly making them money.

That was the point. Replying to your point of "The lenders can't afford to, to pass it all on would be irresponsible to the prudent running of the bank as HBOS have stated." I was pointing out what somebody as astute as yourself will already be aware of and that is that Banks and some Building Societies e.g Nationwide make vast amounts of profits in some areas that they can afford to make small profits/no profits/losses in other areas.

Sadly some savers are choosing to air their apparent self interest anger at the current ultra low interest environment as constant sniping at Gordon Brown and the Government. Such posters really need to understand that life is not just about them. If savings rates had gone up to 15% the same savers would be :j despite the apparent misery that would cause to other members of society. ( It reminds me of the apparent Tory self interest society that we had in the 80s right up to the "boom" year of 1988 which lead to the subsequent "bust" years for many)

Savers who are seeing an apparent cut in their income will just have to do other things to make up for it like get involved in cashback sites.

cos69

bristolleedsfan wrote: »

.... Sadly some savers are choosing to air their apparent self interest anger at the current ultra low interest environment as constant sniping at Gordon Brown and the Government. Such posters really need to understand that life is not just about them. .....

Are you trying to tell us that you believe that there is no connection between the economic mess the country is in and the government ?

Are you trying to say that Gordon Brown having based the economic welfare of the country on the philosophy that he had abolished "bust" so under his guiding hands there would only ever be economic growth and so he never had to build up reserves for when the economy slowed.

Are you trying to say that Gordon Brown is not busy pulling the wool over people's eyes with scare stories about deflation to draw attention away from the inflation his actions are going to lead too because he needs an economic boost in 2009 for his personal survival

or are you trying to tell us that you do not believe that economic problems such as the one we are in "just happen" and having no reserves to fall back on is just how it should be.

I blame Gordon Brown and I also blame the Conservatives for being such a feeble opposition that they have never been able to impress the electorate or unseat the government.

Me - I have built up my cash savings over the last 5 years, so until they start being eroded by the inflation we will start to see next year should weather this storm.

SGE1

OR...

Suddenly many people who have fixed realise they need their cash before the term is up (redundancies or other reasons), and are obliged to withdraw their cash, and as a result, lose a significant proportion, if not all of their interest. BS have been able to rake in cash without paying much interest on it.

RayWolfe

cos69 wrote: »

Me - I have built up my cash savings over the last 5 years

So the current government has not been entirely bad for you then? Excellent.

cos69

RayWolfe wrote: »

So the current government has not been entirely bad for you then? Excellent.

What I have been able to achieve, I have done in spite of the government pushing up my taxes and expenses every year.

bristolleedsfan

cos69 wrote: »

What I have been able to achieve, I have done in spite of the government pushing up my taxes and expenses every year.

Thats what a lot of us said about the Tory years, that we built up whatever we did despite the Tories.

Lets face reality, headline income tax might have got reduced under the Tories, NI and indirect taxes often went up and new taxes e.g insurance premium tax got introduced by them. :mad:

If it had been left to certain Tories we would have been paying double the amount of VAT on fuel since 1992 :eek: ish.

Im not saying im a fan of Brown and Co, reality is that its a world slowdown/recession, while no Government is perfect and by definition cant be blameless their are other contributory factors like Banks lending irresponsibly and large parts of society not being able to live within their means and finding it easy to buy materialistic items by getting into debt.

Im a saver, no saver has a right to a certain level of interest/income from savings, the way some people are painting the picture anybody would think that it was only the UK living in a low interest rate environment.