Why are ISA rates so low?

LizEstelle

It's beginning to annoy me. The BoE .25% rate rise has now apparently filtered through to almost all lending rates but those for savers, predictably enough, are lagging well behind.

If some bank deposit rates are now kicking in at around the 5.1% level, why on earth can't ISA rates be found which are significantly higher? (And I don't mean just kicking around the 5.25-30% mark!)

Is it just me who's wondering why the larger institutions, presumably equipped with economies of scale that small outfits can't achieve, are failing to match or better the 5.75% offered by Ruffler?

If I didn't know better (and I don't) I might think there could be a teensy bit of deliberate non-competitive practice going on here.

Market_Oracle

Yes Ive been pondering the same.

Last time round when interest rate futures were trading near these levels, you could do 4 year fixes at 6% !!! (Northern Rock 4 year fixed rate).

Today, the fix rate is 5.15%

Why ?

They should be above 5.5%, but there not. Which suggests that the Building Societies don't want our money. Perhaps a sign that their loan books are pretty full and they don't want to take too much new debt on, and hence there is less demand for cash.

ReportInvestor

They're competing in different areas Liz e.g. regular savings and internet accounts.

The savings market is very competitive (all the building societies are moaning about it privately) - helped by the constant arrival of foreign banks.

If you wanted to find non-competitive practices, go back to the 1970s when the building societies set the mortgage rate in a cosy cartel (irrespective of bank rates).

Oh - and they also told women who wanted a mortgage to get stuffed.

We're living in comparative paradise .

Re Oracle's point. He could well be right, and Northern Rock was the most aggressive lender back then, with astonishing loan growth. Their ongoing securitisation strategy may also mean they don't have to compete quite so aggressively?

Hereward

Market_Oracle wrote:

Yes Ive been pondering the same.

Last time round when interest rate futures were trading near these levels, you could do 4 year fixes at 6% !!! (Northern Rock 4 year fixed rate).

Today, the fix rate is 5.15%

Why ?

They should be above 5.5%, but there not. Which suggests that the Building Societies don't want our money. Perhaps a sign that their loan books are pretty full and they don't want to take too much new debt on, and hence there is less demand for cash.

For an alleged chartist you don't seem to know much about fixed interest rates. When fixed interest rates are offered, they include a forecast of what the market thinks interest rates will do over the offer period. The offer is then made on what the bank/building society thinks it can get away with taking into consideration the likely market rate at the end of the period; that is, what is the least amount I can offer to get savings money in, or what is the maximum amount I can charge on loans and mortgages. This means, of course, that most future rises, or falls, have already been factored in an attempt to maximise profits for the account provider.Fixed savings rates always look attractive just before a large number of interest rate rises as they tend to offer a higher initial rate; you are in effect gambling on interest rates not rising as much as forecast.

Market_Oracle

Hereward wrote:

For an alleged chartist you don't seem to know much about fixed interest rates. When fixed interest rates are offered, they include a forecast of what the market thinks interest rates will do over the offer period. The offer is then made on what the bank/building society thinks it can get away with taking into consideration the likely market rate at the end of the period; that is, what is the least amount I can offer to get savings money in, or what is the maximum amount I can charge on loans and mortgages. This means, of course, that most future rises, or falls, have already been factored in an attempt to maximise profits for the account provider.Fixed savings rates always look attractive just before a large number of interest rate rises as they tend to offer a higher initial rate; you are in effect gambling on interest rates not rising as much as forecast.

Like I said, last time interst rate FUTURES (i.e. 12 month LIBOR upwards )were trading at these levels, the fixes were coming in towards and AT 6%.

Perhaps you need to take a look at the 'chart'



Present cash ISA fixes are very poor, as you can get much better fixes for NONE ISA's this was NOT the case during the lead upto the 2004 peak when the fixes were of comparable quality in rates i.e. Northern Rock 6%, halifax 5.8%, etc... which were inline with the other Fixed Rate bonds. But this time ? There is no comparison.

Hence this time round, CASH ISA FIXED rates ARE much poorer than they 'should be' which is a FACT. Which suggests Building Societies prefer us not to open an Cash ISA with them rather prefer any one of the other savings products such as the regular saver and non cash isa fixed rate bonds

Yes theres not much point fixing for base rates + .5% or less, when you can get good floating rates such as NS&I, but if I could get base rates +1.25% NOW, then I would jump at that ! As the chances of base rates rising to OVER 6% durng the next 2 years is pretty slim.

And even if they did trend higher to 6% by 2 years time, well, guess what ? Your bond would mature then and you can fix it again at a higher rate

And don't forget that during the 2 years you would have earned interest AT 6%, whilst the trend higher to 6% would have resulted in LESS interest, due to you having earned less interest for most of the intervening time period. But its all moot since the spread between CAsh isa fixed rates and the Base rate at .5% and lower is not worth it.

The best fixes are the likes of Ruffler bank for NON cash ISA's at 2 years at 5.94% - Now that IS a good FIXED RATE spread ! as it would require a base rate of 5.5% for the instant access accounts to start paying in the region of 6%. But if they did trend higher that would take upwards of a year to attain anyway.

So the risks are to NOT taking advantage of excellant spreads between a relatively high base rate and a large spread between Fixed rate and Base rates. As Banks and Building Societies do get it wrong !

Roll the clock back to Sept 04 - 4 year Northern Rock Fixed Rate CAsh ISA at 6% !! What was the fix rate 1 year forward ? 4.5%

meanmachine_2

ReportInvestor wrote:

Oh - and they also told women who wanted a mortgage to get stuffed.

We're living in comparative paradise .

Rubbish. Now you *need* two incomes just to buy the same property.

The deregulation of the market just means more profit for banks and to hell with Joe Public.

Under the regulated system a bank like Northern Rock would never have been able to "grow". Lending 6 times your salary?

That's insane.

the Germans have got it right. A cap on LTV means house prices have gone absolutely nowhere in the last ten years, which means people haven't become debt slaves and have lower living costs.

The UK will pay for their high living costs in the end, though.

ReportInvestor

What are you saying, mm?

Put women back into the kitchen & bedroom "where they belong" ?

Blame women's equality for rising house prices (from which so many have benefited)?

Or regulate borrowing more closely in order to keep a lid on house prices?

richgirl

All thats happened is that house prices have become inflated due to the goverment printing money.

Are you richer when you have to work harder, i.e. 2 people to buy the same house that one person could have bought 30 to 40 years ago ?

I don't think so

But people THINK they are richer ???

Cypher

But people THINK they are richer ???

Who are these people

I've never felt as skint in my life. Which isn't helped by the uncertain jobs future as Manufacturing deserts to foreign soils.

richgirl

Cypher wrote:

Who are these people

I've never felt as skint in my life. Which isn't helped by the uncertain jobs future as Manufacturing deserts to foreign soils.

Those that own houses that have doubled or tripled due to house price inflation.

Milarky

Other problems with cash ISAs: Few banks will accept a transfer (or full transfer) of funds. The whole point of ISAs is not to have our money spread around necessarily - yet that is how to get the current 'best deals' often ('new money only') The rules have hamstrung the consumer, allowing banks to cherrypick for customers. That contrasts markedly with taxable savings where you can play the 'rate tart' game effortlessly.

Remember that in some senses cash ISAs have become the victim of unitended success. Originally you were only to be allowed to save up to an initial £3000 in year one £1000 pa thereafter into cash accounts. In that first year (1999) however the limits were raised to £3000 until 2004-05 They where then due to drop to £1000 again from 2005-06 on. At the last the Chancellor bowed to pressure and continued the concession (which the press and public alike consider a 'right' that was being taken off them) until 2010. Around 2009 expect a 'save our ISAs' campaign from the like of the DM....

The way I look at this is to assume that ISA rates are about 5% gross while taxable rates (on similar large balances) are about 10 Percent more (say 5.5%) So your 'tax free' is going to be free of tax on a slightly smaller amount, but - allowing for the tax - is still gaining you about 0.6% (basic) or 1.1% (higher) That's got to be worth having surely?

But as long as the banks can 'see' the ISA money for what it is they can undercut their taxable rates by a margin. The only way of stopping that happening would be to give the saver a 'certificate' for reclaiming tax paid which the bank knew nothing about. It could just be between the taxman and saver. That won't happen however because, as already stated, cash ISAs were never intended to attract so much of people's money - the ISA rules were intended to lead people into investments. Also, how do you track a 'special balance' (no further deposits against withdrawals allowed) without it being held in a 'special account'? The govt could simply allow a notional amount of tax on savings to be reclaimed each year - and increment that allowance. But why would they make it that easy for people to not pay their taxes? A better approach therefore would be some tweaking of the ISA rules. But don't hold your breath