Why are ISA rates so low?

Market_Oracle

jamesd wrote:

You can borrow money on a mortgage at below 4.75%. You can lend it to a cash ISA at 5.75%.

0.75% or so gross margin on mortgage lending was in the annual report of one building society I checked.

What is there to complain about when you can borrow money from a bank, lend it to another bank and make a greater profit on the deal than a building society makes on its own mortgage lending?

The actual average return on mortgages for the banks, when charges and those on SVT's are taken into account is probably well above 6%.

jamesd

Margin includes the cost of getting the money, so it won't be above 6% unless the money costs under 1% to borrow or in interest to depositors.

Here are the rates for lending and borrowing from the Bristol and West 2006 annual report:

Assets
Loans and advances to banks 3.64% 1.1 billion
Loans and advances to customers 5.50% 21.2 billion

Liabilities
Deposits from other banks 4.66% 19.1 billion
Subordinated liabilities 6.79% 0.4 billion
Due to customers 3.73% 3 billion
Debt securities in issue 5.10% 61 million
Other borrowed funds 8.13% 79 million

As you can see, the difference between the cost of money from other banks, its parent Bank of Ireland, (4.66%) is just 0.84% below the lending rate to consumers (5.50%). That 5.50% rate would include some component at SVR.

If consumers are able to get 5.75% from the Ruffler Bank cash ISA and have a mortgage below 4.9% they seem to have a fair chance of getting a better borrowing-lending margin than Bristol and West did in 2006.