High rates for savers in the Credit crunch-true or false?

jamesd

Meltdown, the essential argument was that savers aren't really getting rates as good as they could. That's fair enough.

What was not fair enough was the claim that HBOS, very recently the subject of false speculative attacks on its share price and a resulting market abuse investigation by the FSA into trades in its shares, was forced to go to the US Fed to raise money when in fact it was sufficiently trusted by others to raise money through a bond issue, which has exactly the opposite implication to the claim made.

The rate HBOS obtained is not exceptionally high when compared to other preference share and corporate bond rates. For example, Abbey has issues paying 10.375% and 8.625%. Still higher than usual.

amcluesent

So the banks have resisted offering the retail investor a decent return. And no wonder! They've bounced NuLabour into accepting their toxic waste as 'collateral' for loans from the BoE and 'moral hazard' be damned. FACT - by raiding the public purse in this way, they've socialised the losses and can continue to offer minimum returns to savers!

dunstonh

The net interest charge (thats the charges on your savings account) has been falling recently. Typically charges on savings accounts have been around 1.2%. Currently they are mostly under 1%. So, the margins have been going down.

Some banks will require savers more to fund mortgages but I think you are more likely to see bonus rates rather than long term decent rates. i.e. if you dont withdraw your money in x period they will pay a higher rate for the first year (or variations of that).

Meltdown_2

Thanks for the information, jamesd.

I am probably being a bit "thick" here, but how on earth can banks make a decent profit on money they are borrowing at 9% and 10%?
Are they able to lend it out at (say) 12% in the current climate?

jamesd

Meltdown, if they had to source all of their money at that rate, they couldn't make a profit at mortgage rates. Fortunately for them they have other sources of funding that were and are at different rates and terms, including borrowing from consumers via savings accounts.

Some of their lending is at credit card rates and to people who are willing to pay more. It's a case of comparing total money source rate with total lending rate and trying to make a profit. Northern Rock has started refusing to offer discounted deals and you can find lots of people complaining about having to pay SVR there once their deal period ends. HBOS would eventually have to do the same if it wasn't able to get enough money to continue to offer competitive deals.

At the moment it looks as though we're going to see more people paying SVR when their deals end and they are unable to meet tougher lending criteria to get a remortgage. Similar to Northern Rock, but not for those with lots of equity and excellent income. That'll help all mortgage lenders to make money. It's looking like a bad year ahead for people who are on reduced rate (below SVR) deals with fixed terms. A good one for people on portable life of mortgage tracker deals, who won't be forced to remortgage.

Even for those who can remortgage, margins between mortgage rates and BoE base rate are higher than they used to be, to cover the increased cost of money to the banks.

As the proportion of borrowers who are on SVR increases, that'll keep the average mortgage rate above the average cost of banks raising money. It's where the credit crunch is starting to hit consumers in a serious way and so far there's no real sign of this possible future starting to go away.

It could be a lot worse. In the 70s and 80s there was a time when the BoE base rate increased to above 10% overnight due to exchange rate issues. No rule saying that can't happen again but the BoE is likely to work hard to try to prevent it. It's trying that now and the rates banks pay for money are not dropping to base rate so it may not succeed. That's where the banks having lots of money on long term deals comes in, reducing the effect of high short term rates on their total cost of money and lending rates. Too soon to anticipate SVRs over 10%, not likely to happen unless the credit crunch lasts a few years and the central banks fail to come up with some better solution - and they will probably find one.