Savers may not face rate cuts

By Paul Lewis BBC Radio 4's Money Box

Mortgage rates may not fall much after Thursday's decision by the Bank of England to cut interest rates by a 0.25%.

Instead, building societies at least may keep the reductions to a minimum to protect the income of savers.

In the past, interest rate cuts have been good news for borrowers as the cost of buying a home has fallen in line with the Bank of England cuts.

But that has spelt bad news for savers as the cuts in mortgage rates have been paid for by slashing the return on their savings.

John Goodfellow spoke to the BBC's Money Box programme

People, including many pensioners - who rely on interest from savings to boost their income - have seen returns on savings fall by around half over the last five years.

But speaking on BBC Radio 4's Money Box programme, John Goodfellow, Chairman of the Building Societies Association, and who also runs Skipton Building Society, said he thought the balance was changing:

We have all got to remember it takes seven or eight savers to fund every individual mortgage

John Goodfellow, Building Societies Association

"I do not think rates on the savings front will be cut by the full 0.25%.

"The reason there is a reluctance to move mortgage rates down as much as 0.25% is to protect the interest of our savers.

"And we have all got to remember it takes seven or eight savers to fund every individual mortgage."

The changing balance

So far, only two major lenders - both of them banks - have cut mortgage rates by the full 0.25%.

And John Goodfellow thought that people with mortgages did not need further cuts in their mortgage rates, which are already at a 40 year low.

"I personally believe there is a very strong argument that the cost of purchasing a house via a mortgage is as low as it needs to be and therefore the balance of benefit should swing towards savers and away from borrowers.

"And I think you will see that in the rate cuts that follow, that the balance is changing."

But with interest on savings now not even matching inflation - currently 3% - how could savers find a decent return?

John Goodfellow said the products were there:

"I think savers probably have to start to look at fixed rates. They should be attractive over the next two to three years."

BBC Radio 4's Money Box was broadcast on Saturday, 12 July, 2003 at 1204 BST.