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Last Updated: Friday, 15 December 2006, 00:03 GMT
Savers receive 'poor rate deal'
By Julian Knight
Personal finance reporter, BBC News

Person holding crumpled £5 notes
Banks and building societies have failed to pass on to savers about a fifth of recent Bank of England (BoE) interest rate rises, the BBC has found.

A BBC and Moneyfacts study found stark differences between the treatment of borrowers and savers.

The Bank of England's main interest rate has risen by half a percentage point to 5% in the past three months.

But while lenders' mortgage rates have gone up by 0.51%, savings rates have only risen by between 0.38% and 0.42%.

In addition, the study found that decisions to move mortgage rates were made more speedily than was the case with savings rates.

In response, lenders argued that they had to consider other factors besides the BoE's decisions when changing rates, such as shifts in the money markets.

Criticism

The BBC and Moneyfacts study included all but a handful of the UK's savings and mortgage providers. Moneyfacts is the UK's leading provider of information on deals available with banks and building societies.

The survey aimed to find out to what extent - and how rapidly - banks and building societies changed their interest rates following a BoE decision.

Consumer groups have in the past criticised banks and building societies, saying lenders and savings providers use changes in BoE interest rates to widen their margins.

Lisa Taylor
Lisa Taylor says banks are making a "tidy profit" from failing to pass on rate rises

In other words, the critics charge, financial institutions squeeze more money from borrowers - but fail to pass on the benefit of the rate rises to savers.

According to Moneyfacts spokeswoman Lisa Taylor, the results of the joint study seem to supports this long-held suspicion.

"The combination of raising mortgage rates by a greater amount - virtually 0.1% on average - and doing it more quickly than savings rates, undoubtedly nets the banks and building societies a tidy profit," she said.

Ms Taylor added that savers with Individual Savings Accounts (ISAs) faired better on average than people with standard branch-based deposit accounts.

"Many branch-based accounts which were already paying inferior rates have not seen increases in line with recent base rate rises, which means the gap between these accounts and 'best buy' rates is widening," she warned.

"Consumers need to check how much their savings account pays, if it is out of line with best buy rates, then perhaps it's time they voted with their feet."

In response, the British Bankers' Association (BBA) said that UK savers and borrowers, in general, get a good deal.

It argues that there are sound business reasons why some savings accounts do not go up by as much as mortgage rates.

"UK banks offer some of the highest rates on instant savings accounts, and are among the most transparent in advertising those rates," said BBA spokesman Brian Capon.

"Banks operate in a competitive environment and need to balance business objectives against the need to be competitive.

"Decisions will take into account the volume of investment in those accounts and the bank's competitive position with regard to the general market level of interest rates.

"Where a bank holds high balances for a particular product, it might increase its interest rate by less than any rise in Bank of England rates."

Stark examples

The study unearthed some stark examples of banks and building societies differentiating between savers and borrowers in terms of interest rates paid.

For example, Chelsea Building Society, Leeds Building Society and Northern Rock passed on about half the rate increase to customers, well below the average for the industry.

In setting rates we, like others, take several factors into account
Ron Stout, Northern Rock

Northern Rock raised its mortgage rates - in line with nearly all lenders - in step with the BoE.

However, the bank increased rates on five of its six savings accounts currently open to new money, by well below the BoE's change.

Even Northern Rock accounts which pledge to track BoE base rates rose by a lower rate on average.

Ron Stout, a Northern Rock spokesman, said its rate decisions were influenced by more than simply the BoE's actions.

"In setting rates we, like others, take several factors into account," he said.

"These include our competitive position and money market rates, not just movements in the BoE base rate."

As for its range of tracker products failing to move at the same rate as the BoE, the bank said its policy sometimes benefited customers.

"We do not claim that rate movements in tracker products will precisely reflect the movement in BoE base rate.

"Importantly, this applies at both times of BoE rate reduction as well as increase. This has enabled us in the past to pass on a lesser reduction than the BoE base rate change," Mr Stout said.

Time-lag

The study found a time-lag between mortgage rate and savings rate move announcements.

In August it took lenders an average of 20 days to raise rates. In November they moved more quickly, announcing a rate increase in just 14 days.

Savers, though, had longer to wait. On average, it took saving providers 30 days following the August BoE decision to announce a rate rise.

In November providers were a little quicker, taking 23 days on average.

But according to the BBA, most savers will not lose out because of the timing of a rate announcement.

"Often the new rates for savings and mortgages will both take effect from the first day of the month following the change," Mr Capon said.

"This will apply whether interest rates are increasing or decreasing."

AVERAGE ISA INTEREST RATE
£1 £1,000 £3,000
AUGUST 4.19% 4.29% 4.39%
NOVEMBER 4.40% 4.50% 4.60%
DECEMBER 4.60% 4.70% 4.81%
Note: Average rate increase for period 0.42%
Average lag time: August - 30 days, November - 23 days

AVERAGE SAVINGS ACCOUNT INTEREST RATE
£1 £,1000 £5,000 £10,000
AUGUST 2.73% 2.83% 3.14% 3.32%
NOVEMBER 2.92% 3.04% 3.35% 3.53%
DECEMBER 3.12% 3.25% 3.56% 3.74%
Average rate increase for period 0.38% to 0.42%
Average lag time: August - 30 days, November - 23 days

AVERAGE MORTGAGE INTEREST RATE
STANDARD VARIABLE RATE
AUGUST 6.34%
NOVEMBER 6.60%
DECEMBER 6.85%
Average rate increase for period 0.51%
Average lag time: August - 20 days, November - 14 days




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