Banks have recently been accused of “ripping customers off” as savings rates have fallen over the past month, despite the ongoing rise in mortgage rates. This has raised concerns among many, as the gap between these two rates continues to widen.
When the gap between savings and mortgage rates increases, banks stand to benefit significantly. Lower savings rates mean customers receive poorer returns on their savings, while at the same time, higher mortgage rates result in customers paying more for home loans.
Last year, it was revealed that banks had generated billions in extra profits, capitalising on the Bank of England’s decision to raise interest rates to a 16-year high. However, rather than passing these rate increases onto savers, banks instead increased their mortgage rates, creating an imbalance that has left many consumers frustrated.
Savings rates had initially shown signs of improvement following pressure from MPs, yet the relief appears to be short-lived as interest rates begin to fall again. As a result, savers are now facing reduced returns on their investments, while the cost of mortgages continues to rise. This growing imbalance is leaving many customers feeling increasingly frustrated.
At the beginning of October, the average two-year mortgage rate stood at 5.4%. However, recent figures from Moneyfacts reveal a slight increase, with the rate now at 5.53%. This rise means homeowners are paying more on their mortgages, even though savings accounts are offering less.
In stark contrast, the returns on savings accounts are falling. The average two-year savings account rate has dropped significantly from 5.06% to 3.98%. This decline represents a noticeable reduction in the value of savings, making it more difficult for savers to keep up with inflation and rising living costs.
Other types of savings accounts are also feeling the pressure, with the average rate for easy-access savings accounts falling from 3.08% to 2.97% over the same period. This downward trend is affecting a wide range of savers, further highlighting the widening gap between mortgage costs and savings returns. As mortgage payments climb, many are left wondering how long this disparity will continue to grow.
Generally, banks adjust their mortgage rates based on swap rates, which are influenced by long-term predictions regarding the future direction of the Bank of England’s base rate. These rates serve as a key benchmark for lenders, allowing them to determine the cost of borrowing for customers.
Recently, markets have revised their forecasts, with many expecting interest rates to remain higher for a longer period. This shift in expectations reflects a more cautious outlook, as the central bank aims to manage inflation and economic growth.
In theory, when interest rates rise, savings rates should follow a similar upward trend. Higher interest rates typically lead to better returns on savings, benefiting those who rely on interest as a source of income or growth.
However, the current situation presents a different reality. As mortgage costs rise, savers are seeing a widening gap, with households paying more on their loans but receiving lower returns on their savings. This growing disparity is leaving many wondering why savings rates have not kept pace with the higher borrowing costs.
Sarah Coles, head of personal finance at the investment platform Hargreaves Lansdown, explained that part of the issue stems from the way banks benefit from the gap between mortgage rates and savings rates. She pointed out that high street banks, in particular, are keen to raise mortgage rates faster than they do savings rates, as they stand to gain from this difference.
She stressed the importance of shopping around for better deals, particularly when it comes to savings. Coles highlighted that online banks and savings platforms often offer significantly better rates compared to traditional high street banks, making it essential for savers to seek out these options to maximise returns.
In addition, Coles noted the competitive nature of the mortgage market, especially in the two-year fixed-rate market. She explained that due to the intense competition in this area, banks tend to react more swiftly to changes in swap rates, which can lead to faster adjustments in mortgage rates compared to savings rates. This reactive behaviour helps banks stay competitive but doesn’t necessarily benefit savers.
Campaigners have now called on banks to raise their interest rates again, citing concerns over the growing gap between savings returns and the rising cost of borrowing. Simon Youel, head of policy and advocacy at research and campaign group Positive Money, expressed frustration over the situation, stating: “Banks have made record profits from increasing interest rates for borrowers while paying depositors insultingly small rates on their savings.”
Youel further urged the Government to take action, suggesting that a windfall tax should be introduced on the banking sector if it continued to exploit the public in this way. He argued that it was crucial for banks to stop taking advantage of the situation and to offer fairer rates to savers.
Meanwhile, Anna Bowes, from the Savings Champion website, raised concerns about providers cutting the rates on new issues of fixed-rate bonds and ISAs, despite the fact that interbank lending rates have been increasing. She labelled some of these recent rate cuts as “savage,” highlighting how they negatively impact savers who are already facing low returns.
Bowes also recommended that savers review their accounts regularly, especially if their bank or building society has reduced their rates. She advised: “If your bank or building society is cutting your rate, check if you could earn more elsewhere. Even if you’ve not seen a cut yet, is there an account with someone else that could add valuable pounds to your pocket?”
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