Avoid falling into a rate trap

Providers have rushed to cut rates on hundreds of savings accounts, but have been slower to reduce mortgage costs.

You can redress the balance by fighting back to get a better rate on both your savings and borrowings.

SAVINGS SAVAGED

Bank of England governor Mark Carney’s move to halve base rates to 0.25 per cent last month has sparked another savings rate massacre.

Rachel Springall, finance expert at Moneyfacts, says that more than 50 accounts have been cut by more than 0.25 per cent, sending savings rates plummeting to new lows. Another 20 best-buy accounts have gone and savers should prepare for more cuts, Springall adds.

MORTGAGES HELD

More than half of UK lenders have so far failed to pass on lower interest rates to borrowers on standard variable rate (SVR) mortgages, which customers revert to after their initial mortgage deal ends. While base rates fell by 0.25 per cent SVRs fell by a meagre 0.09 per cent, Moneyfacts says.

Incredibly, this leaves the average SVR charging 4.71 per cent, almost 19 times today’s base rate, punishing loyal customers.

Springall says lenders have been better at cutting tracker rates but only after pulling a sneaky trick. “Shockingly, some providers pre-empted the base rate cut by increasing their variable rate products beforehand, reducing the effect of the subsequent cut.”

BORROWED TIME

Founder of personal finance website MoneyToTheMasses.com Damien Fahy says anybody who hoped the base rate cut would lead to an equivalent fall in their mortgage payments may be disappointed. “If you are on your lender’s SVR or have a variable rate mortgage your repayments move at its discretion.

Only trackers are guaranteed to follow the base rate.” The good news is that rates on new deals have never been lower, makingnow a great time to remortgage.

“Talk to a mortgage adviser and make sure you don’t get hit with any redemption penalties on your existing deal,” Fahy says.

Figures from Moneyfacts show that somebody with a £200,000 mortgage over a 25-year term on the average SVR of 4.71 per cent would save £243 a month if they switched to the average two-year fix at 2.46 per cent.

Andrew Hagger, personal finance expert at MoneyComms.co.uk, says even if your lender has recently cut its SVR that does not make it a good deal: “Leeds Building Society has cut its SVR, but it still charges a hefty 5.44 per cent whereas West Bromwich Building Society has not cut, but charges 3.99 per cent.

So is West Brom really the baddie here?”

DASH FOR CASH

There is little that savers can do to ease their plight aside from shopping around for the best rate they can get (see page 38 for current best buys). “Even if you are willing to lock your money away for five years the best you can get is 2 per cent from Yorkshire and Clydesdale Banks,” Hagger says.

You can get more by switching to a higher interest current account. Santander currently pays 3 per cent on balances up to £20,000, but this falls to 1.5 per cent from November.

Fahy warns there could be further pain when the Bank of England starts raising rates: “You can rest assured mortgage rates will quickly rise, but savings rates will not go up at anywhere near the same pace.”

Daily Express :: Personal Finance Feed