Banks refusing to help savers despite raising mortgage costs

A house with a percent symbol
A house with a percent symbol

Savers are failing to benefit from rising interest rates as banks pass on higher costs to homeowners while failing to increase savings rates.

Markets expect the Bank Rate will rise to 5.75pc next year, and lenders have reacted by pulling hundreds of mortgages from sale and increasing rates on the loans that are still available.

But banks have only increased the average rate for easy-access cash Isas by 0.02 percentage points since Friday, from 1.03pc to 1.05pc, according to the analyst Moneyfacts. At the same time the average two-year fixed-rate mortgage has risen from 4.74pc to 4.87pc, a 0.13 percentage points rise. This is more than six times the rise in savings.

Few high street banks can match the current Bank Rate of 2.25pc, let alone expectations for its level next year, experts said. Savers in standard accounts have seen the average rate rise from 0.91pc to 0.95pc since Friday, a 0.04 percentage point rise.

Providers who have passed on higher rates to savers have been inundated with customers. The best deal on Wednesday was from Newcastle Building Society at 4.1pc, fixed until November 2023, but was closed to new applicants on Thursday morning after the account was fully subscribed. The top-paying one-year bond is now Oxbury Bank’s 3.91pc deal.

Laura Suter, of the broker AJ Bell, said that high street banks were failing to protect their customers from the eroding effects of inflation, while leaving them exposed to higher mortgage costs.

“The big banks simply do not have the incentive to help because they do not need extra business. Most people will not move their savings accounts,” Ms Suter said.

Some savers have turned to longer-term bonds to get a higher rate. The top paying deal last Friday for a two-year fixed bond was from Atom Bank at 4pc. It is now from Hampshire Trust at 4.32pc.

However, Myron Jobson, of the broker Interactive Investor, warned that locking away cash could be a mistake for some savers. “Interest rates are likely to increase in the near future, so fixing now could mean missing out on better rates coming soon,” he said.

Ms Suter added: “Savers need to be very cautious about fixing at the moment. There are three options: first, you can park your money in an easy-access account and delay fixing, but put a reminder in your diary so that you do not forget to do so.

“Second, you can split your cash across a fixed bond and an easy-access account. Or, if you know that you do not have much time and will rarely check your finances, then fixing now could be a good idea – but only if you are comfortable with missing out on possible better rates in the future.”

While fixed bond rates have improved in the past few days, none come close to matching the current rate of inflation at 9.9pc. For example, £10,000 invested in the best paying two-year fixed bond at Hampshire Trust would earn £432 over 12 months. But after taking into account the eroding impact of inflation, their real cash value would be just £9,492.