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Savings rates drop – is Funding for Lending to blame?

Lending scheme may be pushing interest rates down

Savings rates have dropped by more than 1% since the launch of the government’s Funding for Lending scheme (FLS) in August, Which? has found, with some accounts cut interest rates by as much as 1.3% in the past three months.  

The FLS provides cheap finance to banks which they can use to fund mortgage lending and loans to small businesses. But the knock-on effect appears to be that banks are paying out lower interest rates on savings accounts. With banks having access to cheap finance from the Bank of England they can rely less on customer deposits to fund their lending.

Savings rates plummet on some accounts

Just six of the 17 lenders signed up to the FLS at the end of September have not dropped savings rates on easy access savings accounts, ISAS or notice savings accounts since they joined. 

The biggest drops include Santander’s eSaver, which offered 2.8% at the end of September and but now pays interest of 1.5%. Over the same period, Halifax’s Online Saver rate has dropped from 2.8% to 1.55%.

The top paying instant access savings accounts currently pay around 2.35% interest but other best rate savings accounts can pay out more. 

Funding for Lending hurting savers
The table below shows the impact of the Funding for Lending Scheme on savings rates, and the 12 biggest drops in rates from providers participating in the scheme.
Provider Account Rate on 24/09/12 Rate on 21/12/12 Rate cut
Santander eSaver Issue 7-9 2.8% 1.5% 1.3%
Halifax Online Saver 2.8% 1.55% 1.25%
Aldermore 30 Day Notice Issue 1-4 2.9% 1.75% 1.15%
Aldermore Easy Access Issue 2-6 2.75% 1.7% 1.05%
Santander Direct Isa Issue 11-13 2.75% 1.75% 1%
Bank of Scotland Internet Saver 2.5% 1.55% 0.95%
Halifax Isa Saver Online 2.6% 1.65% 0.95%
Aldermore 30 Day Notice Cash Isa Issue 1-4 2.65% 1.75% 0.9%
Principality e-Saver Issue 6-9 2.85% 2% 0.85%
Virgin Money Easy Access Cash Ia Issue 1-3 2.85% 2% 0.85%
Bank of Scotland Acces Cash Isa 2.35% 1.5% 0.85%
Lloyds TSB Cash Isa Saver 2.35% 1.5% 0.85%

Mortgage rates drops limited

Both banks have used FLS financing to cut interest on their mortgage deals. The lowest mortgages rate at both banks is currently 2.39%, compared with 2.99% in September for Santander and 3.19% for Halifax.

The Bank of England has confirmed that it believes that the FLS has started to have an impact on interest rates offered by banks on loans. But has not commented on whether it thinks the FLS is to blame for drops in savings rates.

Which? welcomes banks offering cheaper mortgage deals to new customers and to those remortgaging. But many of the better rates are reserved for those with at least 40% equity in their home or a 40% deposit. There is not yet much evidence of rates cuts for people who need cheaper deals the most such as mortgage prisoners and first time buyers. Savers may be losing out due to mortgage rate drops for lower risk borrowers.

Richard Lloyd, executive director at Which?, said of the Funding for Lending scheme: ‘There must be more transparency about how this subsidy is being used and clearer rules to ensure more borrowers can benefit, not just those with significant equity in their homes.’

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