Why mortgage and savings rates are falling when they should be rising

Signs of improvement in the economy means “swap” rates, which measure the cost of raising money on the capital markets, have almost doubled since April, rising gradually through May and then soaring in recent days. The swap rates on two-year money have risen from 0.55 per cent in early March to 0.97 per cent today. On five-year money rates have rocketed similarly from 0.99 per cent to 1.8 per cent.

These institutional rates were historically closely linked to households’ personal finances: as swaps went up or down, the fixed rate deals on offer on mortgage and savings tended to follow.

But since the financial crisis that link has been broken, with commentators blaming the flood of cheap money being made available to lenders through the Government’s Funding for Lending Scheme. The scheme’s intention was to provide banks with cheap finance to stimulate lending to businesses and households – but one cruel consequence has been to depress rates paid to savers. This is because with the Government’s cheap cash at hand, lenders do not need to attract private savers’ deposits.

So savings rates have continued to drop during a period when comparable swaps have risen. The best available two-year savings rate in March paid 2.45 per cent, according to Savingschampion.co.uk – today that has fallen to nearer 2.3 per cent. And five-year best-buy rates, which exceeded three per cent in March, are now huddled aruond 2.75 per cent.

Mortgage broker London & Country in Bath reports a number of recent fixed rate increases, including a recent rise by Skipton Building Society of its five-year rate from 2.88 per cent to 3.19 per cent. Newcastle Building Society increased one of its five-year fixed rates from 3.59 per cent to 3.99 per cent.

Other smaller lenders have withdrawn some fixed rates – presumably with the intention of repricing them.

Post taken from the Telegraph