Why banks aren't playing fair

In the past six months we've seen the cost of borrowing rise and the interest earned on our savings fall even though the base rate has stayed at an all-time low.

The Bank of England is the bankers' bank: high-street banks borrow from it in the same way that we borrow from them.

When you read about interest rates changing, it is a reference to the interest rate that the Bank of England charges the banks. More precisely it is known as the base rate or, if you're inclined to melodrama: the Base Rate.

Banks pass on the costs of their businesses to their customers, just like all businesses do. (The viable ones, anyway.) Therefore, when the base rate is higher, it charges customers more money, too. Whilst the base rate is higher, the banks will also pays us more money for deposits.

That's how it's supposed to work, but the link is by no means perfect. Banks have other costs and pressures that affect their prices. The base rate has been unchanged at an all-time low of 0.5% since March (six months ago) and yet mortgage and loan rates have risen whilst savings rates have fallen.

Hang on, let's start with the good news

Before I get to that, let's look at the positives. Since March lenders have been offering more mortgages. More mortgages means more competition, which means more of us can get loans and there is more downward pressure on the cost of them.

Lenders aren't just offering more mortgages to those of us with big deposits, either. Compared with March, they're now collectively offering more mortgages at 60%, 75% and 90% loan to value. (Loan to value means the size of the loan compared to the value of the property, e.g. a 90% loan on a property worth £100,000 is a mortgage of £90,000, with the customer paying a £10,000 deposit.)

Moneyfacts, which supplies all the figures in the tables below, reports that the average arrangement fee has also come down, albeit by just £19 to £925. (However, it doesn't state whether other associated fees have been boosted to compensate.)

Returning to the bad news

I say bad news, but there are some positives in the following tables.

Not with fixed-rate mortgage deals though. Let's look at how the average fixed deal compares to back in March this year:

Average fixed-rate mortgage deals 

Five-year fixed deals have gone up, but I don't blame lenders for that. It looks possible that we're getting through the worst of our financial troubles, which means the chances of the economy and inflation growing increases. The Bank of England increases interest rates to combat inflation, which means lenders will be more wary today than in March that their costs will rise.

Three-year deals are less popular but have fared the best. These have gone up 0.2% to 5.6%.

If you took out a tracker deal six months ago then your cost will not have moved in that time, as the base rate hasn't either. However, if you're looking for a tracker deal today you'll get a slightly cheaper deal, as the following shows:

Average tracker mortgage deals

Both two- and five-year deals stand at the same average interest rate of 3.7%, but fees will have a greater impact on shorter deals. If you want a tracker mortgage, you should look at longer deals with the ability to get out early without a penalty.

These are attractively cheap, but the risk of course is that the trackers will go up. At the first whiff of inflation, lenders will make fixed deals more expensive, so the risk you'll take is that you're too slow to react.

On the other hand, these low rates are of no huge concern for the banks; the base rate can't get much lower and all new tracker mortgages now have collars. (A collar means that there is a minimum interest rate, so the interest rate will only track the base rate down so far.)

Unsecured loans

The average unsecured loan rate has ticked up from 11.9% to 12.1%. That's nothing to be angry about, especially considering the cheapest deals haven't gone up in that time, remaining below 8%. However, when the base rate was ten times higher at 5% in 2001, you could also get personal loans for less than 8%! It's likely that they were too cheap then, which contributed to our problems today, and which is why even the best customers must pay around 7.5% more than the base rate.

Credit cards

Credit cards, which are always extortionate unless you're on a cheap introductory deal, have gone up even further. The average interest rate over the past six months has risen from 17.7% to 18.1%. You've got to be desperate to pay those rates! (If you're stuck on a credit card paying those rates, you could give National Debtline a call if you're a Brit and Debtline NI if you're from Northern Ireland.)

Average savings rates

Last but not least, we have savings, which have also suffered. Here are the average rates and how they've changed in six months:

Variable accounts are paying less for the same reasons. Banks see the risk of the base rate going up as greater now than six months ago. Whilst banks typically resist raising savings rates for existing customers, there will be some pressure for them to do so. Hence this pre-emptive precautionary measure of lowering the rates a fraction more.

Fixed-rate bonds, like fixed-rate mortgages, have gone up slightly. The banks are willing to pay a little more to lock you in for up to five years, as they know that further down the line that could end up being a pretty stinking interest rate.

It's sensible in the long run

This is just one example of how we the consumers are taking the brunt of the financial crisis. However, we need banks to start getting more money back, as lending too much too cheaply is a large part of the reason we're in this mess. Provided we also get better regulation that prevents crazy risk taking, it will have been worth it in the long run.

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