Find out why Jane Baker is critical of Nationwide.
Borrowers with tracker mortgages should be enjoying rock bottom repayments now the Bank of England base rate has been slashed to just 2%. Well, this is the theory, but `collars' -- which are written into the terms and conditions of some tracker deals -- are spoiling the party.
As I explained in my article Beware Of This Tracker Mortgage Trick, some lenders have put a collar -- also known as a floor -- on their tracker deals. The collar allows them to stop passing on interest rate cuts to borrowers once the base rate has dropped below a certain point.
For example, let's say you have a tracker deal which tracks at a margin 2.19% above the base rate -- so today the rate you pay is 4.19%. Your deal also has a 2% collar, which means the rate you pay will not change if the base rate falls below 2%. So your rate cannot fall any lower than 4.19%. This won't be a problem as long as the base rate doesn't drop below 2%. But if it does, you won't benefit from any more base rate cuts.
So, because of the 2% collar, your mortgage repayments won't get any cheaper no matter how low the base rate goes. Your lender will always calculate the interest rate you pay as if the base rate was set at least 2%.
Collars kick in
Last month when the Bank of England reduced the base rate by 1% to match its all time low of 2%, collars -- which are often set at 2.75% or 3% -- began to kick in.
Luckily some big mortgage players, including Nationwide and Halifax, were quick to announce their collars wouldn't be invoked following pressure from the government to pass on the cut. This was a welcome move for many tracker borrowers with the two large lenders.
(Nationwide has a collar of 2.75%* on its older tracker deals, while Halifax's collar is set at 3% for around half a million borrowers.)
But Nationwide has since back-tracked. The lender now says it won't pass on further base rate cuts to customers on trackers with collars. This is bad news for Nationwide mortgage borrowers because another rate cut is looking highly likely when the Monetary Policy Committee (MPC) meet on Thursday. But is it good news for Nationwide savers?
Why is Nationwide invoking its collar?
Nationwide claims the reason it is not passing on cuts to borrowers is because it wants to protect returns for savers with the society. The lender will save money by enforcing its tracker collar which, in turn, should allow it to offer more generous rates to its savers.
So, if the lender is becoming more committed to savers -- at the expense of its existing mortgage borrowers -- you would expect the latest savings rates to be pretty competitive. Let's take a look at its new savings rates which were introduced on 1 January:
Selection of Nationwide's new savings rates
| Savings account | Minimum deposit | Old rate | New rate |
|---|---|---|---|
| Smart | £1 | 3.25% | 2.25% |
| Monthly Income 60+ | £1 | 3.00% | 2.00% |
| Regular savings | < £100 | 2.10% | 1.10% |
| Regular savings | £100 - £199.99 | 3.60% | 2.60% |
| Regular savings | £200 - £250 | 4.10% | 3.10% |
| e-Savings | £1 | 3.05% | 1.95% |
| Instant Access ISA | £1 - £9,999 | 2.60% | 1.50% |
| Instant Access ISA | £10,000 - £24,999 | 2.70% | 1.60% |
| Instant Access ISA | £25,000 | 2.80% | 1.70% |
| Easy Access ISA | £1 - £250 | 0.10% | 0.10% |
| Easy Access ISA | £1,000 | 2.80% | 1.70% |
Rates effective from 1 January 2009.
As you can see, Nationwide has actually hacked some rates back by the full 1% following the last cut to the base rate on 4 December. Worse still, the rates paid on the popular e-Savings, Instant Access ISA and Easy Access ISA accounts have been reduced by 1.1% -- that's even more than the base rate reduction. Nationwide says it has dropped rates by an average of 0.87% across its entire savings range.
How competitive are Nationwide's rates?
We all know savings rates have suffered in the financial crisis, so lower returns across the board are to be expected. But despite Nationwide's supposed commitment to savers, the rates on offer seriously lag behind the competition and inflation too.
For instance, Nationwide is paying just 1.95% AER on its e-Savings accounts. But other instant access accounts -- such as ING Direct Savings Account and Anglo Irish Easy Access Account (Issue 2) -- are offering much healthier rates, with ING paying 5% AER and Anglo Irish at 4.55% AER.
It's a similar story for ISA savings too. Most of Nationwide's ISA accounts pay rates below 2% (with the exception of its fixed rate ISA bonds). For small deposits in the Easy Access ISA, expect a derisory rate of just 0.10%. The current easy access market leader is Birmingham Midshires Direct ISA (Issue 3) which currently pays 4% tax-free -- more than double the return on offer at Nationwide.
Nationwide admits that while its savings rates are pretty low right now, savers should gradually see returns stepped up with the collar on tracker mortgages allowing the lender to save money. But I'm dubious given the new savings rates on offer. There's a long way to go before Nationwide tops the best-buy tables.
*Nationwide has put a 1% collar on its latest two-year tracker mortgage launched on 17 December 2008. Borrowers with this deal will be unaffected unless the base rate is cut below 1%.
More: The Most Consistent Savings Accounts | Start Saving Now For Next Christmas | The Last Of The Good Savings Rates
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