Banks are claiming not to be able to increase savings rates without significantly upping mortgage rates, despite raking in £4.8bn in extra profits this year.
The banking industry has come under fire for not increasing savings rates in line with the Bank of England base rate, but UK Finance, the trade body for the sector, has said that financial institutions are unable to do this without a large hike to the rates faced by mortgage customers.
The argument has not convinced consumer groups or politicians, however.
A spokesperson from consumer website MoneySavingExpert has suggested banks should make less money in profit, pointing out that margins have risen in the last year, which “feels wrong” when millions are experiencing “devastating financial hits.”
The average easy-access savings account paid a rate of 2.32 per cent in June, whereas the average for standard variable rate mortgages (SVR) was 7.52 per cent, according to analytics company Moneyfacts.
Which? has said “banks shouldn’t be treating savers and mortgage holders differently” and the Treasury Committee of MPs wrote to financial bosses today asking if they felt they were treating savers fairly with current savings rates.
While nearly two-thirds of UK adults (61 per cent) save money most or every month, less than a third of homes (28 per cent) are financed with a mortgage.
Another consideration for banks is if they were to increase savings they would face an immediate financial hit as the majority of customers have their money in easy access savings accounts.
Meanwhile mortgage holders are mostly on fixed-rate mortgages, and so if they upped their rates it would take a long time before they would see financial gain.
Many mortgage holders are still borrowing at rock-bottom rates – and will do so for several more years – because the most popular type of deal in recent times has been a five-year fix.
According to UK Finance, the trade association for the financial industry, a total of 205,302 households signed these in 2020 and 2021 – when in some cases rates of less than 1 per cent were available – and won’t face higher costs until 2025 at the earliest.
Conversely, fixed rate savings accounts – where you tie up your money for a year or longer – are far less popular than variable ones. Two years ago when interest rates were at rock-bottom, the best three-year fixed bonds paid around 1.3 per cent, and so they were rarely used.
Their popularity is growing as rates slowly improve, but the most common type of account is still an easy-access account, with around four to five times more cash being deposited in these in recent months than in accounts where the money cannot be accessed straight away.
Banks are also making less money on mortgages at the moment as they try to limit the rate increases to new mortgage holders.
Eric Leenders, managing director of personal finance at UK Finance, said that banking was “all about balancing the needs of savers and borrowers.”
And he added: “Lenders reward savers from the interest charged on loans, so banks will consider their pricing very carefully to make sure that it is fair for all. The savings market is very competitive with a range of products to suit different needs. We would always encourage customers to shop around for the best rate.”
But consumer groups have said banks are making high amounts of profit, and could use this to pass on better rates.
Helen Saxon, of consumer website MoneySavingExpert.com, said: “Banks say if they increase rates for savers they’ll have to increase mortgage rates even more. They say if they don’t, they’ll take a financial hit.
“Yet interest margins – the money they make off the gap between lending rates and savings rates – have been rising over the last year or so.
“And banks’ profits have risen right along with them. All of which feels wrong in a cost-of-living crisis, when millions are experiencing severe, often devastating financial hits of their own.”
And Jenny Ross, editor of Which? Money said that banks shouldn’t be “treating savers and mortgage holders differently by not passing on interest rate rises across the board.”
“The government and Financial Conduct Authority should continue holding high street banks’ feet to the fire to ensure more firms do the right thing,” she added.
An investigation by i last month found that banks raked in £4.8bn in extra profits by not passing on interest rate rises to savers, while increasing mortgages.
Conservative chair of the Treasury select committee chair Harriet Baldwin said at the time that banks must “do more” for savers.
And today, as part of its work on savings rates, the committee has written to several major banks to ask if they believe all their savings rates provide “fair value “to savers and whether customer inertia is being “exploited.”
At the end of July, the financial watchdog will also introduce the consumer duty, a requirement for firms to always act in good faith and deliver ‘fair value’ for their customers.
And the letters ask the banks if they are confident their current savings products are in line with the consumer duty.
Meanwhile, more and more mortgages holders will come off their cheaper rates in the coming months when their fixed deals end, and be faced with higher costs.
The Resolution Foundation think-tank said in a report in June that three-fifths of the “mortgage pain” likely to be felt as part of interest rate rises is still to come – with almost £5 billion set to hit in 2024.
