Mortgage rates dive

The cost of mortgages for many borrowers has hit a new low, the result of a government move to make cheap money available to banks and building societies.

First Direct has launched a five year fixed rate at 2.69% and Chelsea Building Society is offering a fixed rate for two years at 1.89%, the latest in a succession of lenders trying to outdo each other with the cheapest offers.

Both require substantial up front fees and are only available to borrowers who can put up a substantial deposit: First Direct is charging nearly £2,000 and requires the borrower to lay down 35% of the price.

The government's Funding for Lending Scheme is channelling billions of pounds to lenders at very low interest rates. Critics have pointed out that the initiative has largely bypassed first time buyers with small deposits.

Instead, most of the cheap offers are taken up by homeowners re-mortgaging or moving house.

And the Scheme has resulted in a sharp downward lurch in interest rates for savers. The financial information firm, Moneyfacts, said this week that the average interest rate for a new tax-free Individual Savings Account, or ISA, had fallen to 1.74% from 2.55% a year ago.

Bolstered by Funding for Lending, banks don't need to compete for savings to raise funds.

Savings rates plummet

It's true: banks and building societies really have been cutting the rates they are prepared to offer to savers, as a result of the government's much-trumpeted Funding for Lending Scheme.

Funding for Lending is supposed to give a boost to lending to homebuyers and businesses, by channelling billions of pounds in cheap money to lenders.

But what that means is that the lenders, in other words banks and building societies, don't have to raise so much from people like you and me trying to build up savings.

Competition has been extinguished.

This has been acknowledged by a senior Bank of England figure, Andrew Bailey (the one who used to sign our banknotes) in evidence to MPs today.

He said "What the introduction of the Funding for Lending Scheme has already shown us is that competition for deposits has eased off quite a bit actually, and that has been reflected in a change in the rate paid on deposits."

He said rates had been going up before the summer as banks competed hard to win our custom, but since then they had eased off.

Of course plenty of you have seen this effect on our High Streets and on internet websites already, and Moneyfacts has highlighted it - here as well.

More pain for savers

Banks and building societies are withdrawing special bonus rates for savers, leaving them struggling to find a decent return for their money.

Savings accounts often come with a first year bonus of around 1%, to add to the normal interest rate, to attract new customers.

But the number of easy access accounts offering bonuses has fallen from 73 to 46 since August last year. The number of notice accounts with bonus rates has more than halved: only 11 remain.

The financial information firm, Moneyfacts, blames the government's new Funding for Lending scheme, which is channelling cheap money to banks to encourage them to lend.

There's already been a drop in the underlying rates of interest on offer to savers.

Savings rates collapsing

Savings rates have started to "collapse" as a result of a government scheme to encourage lending, according to the financial information service, Moneyfacts.

The £80bn Funding for Lending Scheme (FLS), which allows lenders to borrow from the government at cheap rates, has reduced their need to raise funds from savers.

"The immediate knock-on effect has been the collapse of savings rates across easy access, notice accounts and fixed bonds," according to Sylvia Waycott from moneyfacts.co.uk.

"And the devastation hasn't been limited to just the providers who have joined the FLS."

The highest paying instant access savings accounts for someone depositing £10,000 is down from 3.2% in August to 2.5% now, with the average rate dropping below 1%.

Moneyfacts says that the average one year fixed rate account is down half a per cent to 2.24% since August. Average interest rates for Cash ISAs and notice accounts have fallen as well.

Sharp losses for savers and pensioners who depend on shares

The yo-yoing stockmarket is wreaking havoc with the savings of millions of people.

A typical pensioner retiring today on a personal pension will get 14% less than he or she would have received at the beginning of January.

A small investor who had put away money in a tax-free shares ISA has seen the value of the investment drop by 12%.

Figures complied for the BBC today show the impact of gyrating share prices on savers who have hitched their wagon to shares.

A 65 year-old who had saved £100,000 in a personal pension pot would use the money to buy a retirement annuity, a guaranteed income for life.

But the pot has dropped in value to £91,840 since the start of the year. So the prospective annuity income has fallen from £6,497 to £5,571, a cut of 14% in 9 months.

More than 400,000 buy annuities each year.

A saver who held £10,000 in a shares ISA is likely to have seen its value slip to £8,777, based on the average value of unit trusts which invest in a basket of shares.

HMRC tells me that 3.4 million investors subcribed for stocks and shares ISAs last year.

The figures come from pension experts, Hargreaves Lansdown, and the savings information group, Moneyfacts.

How to shield savings from inflation

After today's news that the Consumer Price Index rose to 4.4% from 4.2%, ways to save and get protection from inflation - courtesy of Moneyfacts.

Provider	Account	Rate	Term	Minimum Investment
Cambridge BS	Inflation Linked Bond	1.00% plus RPI	16.9.16	£5,000
NS&I	Index Linked Savings Certificates	0.50% plus RPI*	5 Years	£100
Post Office	Inflation Linked Bond Issue 2	0.50% plus RPI	10.10.14	£500
Post Office	Inflation Linked Bond Issue 2	1.50% plus RPI	11.10.16	£500
Santander	Inflation Linked Bond Issue 4	110% of the growth in the Retail Prices Index (RPI), or a guaranteed minimum return of 12%, plus original investment returned	1.4.17	£1
Yorkshire BS	Protected Capital Account – Inflation Linked 8	100% of the growth in the Retail Prices Index (RPI), or a guaranteed minimum return of 16%, plus original investment returned	15.9.17	£3,000
Yorkshire BS	Protected Capital Account – Inflation Linked 7	100% of any annual growth in the Retail Prices Index (RPI), or a guaranteed minimum of 1.5%, plus original investment returned on maturity	17.10.17	£3,000
* Interest earned tax-free Source: Moneyfacts.co.uk 15.8.11

New mortgage rates reach low...

...that's if you can get them.

Rates for new fixed and tracker rate mortgages are at their lowest levels since the financial information firm, Moneyfacts, started following them in 1988.

The fall comes as expectations of an interest rate hike from the Bank of England over the next few months have receded.

The average tracker, which shadows the Bank of England rate, is at 3.37% and the average 5 year fixed rate is 5.29%.

However, Moneyfacts accuses lenders of widening the gap between their own cost of funds and the interest rates they charge to customers.

Also, over 40% of homeowners who already have mortgages are on Standard Variable Rates, which have stayed high.