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Quoted Household Rates - July 2014

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The Bank of England updated its database this morning with average quoted household interest rates for July 2014.

Interestingly, this month sees a divergence between 75% LTV 2-year and 5-year fixed mortgages, with the former rate falling and the latter rising:

MortRates0714.gif

As far as deposits are concerned, rates continued to decline on instant access, 1-year and 2-year fixed savings:

DepositRates0714.gif

A few days ago I posted a chart that showed the changing composition of household deposits:

HouseholdDeposits_Jun2014.gif

Households have been shifting away from term savings into instant access accounts, with £140bn of deposits apparently earning no return whatsoever (although there may be an element relating to offset mortgages in non-interest-bearing deposits).

I'm only speculating here, but what I think we're seeing is that households have been reluctant to commit to term savings because the rates have been so low, and so they've moved to instant access in the expectation that rates will improve at some point (and more recently the press has been full of 'rate rise on the way' articles ever since Carney's Mansion House speech).

This wall of overnight money has left the banks with exceptionally cheap short-term funding, enabling them to offer particularly low rates on 2-year mortgage fixes. However they can't rely on this funding for 5-year mortgage fixes as there is much greater uncertainty as to what households will do with their savings over longer time periods.

So we have a chicken-and-egg situation - the banks won't raise savings rates until depositors show more demand for longer savings terms, but the depositors won't make that shift until the banks start offering better term rates.

This also leads to a potential trap for mortgage borrowers, enticing them to take 2-year fixes at extremely attractive rates, but with a significant possibility of a sharp rise in their mortgage rate when they come off the fix.

Edit: removed redundant word.

Edited by FreeTrader

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Don't think it pays to go for lower rates on instant (say sub 1%) whist waiting for better fixes. 5 years are where the 2.5% -3% deals kick in. Many have an early exit option, indeed I would never go for a lock in deal. Taking a 3% bond out for just two of the five years and then taking a years early redemption penalty is still better than waiting two years at sub 1 %.

Edited by crashmonitor

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I think banks are relying on inertia of customers, the best deals are usually fleetingly on offer too. However, a pro-active saver should easily be managing 2.5% average weighted net return on a cash portfolio and not the miserly 1.5% the banks actually pay out on the average deposit.

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Don't think it pays to go for lower rates on instant (say sub 1%) whist waiting for better fixes. 5 years are where the 2.5% -3% deals kick in. Many have an early exit option, indeed I would never go for a lock in deal. Taking a 3% bond out for just two of the five years and then taking a years early redemption penalty is still better than waiting two years at sub 1 %.

Aldermore Bank is now offering 2.35% on its two-year savings account, although withdrawals are not allowed. One-year rate is 1.75%, three-year rate is 2.7%.

I agree that many households aren't acting rationally in waiting for higher rates, but I've heard more than one anecdotal account of counter staff in banks advising customers that they may be better off waiting because rates are due to improve - and that's since the autumn of last year.

Also there's an element of "rates are so crappy, there's no point in shopping around - who cares about 0.5% interest?" - which likely explains some of the rise in non-interest-bearing deposits.

This is the exact opposite to how the professionals think, which is another reason why they're gaining so much (in relative terms) from this low interest rate environment. They're fighting for every basis point they can get.

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As far as deposits are concerned, rates continued to decline on instant access, 1-year and 2-year fixed savings:

DepositRates0714.gif

Households have been shifting away from term savings into instant access accounts, with £140bn of deposits apparently earning no return whatsoever (although there may be an element relating to offset mortgages in non-interest-bearing deposits).

I'm only speculating here, but what I think we're seeing is that households have been reluctant to commit to term savings because the rates have been so low, and so they've moved to instant access in the expectation that rates will improve at some point (and more recently the press has been full of 'rate rise on the way' articles ever since Carney's Mansion House speech).

This wall of overnight money has left the banks with exceptionally cheap short-term funding, enabling them to offer particularly low rates on 2-year mortgage fixes. However they can't rely on this funding for 5-year mortgage fixes as there is much greater uncertainty as to what households will do with their savings over longer time periods.

So we have a chicken-and-egg situation - the banks won't raise savings rates until depositors show more demand for longer savings terms, but the depositors won't make that shift until the banks start offering better term rates.

This also leads to a potential trap for mortgage borrowers, enticing them to take 2-year fixes at extremely attractive rates, but with a significant possibility of a sharp rise in their mortgage rate when they come off the fix.

Edit: removed redundant word.

You could do with a line on that chart showing when the Funding for Lending Scheme started. Rates were just starting to tick up when Mervyn King initiated it. That scheme is where this wall of money has come from. Without it rates would have been higher so people would have been more inclined to put money away for longer.

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I'm bumping this thread to give an update of the chart I posted in the OP which shows the changing composition of household deposits. This one goes up to March 2015, nine months on from the original one, and it shows that sight deposits are continuing to rise whereas non-ISA time deposits continue to decline:

HouseholdDeposits_Mar2015.gif


In the OP I suggested that because savers were continuing to move into short-term cash, this was providing lenders with extremely cheap funding and allowing them to offer exceptionally low mortgage rates. This idea - that the collective action of savers was a contributory factor to record low short-term mortgage rates - wasn't universally well received. However there have been notable comments from lenders recently (at the Building Society Association conference last week for example) which indicate that they are somewhat puzzled as to why savers are not squeezing their margins by actively seeking better rates.

Nationwide published its full-year results a few days ago and the society saw a fall in mortgage lending against the previous year, both in volume and value terms, and yet it increased underlying profits by 32%. This was very much assisted by an increase in its net interest margin from 125 to 146 basis points. Despite mortgage rates tumbling, deposit rates have fallen faster and many savers continue to receive no return on cash whatsoever.

Nationwide2015resultsF.gif


In post #6 I highlighted a one year fixed deal from Aldermore bank at 1.75%, and the rate they are currently offering is 1.90%. Why aren't more people taking up these deals? To me it's somewhat of a mystery.

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I think there are a couple types of saver that aren't going for 1/2/5 year deals:

Would-be house buyers that need quick access to their money

Would-be BTLers, same reason as above

Those wanting to put money into pensioner bonds (the bonds don't seem to appear in the graph)

Those who think rates are going up soon and don't want to be stuck on low IRs for x years (psychology of loss at work here)

Humans do not behave rationally, when you realise that it becomes less of puzzle as to why people behave the way they do around property or savings.

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I think there are a couple types of saver that aren't going for 1/2/5 year deals:

Would-be house buyers that need quick access to their money

Would-be BTLers, same reason as above

Those wanting to put money into pensioner bonds (the bonds don't seem to appear in the graph)

Those who think rates are going up soon and don't want to be stuck on low IRs for x years (psychology of loss at work here)

Humans do not behave rationally, when you realise that it becomes less of puzzle as to why people behave the way they do around property or savings.

Pensioner bonds aren't deposits, although savers think they are (and the government does its best to maintain the pretence).

Agree with you re humans not behaving rationally, so I guess I shouldn't be puzzled by savings behaviour.

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I think there are a couple types of saver that aren't going for 1/2/5 year deals:

Would-be house buyers that need quick access to their money

Would-be BTLers, same reason as above

Those wanting to put money into pensioner bonds (the bonds don't seem to appear in the graph)

Those who think rates are going up soon and don't want to be stuck on low IRs for x years (psychology of loss at work here)

Humans do not behave rationally, when you realise that it becomes less of puzzle as to why people behave the way they do around property or savings.

There is also a possibility that savers spent their maturing term deposits and the money ended up spread across many current accounts. I argued in the past that dropping term deposits could suggest that recovery was funded by savings (increased money velocity).

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There is also a possibility that savers spent their maturing term deposits and the money ended up spread across many current accounts. I argued in the past that dropping term deposits could suggest that recovery was funded by savings (increased money velocity).

I can't disagree with that as one of rationales behind low interest rates is to get people spending their cash (esp. when inflation > IRs)

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Saving? That's so 20th century. The savvy investor is pumping their money into housing and watching returns of 4%-8% or higher.

Homes Under The Hammer is the way forward. :D

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Daft question, and I'll be suitably embarrassed if there's a simple answer. Why are the banks offering such knock out rates on current accounts? For example this Club Lloyds current account, (other banks offer similar products, the Santander offer is pretty good too). Similarly Lloyds offer a regular saving account with a pcm limit of deposits of £400 which also pays 4%.

For me, the funds being directed towards accounts, ahem, like these would in the absence of these attractive rates perhaps have been directed into time deposits and I know anecdotally of people who have withdrawn money from time deposit accounts in order to make deposits in products like these, which I assume would be characterised as interest bearing sight deposits.

For full disclosure, though this will make it more embarrassing when a more straightforward explanation is forthcoming, my only theory is that there are customer with two different profiles, people like less well off pensioners who don't have the pcm earnings to qualify for the accounts but do have a big chunk of cash on hand, but are not adding to their savings. A big bank offering a market leading rate would be swamped by people like this and end up with more funding than it needed (if that isn't a wrong-headed notion).

On the other hand you have people like me who are receiving income and saving. Looking at the net flows between banks, it's bad news for a bank if you don't have customers like me because funds will flow out of the door when any of your customers effectively pay my wages (through whatever convoluted mechanism is operating) because I keep a material proportion of that money on hand, depositing it with my own bank. Hence a customer like me is a source of a net flow into my bank.

Hence, and I'm way out on a limb here, could your trend in fact be an artefact of the way banks have responded to managing the profile of the net cash flows generated by their customer base which they have been compelled to make because of the fact that they are being required to prefer customer deposits to wholesale funding markets as a source of funding? [Crosses fingers and anticipates crushing embarrassment...]

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All the other reasons plus they don't trust the government not to do something to steal locked away savings despite the savings guarantee. It ties in with increasing lack of trust in the established order as demonstrated by voting patterns in recent elections.

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Daft question, and I'll be suitably embarrassed if there's a simple answer. Why are the banks offering such knock out rates on current accounts? For example this Club Lloyds current account, (other banks offer similar products, the Santander offer is pretty good too). Similarly Lloyds offer a regular saving account with a pcm limit of deposits of £400 which also pays 4%.

For me, the funds being directed towards accounts, ahem, like these would in the absence of these attractive rates perhaps have been directed into time deposits and I know anecdotally of people who have withdrawn money from time deposit accounts in order to make deposits in products like these, which I assume would be characterised as interest bearing sight deposits.

For full disclosure, though this will make it more embarrassing when a more straightforward explanation is forthcoming, my only theory is that there are customer with two different profiles, people like less well off pensioners who don't have the pcm earnings to qualify for the accounts but do have a big chunk of cash on hand, but are not adding to their savings. A big bank offering a market leading rate would be swamped by people like this and end up with more funding than it needed (if that isn't a wrong-headed notion).

On the other hand you have people like me who are receiving income and saving. Looking at the net flows between banks, it's bad news for a bank if you don't have customers like me because funds will flow out of the door when any of your customers effectively pay my wages (through whatever convoluted mechanism is operating) because I keep a material proportion of that money on hand, depositing it with my own bank. Hence a customer like me is a source of a net flow into my bank.

Hence, and I'm way out on a limb here, could your trend in fact be an artefact of the way banks have responded to managing the profile of the net cash flows generated by their customer base which they have been compelled to make because of the fact that they are being required to prefer customer deposits to wholesale funding markets as a source of funding? [Crosses fingers and anticipates crushing embarrassment...]

That seems a reasonable explanation to me, and may well be a significant factor in the shift to instant access.

However, although the spread between average instant access rates and 1-year fixed is lower than in 2011 (it was around 135 bps back then), it's been fairly constant since the second half of 2013 at around 70 bps.

My belief is that for many people the notion of tying up their funds for a year to squeeze out an extra 70 bps in interest (which may be taxed as well) just isn't worth the hassle. In my view though it's at times such as these when savers should be fighting for every last crumb. With compounding over time it can make a big difference.

Anecdotally I know a number of people who have large sums of cash sitting in current accounts doing nothing for long periods, but they either can't be arsed to shift it around for a better return or they won't commit to a time deposit because they're fearful of missing better rates which are always 'just around the corner'.

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West Bromwich Building Society released preliminary full year results yesterday.

From the report:

"Profit before tax improved from £2.1m to £12.4m. The main driver for this is a rise in the net interest margin from 0.81% to 1.15%."

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Daft question, and I'll be suitably embarrassed if there's a simple answer. Why are the banks offering such knock out rates on current accounts? For example this Club Lloyds current account, (other banks offer similar products, the Santander offer is pretty good too). Similarly Lloyds offer a regular saving account with a pcm limit of deposits of £400 which also pays 4%.

For me, the funds being directed towards accounts, ahem, like these would in the absence of these attractive rates perhaps have been directed into time deposits and I know anecdotally of people who have withdrawn money from time deposit accounts in order to make deposits in products like these, which I assume would be characterised as interest bearing sight deposits.

For full disclosure, though this will make it more embarrassing when a more straightforward explanation is forthcoming, my only theory is that there are customer with two different profiles, people like less well off pensioners who don't have the pcm earnings to qualify for the accounts but do have a big chunk of cash on hand, but are not adding to their savings. A big bank offering a market leading rate would be swamped by people like this and end up with more funding than it needed (if that isn't a wrong-headed notion).

On the other hand you have people like me who are receiving income and saving. Looking at the net flows between banks, it's bad news for a bank if you don't have customers like me because funds will flow out of the door when any of your customers effectively pay my wages (through whatever convoluted mechanism is operating) because I keep a material proportion of that money on hand, depositing it with my own bank. Hence a customer like me is a source of a net flow into my bank.

Hence, and I'm way out on a limb here, could your trend in fact be an artefact of the way banks have responded to managing the profile of the net cash flows generated by their customer base which they have been compelled to make because of the fact that they are being required to prefer customer deposits to wholesale funding markets as a source of funding? [Crosses fingers and anticipates crushing embarrassment...]

Current accounts carry fees, the opportunity for you to go overdrawn and pay the bank a hefty APR for short periods and they also get to know your contact details and spending patterns so that they can sell you high margin stuff like life insurance, mortgages and loans. so the teaser rate will be seen as a loss leader. I suspect those that maintain the max balance for the entire period in order to get the teaser rate will soon be getting booted off the program.

it's like interest free credit....the money in that is made off the people who don't pay it off in time and then get absolutely hosed. If you take out interest free credit and then pay it off to terms a couple of times you will find you get mysteriously "declined" for future deals as the banks have sussed that they won't be able to rinse you.

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