Why it's cheaper to Borrow than it is to Save

14 Jan 2010 Tell a Friend

With mortgage interest rates still at historic lows, and with the lending criteria becoming tougher than a round on University Challenge, lenders have had to reduce the mortgage rates in order to attract new borrowers.  But how to plug the shortfall?  



According to new figures published by information provider Moneyfacts, many providers are cutting the rates of interest that they pay out on savings accounts in order to avoid losing money.  The data shows that as recently as November 2009, banks were keen to attract new savers and therefore were offering particularly attractive introductory rates. 

At the peak of the saver recruitment drive, interest rates were offered that amounted to 10 times the base rate, according to Moneyfacts.  

Ever since however, the interest rates have been falling sharply, whilst mortgage interest deals have been getting increasingly competitive. Michelle Slade, spokesperson at Moneyfacts.co.uk, commented: "Providers must strike the right balance between savers and borrowers in order to maintain their balance sheets. No provider will offer market leading deals to both at the same time.


"Competition is slowly returning to the mortgage market with LTVs and product numbers increasing and rates falling.  Many savers have just experienced their worst ever year's returns and 2010 is not shaping up to be much better. The only benefit is likely to come from the forthcoming ISA season that will see providers battling it out to attract savers' tax free allowances."

The data provider looked at a range of savings options, across Instant Access savings accounts (where you have no restrictions on withdrawing your savings), Individual Savings Accounts (ISAs) which offer tax-free savings and savings bonds.  As many ISAs pay returns at the end of the tax year (on the 5th of April each year), there is likely to be a rush to encourage consumers to deposit their lump sum savings before the deadline.  



If you have your money in an instant access savings account and you are disappointed with the returns that you have seen this year, there is plenty of time to move your savings to an ISA in order to benefit from this year's tax allowance.  Another light at the end of the tunnel for savers is that from the start of the next tax year (6th April onwards), the tax-free ISA allowance is going to increase for everyone (it has already increased for savers over 50) from £7,200 to £10,200.  Visit our Tax-free ISA allowance article to find out more about this.