What has happened to mortgage and saving rates since the base rate cut?

Easy-access savings rates have fallen by seven tenths, but many mortgage borrowers have barely benefited since the Bank of England cut its base rate to an all-time low last year, data suggests. 

Savings rates have plummeted but some of Britain’s biggest lenders have failed to pass on the full 0.65 percentage point cut since last year, when the central bank took drastic steps to shore up Britain’s pandemic-stricken economy, data from Moneyfacts analysed by This is Money has found. 

A year ago today, base rate was cut from 0.75 per cent to 0.25 per cent, before being cut to 0.1 per cent a week later.  

Britain’s biggest banks have seen profits plummet and lending margins squeezed as they were unable to pass the base rate cut onto savers who were already being paid a pittance – in many cases, 0.01 per cent.

The Bank of England base rate was cut to 0.25% on 11 March 2020 and to an all-time low of 0.1% on 19 March

They have paid as little as £1 interest on every £10,000 saved since last July in bread and butter accounts, and currently pay as little as 0.15 per cent to savers who locked their money away for two years.

And the base rate cut has in many cases failed to filter through either to borrowers on standard mortgage rates or to those seeking higher loan-to-value mortgages, who have seen rates increase by more than 1 per cent. 

This is Money looked at mortgage and savings data from Moneyfacts and the financial results of some of Britain’s biggest banks to find out how the base rate cut and coronavirus pandemic have changed the financial landscape, and asked some experts what 2021 could bring for borrowers and savers.

Have fixed-rate mortgage borrowers benefited at all?

Borrowers looking for a new fixed-rate mortgage deal, meanwhile, will be unlikely to see any benefit from the base rate cuts.

The average two-year fixed rate mortgage has actually increased from 2.43 per cent in March 2020 to 2.58 per cent as of this week and this has been driven largely by increased costs for those with a 10 per cent deposit, typically first-time buyers.

This means that an average borrower with a £200,000 mortgage on a 25-year term, with a two-year fixed deal, will be paying £905 a month today compared with £890 a year ago.

And five-year fixed-rate deals now sit at 2.74 per cent on average, a far cry from the less than 1 per cent some mortgage brokers speculated they could fall to last March, pre-pandemic. 

What has happened to rates on Britain’s favourite fixed-rate mortgage? 
Date Average two-year fixed mortgage rate   Average two-year fixed 90% LTV Average two-year fixed 75% LTV Average two-year fixed 60% LTV
8 March 2020 2.43%  2.57%  2.29%  1.8% 
8 March 2021  2.58%  3.52%  2.28%  1.64% 
Source: Moneyfacts.co.uk 

‘The base rate reduction hasn’t been passed on to customers in many cases,’ said Chris Sykes, a mortgage consultant at Private Finance.

He said this was due to the economic downturn caused by the pandemic, and driven largely by increased rates on higher loan-to-value mortgages. 

Fears for falling house prices and the financial status of first-time buyers has meant those with larger deposits or more equity have benefited from falling rates last March, while those seeking higher loan-to-value mortgages have seen rates increase, if they can even get hold of a mortgage at all.

Chris Sykes added: ‘With the coronavirus, although the base rate reduced, the economic risks involved with being a lender have increased significantly, with unemployment and some businesses at risk among other concerns.

Lloyds Bank has failed to pass on the base rate cut to its mortgage borrowers

Lloyds Bank has failed to pass on the base rate cut to its mortgage borrowers 

‘Lenders price their products according to risk so, although they may well be borrowing money for less now by paying their customers less in interest on their savings products for example, they have had to increase the margins to account for the extra risk.’ 

This has meant borrowers requiring a mortgage to cover 90 per cent of a property’s value, should expect to pay a lot more now than would have applied prior to the base rate cuts of a year ago.

An average borrower, taking a 90 per cent mortgage on a two-year fixed deal, will face an interest rate of 3.52 per cent today, up from 2.57 per cent prior to the base rate changes.

‘I have a client that had an offer from HSBC in May of 2020 for a 90 per cent mortgage at a rate of 1.79 per cent, but the deal fell through,’ said Sykes.

‘Now they are back in the market looking again and the best rate I can get them for a similar situation is around 3.25 per cent.’

And fixed-rate deals, unlike SVR or tracker mortgages, do not necessarily move in line with the base rate.

Rates on mortgages have depended on how much money borrowers are seeking. Higher loan-to-value deals have got cheaper but those favoured by first-time buyers are more expensive

Rates on mortgages have depended on how much money borrowers are seeking. Higher loan-to-value deals have got cheaper but those favoured by first-time buyers are more expensive 

‘Fixed rates are very much dependent on what money markets expect will happen to rates and that can affect the cost of funds for a lender and be passed on in any product pricing,’ David Hollingworth, associate director at L&C, added.

‘It’s possible therefore for fixed rates to be moving even though there is no change at all in base rate. Market competition will also have a part to play in how low rates will drop at certain points in time.

‘More intense competition for borrowers usually helps to improve the range of rates on offer as lenders have to balance the need for volume with the degree of margin that they can make on their mortgages.’ 

What about other mortgage rates?  

Although most lenders have cut their standard variable rate in line with the base rate cuts, some have refrained from doing so, including Britain’s biggest bank Lloyds and the second-largest building society Coventry, figures from Moneyfacts show.

Lloyds and Halifax passed on as little as 0.15 percentage points of the two cuts of 0.65 percentage points last March, Coventry 0.25 percentage points and Skipton Building Society 0.35 percentage points, according to Moneyfacts.

It is worth pointing out here though that Lloyds and Halifax, collectively Britain’s biggest mortgage lender, have an SVR broadly in line with other big banks.  

A shift in the base rate does not necessarily mean mortgage borrowers will see the rates they pay change, despite it making banks’ borrowing costs cheaper.

Has your bank passed on the base rate cut to mortgage borrowers? 
Lender Current standard variable rate  Rate change since Base rate cuts
Halifax  3.59% -0.15%
Barclays  3.59% -0.65%
Coventry BS  4.49% -0.25% 
HSBC  3.54% -0.65% 
Bank of Ireland UK 4.09% -0.15%
Metro Bank  3.60% -0.65% 
Leeds BS  5.29%  -0.40% 
Lloyds Bank  3.59%  -0.15% 
Nationwide  3.59%  -0.65% 
NatWest  3.59%  -0.65% 
RBS  3.59%  -0.65% 
Santander  3.35%  -0.65% 
Skipton BS  4.64%  -0.35% 
Virgin Money  4.34%  -0.65% 
Yorkshire Building Society  4.49%  -0.50% 
Source: Moneyfacts.co.uk 

‘There are a number of factors that influence how banks and building societies set their mortgage rates in addition to the base rate,’ said James Pagan, head of mortgages at Nationwide. 

‘This includes their overall cost of funding, prevailing market swap rates and the wider competitor market and demand.’

The SVR is the interest rate a borrower will find themselves paying once their initial fixed rate or tracker deal comes to an end and they do not remortgage.

‘The SVR is not directly pegged to the base rate, so it’s up to the lender as to whether they pass on the cut in full or even at all,’ David Hollingworth said.

‘Like all UK banks and building societies, we have to revaluate our offerings following a base rate change to ensure we are balancing the needs of both our mortgage and savings customers,’ said a spokesperson for Skipton Building Society.

‘Our decision in March 2020 to reduce our standard and variable mortgage rates by 0.35 per cent followed on from the previous base rate change, where Skipton was one of very few lenders that opted not to pass on the 0.25 per cent base rate increase to our mortgage customers.’

What about savers? 

Savers who had already faced a decade of low returns after the financial crisis likely read of the news on 11 March with dismay.

Not only was the base rate cut to 0.25 per cent, and an all-time low of 0.1 per cent eight days later, but the Bank of England also launched a new fund to provide banks with billions of pounds in low-cost funding that they would no longer need from savers.

And with the shutdown of wide swathes of the economy hitting lending at the same time as Britons were saving record sums, it is no wonder savings rates have tumbled as banks simply have not needed the money.

What has happened to the savings market since last March? 
  1 March 2020 1 March 2021  % change 
Number of available easy-access savings accounts  330 284  -13.9% 
Average rate on an easy-access savings account  0.57%  0.17%  -70% 
Number of available one-year fixed-rate bonds  169  133  -21% 
Average rate on a one-year fixed-rate bond  1.16%  0.44%  -62% 
Number of available two-year fixed-rate bonds  156  118  -24% 
Average rate on a two-year fixed-rate bond  1.24%  0.51%  -24% 
Number of available five-year fixed-rate bonds  73  59  -19% 
Average rate on a five-year fixed-rate bond  1.56%  0.84%  -46% 
Source: Moneyfacts.co.uk 

The availability of easy-access, one, two and five-year fixed-rate deals has decreased by between 14 and 24 per cent, according to Moneyfacts, while the rates savers have been paid on average has fallen by as much as seven-tenths.

And best buy rates have fallen even further. ‘If we look back a year, Atom Bank topped the one and two-year fixed-rate tables paying 1.6 per cent and 1.7 per cent’, James Blower, an industry analyst and founder of The Savings Guru said.

‘They seem like heady days compared to the 0.65 per cent from Al Rayan and 0.58 per cent from OakNorth available now. Virgin Money topped the easy-access tables paying 1.31 per cent, a nudge ahead of Marcus who were paying 1.3 per cent. Marcus top the tables now but offers just 0.5 per cent.’

While rates actually held up fairly well after the two base rate cuts due to National Savings & Investments topping the best buy tables and soaking up billions of pounds, rates collapsed to all-time lows after the Treasury-backed bank cut its rates in November.

‘Best buy rates fell by a fifth between March and September and have more than halved since then. As soon as NS&I announced their cut in September, savers started to move their money and this has caused the sharp falls in rates since.’

What do Britain’s biggest banks pay savers now?
  Easy-access rate 1 March 2020  Easy-access rate 1 March 2021  Two-year fixed-rate bond rate 1 March 2020  Two-year fixed-rate bond rate 1 March 2021 
Barclays  0.25% 0.01%  0.90%  0.25% 
Halifax  0.10%  0.01%  0.55%  0.20% 
HSBC  0.19%  0.02%  1%  0.35% 
Lloyds Bank  0.10%  0.01%  0.65%  0.20% 
Nationwide  0.40%  0.14%  0.85%  0.35% 
NatWest 0.17%  0.01%  0.70%  N/A 
Royal Bank of Scotland  0.17%  0.01%  0.70%  N/A 
Santander  0.38%  0.03%  0.45%  0.15% 
TSB  0.48%  0.04%  0.80%  0.20% 
Source: Moneyfacts.co.uk 

Meanwhile Britain’s biggest banks all pay savers as little as £1 interest on every £10,000 saved and just 0.15 per cent to those who lock their money away for two years.

‘The crisis has also seen a real flight to cash with the savings ratio at a record high, but this has meant that the high street players are generally overly liquid and as such we have seen the rates from these providers tumble’, Kevin Mountford, co-founder of savings platform Raisin UK, said.

However they have not cut rates by as much as the base rate fell as they simply paid savers too little to do so.

But although rates have now likely hit the bottom, it does not seem likely they will rebound any time soon. 

I don’t see much cause for optimism for savers in 2021. 

James Blower, The Savings Guru 

Some £75.9billon of cheap Bank of England funding remains on the balance sheets of Britain’s banks and there is no sign the base rate will be hiked any time soon.

‘I don’t see much cause for optimism’, James Blower said. ‘The drivers that are likely to move rates up are positive growth in the economy, base rate increases, an end to the pandemic and competition. 

‘We all know the economic outlook isn’t strong at the moment and base rate is more likely to fall than rise. This really only leaves competition to stimulate the market. 

‘There are new banks set to enter the savings market, but these won’t need large volumes of savers so are likely to stimulate rates but not push them up significantly.’

Kevin Mountford added: ‘Let’s hope that the recent Office for Budget Responsibility outlook plays out and the economy improves to a level whereby the sector needs additional funding which will mean that, relatively speaking, some good deals will be offered from time to time but savers will need to be vigilant and prepared to move and make their cash work harder.’

Banks see margins squeezed further by base rate cuts

Britain’s banking system is thankfully in better shape now than it was in 2007 or the nation could have faced another financial crisis on top of a public health one.

‘My fears were that we would see a repeat of the 2007 crisis when the banking sector looked like a rabbit in the headlights and all business pretty much stopped overnight’, Kevin Mountford of Raisin UK said. 

‘This time it has been different and to be fair the banking sector is far more robust than it was around 15 years ago.’

But while the system has not fallen over, it has not been easy for Britain’s biggest banks, which have already been squeezed by a decade of low interest rates and a ferocious price war in the mortgage market.

Profits have tumbled, with the five largest UK lenders all seeing their pre-tax profits fall by at least 40 per cent between 2019 and 2020. NatWest and Royal Bank of Scotland even tipped into a £531million loss last year, down from as £4.2billion profit in 2019.

What has happened to the profits and margins of Britain’s biggest banks? 
  Pre-tax profit 2019  Pre-tax profit 2020  Net interest margin 2019  Net interest margin 2020 
Barclays UK £1bn £546m  3.09%  2.61% 
HSBC UK  £1bn  £163m  2.05%  1.71% 
Lloyds Banking Group  £4.39bn  £1.26bn  2.88%  2.52% 
NatWest Group  £4.2bn  £351m loss  1.99%  1.71% 
Santander UK  £981m  £552m  1.64%  1.65% 
Source: Annual reports 2019/2020. Lloyds Banking Group includes Bank of Scotland and Halifax, NatWest Group includes Royal Bank of Scotland.  

This was not just due to the base rate cut, ‘expected credit losses were the primary factor underpinning reduced profitability for the banking sector in 2020’, according to John Cronin, an analyst at the stockbroker Goodbody.

Banks have set aside money to cover billions of pounds of loans expected to go bad as a result of the economic downturn caused by the pandemic, both their own and that provided through Government-backed schemes.

But this has been exacerbated by the margins of retail banks, which have been squeezed even further by the base rate cut.

Analysis of the balance sheets of Britain’s five biggest banks has revealed only Santander did not suffer a reduction in its net interest margin, the difference between what a bank pays out to savers and what it earns from borrowers.

NatWest and Royal Bank of Scotland tumbled to a £351m loss in 2020 on the back of the coronavirus pandemic, down from a £4.2bn profit in 2019

NatWest and Royal Bank of Scotland tumbled to a £351m loss in 2020 on the back of the coronavirus pandemic, down from a £4.2bn profit in 2019

And the likes of Barclays, HSBC, NatWest and Lloyds are particularly affected by this as they already pay so little to savers that they cannot pass on the full base rate cut, but have in most cases done so to mortgage borrowers.

Banks with large numbers of customers on standard or tracker mortgage rates more sensitive to the Bank of England base rate have been particularly affected by this, as they cannot reduce savings rates by as much as mortgage rates have fallen.

Further squeezed margins and reduced profits have led to banks looking at other ways of making money, be that insurance or wealth management or through the idea of potentially charging for current accounts or business deposits. 

And with interest rates set to stay low for the foreseeable future, it is a question banks will likely have to find an answer to soon.

‘Structurally suppressed base rates will mean a lower revenue run rate into the future’, John Cronin added, ‘and banks therefore need to continue to focus on income diversification through fee-based products and services as well as cost rationalisation in response to this dynamic.’

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