The beginnings of the financial crash first took hold 10 years ago this week, when Northern Rock collapsed and the first run on a British bank in over a century began. Many will remember the news reports showing queues of savers lining up outside branches to withdraw their cash, and the full-on banking crisis quickly followed. Things have changed a lot in the industry since then, but how have things changed for the general customer? We take a look.
It's no secret that the savings market has seen a significant downturn in the last decade, but more surprising could be just how far it's fallen when comparing the rates on offer then and now; our figures show that, in September 2007, the average easy access account paid a rate of 4.31%, whereas now it clocks in at just 0.40%, over 10 times less. It's a similar story in the fixed bond sector, with the average two-year bond rate of 10 years ago standing at 5.99%, compared with a mere 1.38% today.
It's an even bigger blow when looking at the best deals available. Ten years ago, it was possible to get an easy access rate of a whopping 6.50% - albeit including a bonus element - with West Bromwich offering this very rate. Meanwhile, Heritable Bank, which is no more, offered a two-year fixed rate bond paying 6.70%; both of these rates are unheard of in today's climate.
When you compare the rates with those on offer today, it quickly becomes disheartening. Indeed, even the best easy access account pays a rate of just 1.25%, while in the fixed sector, the best two-year bond pays an expected profit rate of 2.20%, as the table below shows:
|Account type||Top deal in Sept 07||Rate||Top deal today||Rate||Difference|
|Easy access||West Bromwich BS,
Premier Bonus Tracker 2
Easy Access Savings
|Two-year bond||Heritable Bank,
2 Yr Fixed Rate Bond 20
|6.70%||Al Rayan Bank,
Fixed Term Deposit
But why have rates fallen so much? A lot of it can be blamed on base rate, which was cut to 0.50% in 2009 and cut further still last August, and as confirmed yesterday (14 September), it'll stay at 0.25% for at least another month.
This gave savings providers the green light to cut their own interest rates, particularly in the variable sector, with variable savings rates often linked to base rate fluctuations. Things aren't quite so clear cut in the fixed rate sector, but even here the economy will have had a serious impact, particularly when you consider the Funding for Lending Scheme (FLS).
This scheme was designed to give providers cheap money that they could lend out as mortgages, in an attempt to kick-start the housing market that was struggling in the recession. However, this had a knock-on effect on savings rates; providers no longer needed savers' cash to fund their lending, and so they stopped competing, lowering their rates in the process.
"In the past 10 years, savers have been tormented by rock-bottom rates, with averages consistently falling to record lows," said Charlotte Nelson, finance expert at moneyfacts.co.uk. "They've been caught in a spiral of misery, having to contend with a record low base rate, banks not wanting savers' funds and now rising inflation, which is eating away at their savings.
"With rates so low it doesn't take a lot to enter the Best Buy tables, so long-suffering savers now have to be savvy and work hard to get the maximum return on their savings." So make sure to do your research!
It's a completely different story in terms of mortgages, as the very same factors that have decimated the savings market have transformed the mortgage market for the better, with record low base rate pushing mortgage rates to record low levels, and competition from lenders - fuelled by funding through the FLS - only adding to the downward spiral.
For example, in September 2007, the average two-year fixed mortgage rate stood at 6.45%, yet today it's fallen to 2.22%, a drop of 4.23% in the space of a decade. Similarly, the average five-year fixed rate has fallen from 6.54% to 2.76% over the same period, with these reductions having a huge impact on repayments and serving to boost mortgage affordability during an otherwise difficult financial period.
Looking at individual deals again further highlights the improvement, with the lowest rates available today being far lower than in 2007:
|Mortgage type||Lowest rate in Sept 07||Details||Lowest rate today||Details||Rate difference|
|Two-year fixed||2.45% from Newscastle BS||90% LTV, £445 fee||0.99% from Yorkshire BS||60% LTV, £1,495 fee||-1.46%|
|Five-year fixed||5.59% from Yorkshire BS||95% LTV, percentage fee||1.59% from HSBC||60% LTV, £999 fee||-4.0%|
It's also interesting to note how the lending environment overall has changed, with lending today being far more centred on risk. Indeed, even the best rates in 2007 were available to those with deposits of just 5 or 10%, whereas today, even the best first-time buyer mortgages will be more expensive than if you had a larger deposit.
"A record low base rate has seen mortgage rates plummet to all-time lows, making it a good time to be a borrower," said Charlotte. "However, this is not a return to the riskier lending we once saw. Ten years ago the mortgage market saw most of its products sit in the higher loan-to-values, but it's the reverse, with those with a larger deposit now not only having more choice, but also access to the cheapest deals."
The moral of the story? Mortgage rates may be at record lows, but if you want to nab the best deals, it could pay to save up a bit more of a deposit. However, don't worry too much about what would happen if rates started to rise - our research shows that borrowers should still be able to absorb a modest rise in base rate, which means now's still the perfect time to compare your mortgage options.
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