Prospective first time buyers were probably one of the groups hardest hit by the financial crisis and credit crunch.
Banks stopped lending to borrowers they perceived as being higher risk, so first time buyers, the self-employed and people with poor credit histories found life hard. But first time buyers were hit by a double whammy, even if they could find a lender willing to accept their personal circumstances, the size of deposit needed was so huge it made it impossible for many. First time buyers rarely have a large deposit and were used to seeing 95% and 100% mortgage routinely advertised before the credit crunch, most simply hadn’t bothered to save, because they didn’t think they needed to.
What’s this got to do with my savings I hear you ask? Bear with us, we’re getting there!
Fast forward four years to last summer and what’s changed? Well, the government has introduced a plethora of schemes to help first time buyers, but none really worked, the housing market is still stagnant and first time buyers, so often seen as the ignition needed to get the housing market started, were still struggling.
Last summer as we basked in the Golden Jubilee and Olympic celebrations, George Osborne, our beleaguered Chancellor, announced a new initiative, the Funding for Lending Scheme, aimed at reducing the cost of borrowing, whilst making loans more accessible for those people and businesses who were struggling get credit.
So far so good, but this is where the law of unintended consequences rears its head.
Banks and building societies have traditionally raised finance from the wholesale lending market, in other words each other, and from savers in the form of deposits. Now suddenly the same banks and building societies, who were so keen to attract your savings at the height of the property boom and when they were trying to repair their balance sheets, are now less keen.
After all, why pay savers 2%, 3%, 4% or even 5% when they can get access to funds for less than 1% from the Funding for Lending Scheme?
So, whilst already cheap mortgage deals have got even cheaper what’s happened to savings rates? You guessed it; they’ve fallen too, through the floor, with rates changing on a daily basis and accounts regularly withdrawn, almost as soon as they have become available. The result is a savings market where it is now impossible for a basic rate taxpayer (20%) to find an account where the interest he or she will receive is above inflation; that means every basic rate taxpayer opening a new savings account will lose money, hardly the aim of saving!
Is the Funding for Lending Scheme working? Anecdotally there are reports of more high loan to value mortgage products coming to the market, but they are a trickle, which could easily run dry. Has the Funding for Lending Scheme been worth the pain? In our opinion no, sure first time buyers are important, but so are savers and we believe the pendulum has swung too away from savers.
Phillip Bray writes for Investment Sense and looks at why even the best buy savings accounts are struggling to keep pace with inflation after their interest rates have been cut as a direct result of the government’s Funding for Lending Scheme.