Fixed rate bond rates increase to fund mortgage deals
Savers are beginning to enjoy better rewards again after banks and building societies continue to offer more competitive deals in order to raise money to fund new mortgages and clear previous wholesale borrowing before the financial crisis.
Figures from the financial information firm Moneyfacts have shown that interest rates paid on fixed rate bonds have seen more than a 50% increase since March, despite the Bank of England base rate remaining unchanged at its lowest ever recorded level of 0.5%.
Since March, the average rate paid on 5 year fixed rate bonds has increased from 2.86% to 4.38%, while 4 year bonds have seen a rise from an average of 2.89% to 4.12%.
The last few weeks have brought a number of new fixed rate bonds offering rates of up to ten times higher than the current base rate, some of which are being offered through small and medium-sized building societies.
Barnsley building society is currently offering 5% on its 3 year fixed rate bond available online. Instant access savings accounts are also upping the competition, with Egg increasing its rates to a market-leading 3.25%.
Michelle Slade, spokeswoman for Moneyfacts, said lenders had progressively turned to the retail market in order to raise funds.
"Continuing volatility in the money markets is seeing providers increasingly having to use their savings books towards funding their lending activities. Most fixed rates investments don't allow early access, as this guarantees the length of time the funds are available to the provider," she said.
Ray Boulger, from mortgage broker John Charcol, said there were several reasons behind smaller lenders looking towards retail deposits in order to fund new mortgages. This year, a number of small to medium size lenders have had their ratings downgraded by credit rating agencies, making it harder for them to get credit, not to mention more expensive.
"Some of the banks and building societies will also have wholesale funds coming up to maturity that they raised in the good times and now need to repay and retail funds will be the cheapest way for them to get the money in," he said.
These pressures have resulted in an influx of competition into the savings market, Boulger added. "There was a limit over which it wasn't worth paying for extra funds when lenders could raise money easily on the wholesale markets," he said.
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