There's no point being a saver until 2015

Updated: 
With the extension of the Funding for Lending Scheme, there may be better places to put your money than a savings account for a few years.

The Bank of England and HM Treasury have announced the Funding for Lending Scheme is to be extended.

The scheme, which allows lenders to borrow cheaply from the Bank of England so long as that money is then lent out, was due to finish in January 2014. However as it has been viewed as a success so far, that date has been extended by 12 months.

And that's a disaster for savers.

How the Funding for Lending Scheme works
The Funding for Lending Scheme was formally launched in July last year and is designed to work as an incentive to banks and building societies to lend more. It does this by providing cash which can then be lent out, at a far cheaper rate than if lenders had to raise that cash through other means, such as savings accounts.

Exactly how cheap that funding is depends on how much lending the bank or building society does. If they maintain or expand their lending, they pay a fee of just 25 basis points, relative peanuts.

That means banks and building societies can offer more competitive loans and mortgages to individuals or businesses, but still pocket a healthy margin.

How Funding for Lending is changing
The scheme is being extended, but there are a couple of changes to how it works to note. The first is that the incentive to boost lending will be skewed more towards lending to small and medium enterprises (SMEs).

For every £1 of net lending to SMEs this year, banks will be able to borrow £10 from the Funding For Lending scheme. This will fall to £5 from 2014. Lending to individuals will remain on a pound for pound basis.

The scheme is also being extended to include financial leasing and factoring firms.

What Funding for Lending has meant for borrowers
Borrowers have certainly had a lot to celebrate since the launch of the scheme. The table below covers the average rates charged on mortgages in April last year compared to today.

Mortgage term

April 2012

April 2013

Two-year fixed rate

4.60%

3.83%

Three-year fixed rate

4.84%

4.12%

Five-year fixed rate

4.82%

3.96%

Two-year variable rate

3.62%

3.41%


Source: moneyfacts

As you can see, it's fixed rate mortgages that have benefited the most. Indeed, rarely a week goes by without the launch of a new record low rate of some form. Not that long ago a two-year fixed rate dipping below 2% was incredible news – now you can even get three-year fixed rates at 1.99%!

With personal loans, in May last year before the launch of Funding for Lending, the cheapest rate available on a loan of £7,500 to £15,000 was 6% from a number of lenders including Tesco, Clydesdale Bank and M&S Money.

Today, the best deals are almost a full percentage point cheaper, with Tesco, Sainsbury's, Clydesdale Bank and Derbyshire BS all charging just 5.1%. Indeed, it has even fallen to 5% on occasion so far this year.

What Funding for Lending has meant for savers
Because banks and building societies aren't so reliant on your savings to fund their lending, the rates on offer from savings deals have plummeted.

Let's take a look at how the average rates on Cash ISAs have changed from this time last year.

Type of Cash ISA

April 2012

April 2013

Instant access ISA

1.88%

1.54%

Notice ISA

2.05%

1.76%

One-year fixed rate ISA

3.03%

2.05%

Long-term fixed rate ISA

3.58%

2.41%

Source: moneyfacts.

The rates weren't even that great last year, but they are downright appalling this year!
It's a similar story with other types of savings accounts. The table below covers the average rates of interest on offer in April 2012 and April this year.

Type of saving account

April 2012

April 2013

Easy access

1.01%

0.76%

Notice

1.57%

1.13%

One-year fixed rate bond

2.81%

1.78%

Two-year fixed rate bond

3.34%

2.06%

Three-year fixed rate bond

3.43%

2.22%

Four-year fixed rate bond

3.78%

2.33%

Five-year fixed rate bond

4.02%

2.48%

Source: moneyfacts

So across the board rates have been forced downwards significantly since the introduction of Funding for Lending.

But it's not just the rates that have taken a hit; even the number of deals on offer has been dented by the Funding for Lending Scheme.

April is supposed to be prime Cash ISA season, when banks and building societies fall over each other for your savings cash. Yet this April saw just 325 Cash ISAs available, down by almost a quarter from the 420 on offer this time last year.

Is there any point in saving?
It should go without saying that having a decent savings safety net in place is a great idea. It pays to be prepared, just in case there's a significant change in your circumstances.

However, there's an argument to be made that once that safety net is in place, there are better things you can do with the money you have left over each month rather than sticking it in a naff savings account until 2015 at least.

For example, you could try being a lender yourself through a peer-to-peer lender like Zopa, RateSetter or Funding Circle. Though even the rates on offer from peer-to-peer lenders is falling, as we explain in Peer-to-peer investor returns fall to 5.1%.

Instead you may be better off using that cash to pay off existing debts, such as your mortgage. Even modest overpayments can make a big difference and save you a lot in the long run.

For example, let's say you have 20 years to run on a £150,000 mortgage charging 5%. Your mortgage payments currently come to £990 per month. However, by paying an extra £50 a month, you'll clear the mortgage 20 months early, saving yourself £7,866 in interest!

To see what a difference overpaying could make to your mortgage, check out our mortgage overpayment calculator.

Another use for that money could be to stick it in a pension. After all, that money will be topped up by cash from the Government and potentially your employer as well.

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