ROYAL Bank of Scotland last night moved to reassure borrowers that the UK government’s recapitalisation of the bank would leave it in an “excellent position” to support customers.
The reassurance came after another dramatic week in the world’s banking sector, during which the UK government took large stakes in three of the biggest British banks.
The Treasury agreed to invest £37 billion by buying shares in Lloyds TSB, Halif
ax Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS).
As part of the recapitalisation deal, RBS agreed “to maintain the availability of small and medium-sized enterprise and mortgage lending at least at 2007 levels”.
A similar agreement was reached between the Treasury and HBOS, to “immediately restore and maintain the availability and active marketing of competitively priced mortgage lending (other than in the non-conforming market) over the next three years at a level at least equivalent to that of 2007”.
After the statements were made to the Stock Exchange on Monday morning, the Council of Mortgage Lenders (CML) sought clarification from the Treasury regarding its intentions to keep mortgage lending available at 2007 levels.
Following guidance from the Treasury, a CML spokeswoman said: “We understand that the government wants to achieve a broad, deep mortgage market in general with a good spread of products enabling access to the mortgage market for all credit-worthy borrowers. This is something we support completely.”
While the industry body may be reassured by the UK government’s action, what does the re-capitalisation mean for existing mortgage customers and those thinking of taking out a loan with the banks?
An RBS spokeswoman yesterday told The Scotsman: “The re-capitalisation of RBS Group, underwritten by the UK government, will make the bank one of the most strongly capitalised banks in the world.
“This will ensure the bank is in an excellent position to support customers in these difficult economic conditions and provide both saving accounts and mortgages to all customers.
“On 8 October, RBS and NatWest confirmed the full 0.5 per cent rate cut would be passed on to customers, following the Bank of England’s base rate decision. In addition, on 14 October, RBS and NatWest introduced a competitive 5.74 per cent two-year fixed rate mortgage with a £499 fee, for both new and existing customers.”
Louise Cuming, head of mortgages at
moneysupermarket. com, a comparison website, said: “Let us hope that RBS, Lloyds TSB and HBOS do more for borrowers than Northern Rock.
“The now UK government-run Northern Rock will only pass on a 0.15 per cent cut to its standard variable rate (SVR) from next month, not the full 0.5 per cent cut that was announced by the Bank Of England last week. It is all well and good of Northern Rock to moan about the London Inter-bank Offered Rate [Libor], but most of its major rivals have passed on the full 0.5 per cent to its customers stuck on an SVR.
“At 7.34 per cent, its SVR is still more than one per cent above the three-month Libor rate. That makes it a very profitable part of the Northern Rock business at the expense of its most vulnerable borrowers.”
Cuming told The Scotsman: “I don’t think the government will interfere in RBS and HBOS’s SVRs, but I think these organisations will be desperate to repay their loans to the government.
“I think that’s what we’re starting to see with Northern Rock – it’s not passed on anything like the full 0.5 per cent interest rate reduction to its SVR, therefore it’s making more profit and can pay-off its loans more quickly.
“You wonder whether the same pressure will come to bear on HBOS and RBS because there’s no doubt that they didn’t want to have to borrow so much money from the government.
“But now they’ve been forced into this position and you have got the feeling they will want to repay as quickly as they can – and the only way to do that is to get more money from existing customers.
“They have passed on recent reductions in the base rate to their SVRs, but it’s a case of ‘watch this space’ and make sure they pass on any further reductions.”
Cuming said she expected another reduction in the Bank of England’s base rate before Christmas, but warned that the Libor also needed to fall to help borrowers in the long term. She added: “If rates come down again, then it will continue to be a story with two sides – for existing borrowers on variable or tracker rate mortgages, it will be good news because they will immediately benefit from lower monthly repayments.
“But for borrowers looking for new products, we’ve seen tracker rates going up rather than down so any rate reduction will not benefit new borrowers.”
Savers should take heart from banking rescue planTHE UK government’s banking bail-out should reassure worried savers, according to financial experts.
Kevin Mountford, head of banking at comparison website
moneysupermarket.com, said: “Savers should see the government bail-out as a message that they don’t need to worry about the security of their savings.
“But I’d still recommend not having more than £50,000 with a single institution. And if you have money with an overseas bank, or are thinking of opening an account with one, it is worth checking whether it is fully signed up to the Financial Services Compensation Scheme [FSCS] or if it is part of the passport scheme.”
While the security of savings appears to have been addressed, savers are also worried about the effect of rising inflation.
Michelle Slade, an analyst at
Moneyfacts.co.uk, said: “A combination of inflation at 5.2 per cent and tax means that savers will now find it near impossible to earn interest on their money.
“A standard rate taxpayer needs to find an account paying 6.50 per cent, while a high rate taxpayer needs to earn a rate of 8.63 per cent.
“For higher rate taxpayers, there is no account on the market paying such a rate. Standard rate taxpayers only have access to a couple of accounts and then only with restrictions.
“Savers had been benefiting from the credit crunch, but now the tables have turned. The Bank of England cut base rates as part of a move to kick-start the housing market, but it has come at the expense of savers.
“Until inflation is brought back under control, savers need to make the best of a bad situation. By ensuring that they achieve the best rate possible for their money, they can limit the effect inflation will have on the value of their money.”
For details of the FCSC, call 020 7892 7300 or visit the website at
www.fscs.org.uk.
