And then it happened. The impact of the US mortgage crisis hit the UK.
The news that Northern Rock had sought emergency funding from the Bank of England sent thousands of customers crowding into branches across Britain, desperate to pull out their savings amid fears that the bank was about to collapse. Northern Rock, Britain’s eighth-largest listed bank, saw its access to funds dry up as the cost of borrowing between banks rose in the broader credit crisis that had started just a month earlier. Although the Bank of England at the time said that Northern Rock was solvent and would only need short-term help, the majority of customers were not willing to take any chances.
By November, customers had withdrawn around £14billion in deposits – almost 60% of the £24billion Northern Rock held before seeking aid from the Bank of England on September 13, 2007.
What has happened since?
Northern Rock was nationalised in February, with the Government offering a 100% guarantee on all existing savings there – and extending the offer to new deposits too. In practice this means that Northern Rock is, ironically, now arguably the safest provider with which to store your savings.
However, even though no saver has lost a single penny because of the Northern Rock crisis, consumer confidence has been severely affected. Depositors have become more cautious and are now aware of the Financial Services Compensation Scheme (FSCS) and what would happen if their bank was to go bust. At moneysupermarket.com, our forums are inundated with concerned customers worrying about how safe their money is, and where to deposit their cash
Twelve months on and the credit crisis has only deepened. Banks are tightening their lending criteria on mortgages and it’s now increasingly difficult to get a mortgage without a deposit of at least 10%. So with the credit crunch far from over, should customers still be worried about where they deposit their cash?
Are your savings safe now?
As long as you're savvy with your cash, there's little to be concerned about.
The Financial Services Compensation Scheme (FSCS) regulates financial institutions such as banks or building societies - it does not offer protection to savings stamps or hamper schemes, such as Farepak, which famously suffered a dramatic collapse.
The chances of a bank going bust are extremely unlikely, but if it were to happen, the FSCS guarantees the first £35,000 of your savings. If you have cash in a joint account, the first £70,000 is protected.
You may therefore assume that as long as you keep no more than £35,000 in one account you will be protected – however, there is a catch.
The protection does not apply per bank account – it applies per financial institution. Some firms have numerous savings brands. Halifax Bank of Scotland is a good example of this, as well as the Halifax and Bank of Scotland brands, Birmingham Midshires and Intelligent Finance are part of the same group and HBOS also provides the savings account for The AA and Saga. So if you've got more than £35,000 saved across several accounts from the same institution, you won't receive any extra protection - you need to spread your money around among different institutions.
How the savings market has changed
While savers are now more cautious as a result of the events of the past year, they are also the winners of the credit crunch. Although rising living costs are pulling on the purse strings of many, those with money to spare are enjoying the best saving rates for years.
The shortage of funding in the wholesale markets has resulted in banks and building societies turning to retail savers to shore up their reserves, and in order to attract our money they are having to offer higher rates of interest.
This time last year, the highest-paying easy access account was the Northern Rock Tracker Online at 6.31% – 0.56 percentage points above the then Bank rate, which was 5.75%. Bank rate has since fallen – it is currently 5.0% - but savings rates are higher. The leading easy access account is the Alliance & Leicester (A&L) eSaver paying 6.56% - that’s 1.56 points above Bank rate.
Indeed there are now eight accounts in addition to the A&L deal paying 1.50 points above Bank rate or more – the Kaupthing Edge Savings Account (6.55%), the Birmingham Midshires e-saver account Issue 2 (6.52%), the Bradford & Bingley Internet Saver 3 (6.51%), the Heritable Bank Online Saver (6.51%), the Manchester Building Society Premier Bonus Issue 3 (6.51%), the ING Direct Savings Account (6.50%), the Capital One Bonus Saver Issue 3 (6.50%) and the Abbey esaver direct (6.50%). Therefore there are plenty of opportunities for savers to spread their cash around and still pick up a high rate of interest while maintaining regular access to their cash – although you should check the terms and conditions of each deal as some withdrawal restrictions do apply.
If you’re willing to lock your money away, the picture is even better. Whereas a year ago the highest rate on a fixed rate was from Anglo Irish Bank One at 6.90% - 1.15 points above Bank rate – now you can pick up a rate as much as 2.20 percentage points above Bank rate. The ICICI One Year Hisave Fixed Rate Account, at 7.20%, is the market-leader, although there are several other institutions offering rates in excess of 7.0%.
It seems that the credit crunch and the Northern Rock collapse has affected all aspects of society – even those with less than £35,000 in savings are eager to make sure that their money is safe. The key now is for consumers to use this as their prompt to ensure they are getting good value from their bank and a rate of interest that is competitive in the new economic climate.
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Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.