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Don't let the credit crunch eat into your savings

Not a day now passes, it seems, without a major banking name being drawn into a discussion regarding the credit crunch and what this means for its customers. Up to now, most of the pain in the UK has been borne by existing mortgage customers, who have seen their interest rates rise, and by new borrowers, who have had to contend with increased deposit requirements and higher interest rates on their home loans. But what does the credit crunch mean for savers offshore?

The so-called credit crunch is often blamed on the fact that the big banks and finance institutions have apparently stopped lending to each other in the wholesale markets, or at least they have become far more cautious in their approach.

The result is that conditions have become tougher and the cost of interbank loans has risen as the supply of money in the wholesale markets has become tighter. Traditionally, wholesale money costs were generally slightly above or slightly below the UK base rate, depending on whether the market expected UK base rate to rise or fall.

Recently, though, wholesale interest rates have been over 1% above UK base rate on some days, so the cost of this source of finance has gone up dramatically.  The reliability and volume of this flow of money is important for the banks – historically, they will aim to raise funding at a low rate in the wholesale markets and then lend this as mortgages and other loans at a higher rate to their customers. If they cannot access funding in the wholesale markets, or if the cost is too high, the whole market machinery slows down, and there will be fewer takers for mortgages and loans at these new, higher costs.

This credit crunch is often blamed on the US sub-prime crisis, and whilst the packaging of US mortgages of questionable quality into complex financial instruments which have then been widely traded is certainly a factor, it is probably not the only reason for the crisis.

Fear is also now stalking the markets, as these securities have been so widely traded that many organisations are struggling to calculate accurately their exposure to any risks, so the general air of suspicion and uncertainly becomes ever more widespread. This, in turn, has undermined market confidence.

Savers though, should not be affected by banks reining in their borrowing clients, and many have, indeed, seen an upside to the credit crunch.

A quick look at the savings rates on offer from leading offshore banks, confirms all are paying over UK base rate, which is currently 5%.

Historically, the majority of variable rate based savings accounts would have offered savers an interest rate below UK base rate or one equal to UK base rate for larger balances.

As the cost of raising money in the wholesale markets has risen for both banks and building societies, so many are now turning again to their core retail savings clients to raise funds, with the result that savers can now find interest rates on good quality savings accounts offering a full 1% above UK base rate.

For the specialist offshore savings institutions, then, this is an opportunity to pass on the benefits of high wholesale money market rates to their savings customers.

But should savers simply chase the highest rates on offer, or do they need to tread carefully with some of the more extreme products available?

The answer is, buyer beware. If the main reason why you have opted for an offshore deposit account is safety and security, you will probably be more at home with an organisation with a long track record of offering consistently attractive interest rates, rather than one which is trying to top the best buy tables for a few weeks.

Most of the savings accounts available today are unlikely to be offering the highest rate in 18 months time, so personal choice will play a role – if you are the kind of saver who is happy to watch the interest rate and constantly switch funds between accounts, there are products that will suit you

The credit crunch, then, has been generally bad news for borrowers, but for savers the picture is altogether brighter, as savings accounts offering higher than usual returns look like they will be available for some time. Choosing the right organisation will still require care, though.

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