How badly are consumers getting clipped by banks?
Mortgage rates have risen in recent months as deposit rates have remained near zero. This is a lose-lose proposition for consumers, and a new index reveals that it is only getting worse.
The MoneyRates.com Consumer Lost Interest Percentage (CLIP) Index measures the gap between bank rates for borrowers and depositors. The gap between 30-year mortgage rates and one-month certificate of deposit (CD) rates reached 4.40 percent in August, a level reached or exceeded only about 20 percent of the time since 1971. The CLIP Index will examine where this disconcerting trend for consumers is headed next.
Tracking the gap between rates
It is no surprise that mortgage rates exceed the interest rates paid on deposits such as CDs, savings and money market accounts. Mortgages represent longer commitments and thus more risk, plus banks deserve to make a profit on their activities. How much profit is fair is a subjective question, but by measuring the size of the gap between mortgage rates and deposit rates over time, you can tell whether that gap is currently above or below average.
The CLIP Index measures how much interest consumers lose in the gap between mortgage and deposit rates. To create this index, MoneyRates.com compiled 30-year mortgage rates and one-month CD rates going back to 1971. This yields more than 40 years of history to help put the current gap between mortgage and deposit rates in perspective.
Historical norms and ranges
So what's normal for the gap between mortgage and deposit rates? According to the CLIP Index, the historical mean for this gap is 2.83 percent. The historical median isn't far off, at 3.06 percent. With more than 40 years of history behind them, those numbers can be considered normal for the gap between mortgage and deposit rates.
In terms of extremes, that gap has gotten as high as 6.20 percent, back in August 1982. However, it's pretty rare for the CLIP Index to reach even 5 percent -- this has happened less than 4 percent of the time.
At the other extreme, on rare occasions the CLIP Index has posted a negative number, meaning that deposit rates have actually exceeded mortgage rates. This spread in consumers' favor briefly reached as high as 4.45 percent in December 1980, but the CLIP Index has yielded a negative number less than 6 percent of the time historically.
Current rate levels and trend
The current gap of 4.40 percent in the CLIP Index reflects the gap between mortgage and deposit rates through August. This is well above the 3.06 percent median, and among the top 20 percent of the historical readings. This means that consumers are losing an unusually large amount in the gap between what they pay on mortgages and what they earn on deposits.
This bad situation has worsened in recent months. The CLIP Index ended 2012 at 3.28 percent, and thus has climbed more than a full percentage point in the first eight months of 2013. Furthermore, the CLIP Index has been above the current 2.83 percent mean since November 2008. This stretch of four years and 10 months with a bigger-than-normal gap between mortgage and deposit rates is the longest ever measured by the CLIP Index.
The timing of when this period started -- coinciding with the huge drop in short-term rates in reaction to the 2008 financial crisis -- shows that this unusually severe gap between mortgage and deposit rates is one of the prices consumers have paid for troubles in the banking system. Record low mortgage rates in recent years may have seemed like a good deal for consumers, but with deposit rates having fallen even further, consumers have gotten the short end of the stick overall.
How you can narrow the gap
The gap between mortgage rates and deposit rates is unusually wide, and this costs consumers money. Here are four things you can do to narrow that gap:
- Shop actively for better bank rates. The CLIP Index measures broad averages, but neither deposit rates nor mortgage rates are the same at every bank. Smart shopping can earn you higher deposit rates and lower mortgage rates.
- Keep your credit in shape. A good credit rating should qualify you for lower mortgage rates.
- Consider a shorter-term mortgage. Since the gap between mortgage and deposit rates is based in part on a natural difference between long- and short-term rates, you can reduce this difference by choosing a 15-year mortgage over a 30-year mortgage.
- Consider longer-term deposits. Again, there is a long-short dynamic at work here, so a longer-term CD could help narrow the gap. Look for CDs with mild early-withdrawal penalties so you'll have some flexibility if deposit rates start to rise.
MoneyRates.com will update the CLIP Index on a regular basis to keep consumers apprised of whether the situation with bank rates is improving or worsening.