We have been banging on for quite some time about the trend in mortgage and deposit rates, namely that mortgage rates will continue to rise and that deposit rates will start to drop (already happening) and this will continue downwards – in particular you’ll have to watch for zero rated fund movements.

Zero rated funds are the money that banks keep for you (a liability for them) in the likes of demand and current accounts. You used to get zero interest but in return you got free banking. Now more lenders are demanding that you keep a certain balance in the account or you get charged a fee, such as Bank of Ireland’s recent decision to require a €3,000 balance to qualify for free banking.

This creates a near ‘negative interest rate’ for people who don’t keep that sum in their current account because fees mean the bank will cover all operational cost associated with your account for regular banking activity while making money elsewhere with those funds or from other products you buy from them.

Lenders know from profiling their current accounts how much the baseline scenario is for the levels held – so for instance they might know from historical analysis that they never drop below say €100m in current accounts, in turn they will lend out some of this money that they get for free (free because operational costs are covered in many instances and where the cost is less than any market alternative) and they will turn some of it into loans.

These loans can range from being fixed rate mortgages to car loans etc. the main point being that these funds are the most profitable a bank could hope for, that was what spurned competition in free banking to begin with. Now by raising the limit it brings in more funds or at least counters operating costs.

The solution isn’t to keep €3,000 in the bank, instead it is to get a better rate elsewhere which you can do in a variety of ways from using term deposits to alternative choice.