Online saving rates get a boost
The savings horizon is starting to look a little more interesting as provider appear to be turning their attentions away from fixed-rate offerings and towards instant access accounts.
Changes to saving rates have a lot to do with swap rates, the interest rates providers pay on inter-bank loans. These have been coming down of late, making it cheaper for banks to borrow from each other in order to fund some of their mortgage lending.
As a result, the need to bring in funding from savers has become less pressing and competition is dropping off.
The impact of this can be clearly seen with a quick examination of the fixed-rate savings sector.
Following months of steadily increasing rates to over the 7% mark, the disappearance of the two top players - Birmingham Midshires and Bank of Cyprus - appear to suggest that the tide has turned and rates will now remain static or even fall.
Kevin Mountford, head of savings at moneysupermarket.com, says: "It had to happen sooner or later and it looks like things may have gone ‘pop' for fixed rate bonds. Birmingham Midshires and Bank of Cyprus are unlikely to be the only providers that decide enough is enough, and I fear that the days of 7% plus fixed rate bonds could be numbered.”
Such fears have been alleviated slightly after ICICI HiSAVE increased the AER on its one-year fixed-rate account to 7.2% AER for deposits from £1,000.
And there are still 7% plus accounts on the market (see table below). But in the meantime, providers seem to be turning their attentions to popular instant access saving products.
Although these accounts – often offered online – do not boast interest rates anywhere near as high as fixed-rate accounts, the fact that cash can be withdrawn in an instant is a big plus for many savers.
Rates have been static across the instant access sector for a while, but this week Kaupthing Edge increased its AER from 6.5% to 6.55% on deposits from £100.
Mountford says: "Easy access accounts are back in the spotlight due to a reduction in swap rates, making it more difficult for providers to offer improved rates on fixed rate bonds.
“At 6.55% Kaupthing's easy access account raises the bar and clearly demonstrates the desire by foreign banks to maintain their status as the best-buy providers."
Top five fixed-rate accounts:
|Source: Moneyfacts 30/07/08|
|ICICI HiSAVE||7.2%||One year||£1,000|
|Anglo Irish Bank||7.05%||One year||£500|
|Post Office||7.05%||One year||£500|
Top five instant access online accounts:
* Includes 0.88% bonus until 31/08/09
|Kaupthing Edge||6.55%||£1||No penalties for withdrawals|
|Birmingham Midshires||6.52%||£1||No penalties for withdrawals|
|Bradford & Bingley||6.51%||£1||No penalties for withdrawals|
|Alliance & Leicester||6.5%*||£1||
No interest accrued in a month
when withdrawal is made other
|Citibank||6.43%**||£1||No penalties for withdrawals|
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.