Banks cut saving rates
Savers with instant access accounts have seen their interest rates slashed by nearly half a percentage point over the past six months.
Despite the top saving rates continuing to look competitive across the market, research shows that average rates on instant access deals have fallen from 3.76% in January to 3.3% now. In addition, the number of accounts paying more than 5% interest has fallen from 270 to 145 over the same time period.
The figures contradict the general perception that banks and building societies are desperate to get their hands on your cash, and are offering competitive deals in order to attract new business.
But Sean Gardner, director of MoneyExpert.com, which carried out the research, says providers are looking to bring in long-term savers rather than so-called “rate tarts”.
Instant access accounts, which allow people to easily dip into their savings when needed, do not represent the long-term value that banks and building societies desperately crave. In addition, with research indicating that 2.2 million people switch their saving account every six months, providers are focusing on deals that force savers to put their money away for a set period of time.
Gardner says providers are, therefore, boosting rates on long-term saving products - such as fixed-rate deals - at the expense of instant access accounts.
"The drop in instant access savings rates reflects banks' efforts to encourage people to save for the long term,” he adds. “They want to know they have money to play with and can't afford to offer as good deals to attract short-term savings that can be withdrawn without penalty at a moment's notice.”
So, what does this mean for savers?
Well, if you are happy to put your cash aside for a fixed period of time and don’t require instant access to it, then a fixed-rate account probably is the best home for your money.
The top rates on fixed deals remain above the 7% mark, whereas even the best instant access deals have rates between 6% and 6.5%.
If you are prepared to fix, then ICICI Bank’s HiSAVE Fixed Rate account boasts an AER of 7.2% for one year on deposits from £1,000. This account is available to both new and existing HiSAVE customers.
Elsewhere, FirstSave offers a one-year fixed account at 7.1% AER on a deposits of £1,000, while Icesave has a one-year account at 7.06% also on £1,000 upfront.
Rates on longer term fixed interest accounts are also just over the 7% mark, so if you are happy to put your money away for longer then these might be a good bet. FirstSave offers two accounts, fixed for either two years or three years, both paying 7.10% AER on deposits of £1,000 plus.
For more of the best fixed-rate accounts and other saving deals, read the Moneywise daily round-up of the market.
If you do need instant access to your money, then it’s a question of ensuring you opt for an account that suits your needs and offers a decent interest rate. And remember to keep on eye of the rate, moving to another deal if need be.
Kaupthing Edge pays an AER of 6.55% on its online account for people with deposits of £100, while Birmingham Midshires pays 6.52% AER on deposits of £1.
Or Bradford & Bingley pays 6.51% AER on deposits from £1 and Intelligent Finance's isaver account pays 6.4% AER on deposits from £1.
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.