Savings rates bounce back
April’s interest rate freeze has prompted something of a rally on fixed-rate savings accounts with providers pushing out ever-more competitive deals and increasing returns for savers.
With the Bank of England now unlikely to decrease the base rate any further, banks and building societies are reacting by trying to offer savers more reasons to keep their money in cash.
According to data provider, Moneyfacts, 35 fixed-rate deals now pay 4% or more – compared to just two at the start of March.
Michelle Slade, analyst at Moneyfacts, says: “With the base rate being kept on hold in April, savings providers have had a chance to review their positioning in the market. We are now seeing those that want to increase their position offering improved terms, which is good news for savers.”
ICICI Bank is one example of a provider that has tweaked its fixed-rate range to make it more competitive. Its HiSave account has been in the best-buy tables for some time now, initially paying 4.1% over two years or 3.9% over 12 months.
However, it recently revamped its range and now offers a five-year account paying 4.4% AER, a two or three-year deal paying 4.2% or a 4% bond fixed for four years.
While higher interest rates are great news for people with a lump sum to lock away, the renaissance in the savings market is mainly focused in one area – long-term deals.
For example, Halifax offers an online deal that pays an impressive 4.3% on opening deposits of £500. But, this deal is fixed for five years and no withdrawals allowed during that time. Similarly, Cater Allen Private Bank (which is part of the Santander group of companies) pays 4.11% - but only on its two-year fixed deal.
There are two problems with opting for such long fixed-term periods. First of all, you risk losing your interest or being hit with a penalty should you need to access your money during the term.
In addition, experts say that fixed-rate deals are likely to get more attractive as 2009 progresses – by locking your money away now, you could miss out on better returns down the line.
An alternative is finding a fixed-rate deal with a shorter term. While you won’t earn as much in interest, over the longer-term this could actually work out better for you as you might be able for find a higher paying account once the fixed period ends.
West Bromwich Building Society, for example, pays 4.29% AER on its 13-month deal, for people with at least £5,000 to lock away.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.
by: Hannah Nemeth
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