The return of the 5% savings account
Savings accounts with rates of 5% and more are back as banks once again start to vie for your money.
The past eight months have seen headline rates of savings accounts diminish to dismal levels, with many accounts paying little over 0% interest, in reaction to the falling Bank of England base rate. This now stands at just 0.5% and is extremely unlikely to fall any further, giving savings providers an opportunity to increase their rates slightly.
As a result, instant access accounts are now very much back in the spotlight; although rates are still pretty low compared to those seen during 2008, savers with their money in variable-rate accounts at least have the security of knowing their returns are unlikely to fall going forward - and could even rise when the base rate eventually returns to a more ‘normal’ level.
Meanwhile, funding for mortgage lending for banks and building societies remains expensive, putting the onus back on savings books to provide them with the capital to increase their mortgage operations.
This has led to a host of new fixed-rate accounts, and an increase in average rates. According to data provider Moneyfacts, one-year savings accounts pay, on average, 0.31% more today compared to March, while two-year accounts pay 0.67% more.
But it is the longer-term savings accounts that have seen the biggest increase in rates; Moneyfacts says four-year accounts pay 0.84% more on average and five-year deals 1.13% more.
Michelle Slade, analyst at Moneyfacts, says: “Volatility in the money markets is prompting providers to turn to their savings book to fund their lending activities.
“In order to attract savers from their competitors, providers are offering ever-increasing rates. At the beginning of March just three bonds paid a rate of 4.00% or more, as of today that number has grown to 124.”
Clydesdale Bank and Yorkshire Bank are both offering a five-year savings account paying an impressive 5% AER on upfront deposits of £2,000, or 4.5% for three years. A two-year bond, meanwhile, will earn you 3.75%.
Stroud & Swindon has a range of fixed-rate accounts, including a deal that pays 5% until 31 July 2012. You must deposit £5,000 plus to qualify.
Elsewhere, private bank Close Brothers is currently offering a three-year fixed savings account paying 4.75%, or a two-year deal paying 4.5%. Both deals require an initial deposit of at least £10,000, and can only be opened between 20 June and 3 July, subject to availability.
Or, Yorkshire Building Society offers an e-bond paying 4.5% until 31 August 2013 on deposits of £100. It will also pay 4% over three years, or 3.5% over two.
ICICI Bank offers a range of fixed-rate accounts that allow you to fix for anything from six months to five years. You need to have £1,000 to deposit upfront, and the interest you earn varies depending on the term, but it will pay up to 4.4% if you fix for five years or 4% for four years.
As a general rule, providers are currently rewarding savers opting for longer-term fixed deals with better rates. For example, Halifax has increased the rate of interest on its five-year websaver account to 4.75% AER (up from 4.4%) on deposits of £500. It pays 4.5% for four years or 4.25% for three.
Birmingham Midshires also offers a two-year account paying 4.25% AER on deposits from £1. Kent Reliance also pays this rate for two years, while Barclays has a three-year account also paying 4.25%.
West Bromwich Building Society, meanwhile, offers an e-bond paying 4.15% AER until 31 May 2011 for anyone with at least £5,000 to deposit. Withdrawals or additional deposits are not permitted and you can only manage your account via post or the telephone. It also pays 3.25% for 12 months.
Santander-owned Abbey is offering a two-year fixed-rate bond paying 4.15% AER on balances from £25,000. It also pays 4% over 18 months again on an upfront deposit of £25,000.
Cheltenham & Gloucester has launched a fixed-rate account paying 4.05% for two years on balances of £50,000. If you have less to save (between £500 and £49,999) you'll earn 3.8%, or if you'd prefer to only fix for one-year you'll earn 3.5% on balances of £100.
The AA also pays 4.05% on its 16-month fixed-rate account.
One-year fixed-rate savings accounts are in high demand at the moment but, sadly, are not as competitive as their longer-term cousins. Skipton Building Society pays 3.87% AER until 28 February 2010 on deposits of £500.
Monthly savings accounts
The credit crunch has not only highlighted the importance of saving, it has also created a financial climate where saving products offer better value than in recent years.
Lloyds TSB recently increased the rate on its monthly saver account to 5%. The deal, which is fixed for 12 months, requires savers to pay in between £25 and £250 each month.
The benefit of this account is that instant access withdrawals are allowed - however, you cannot replace any funds withdrawn.
Accounts for children
If you have already invested your child trust fund voucher but want to open up a savings account for your child, then Halifax's one-year Regular Saver account pays 6% AER for one year on deposits from £10.
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.
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