Best savings rates now rising at fastest pace seen in years

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Saving deals are rising at the fastest pace recorded since the first Bank of England base rate rise in December.

The savings deals at the top have increased by more in the past two months than they did in the five months prior to that. 

The average easy-access, one-year and two-year fixed rate savings deals also rose more last month than in any previous month over the past year, according to Moneyfacts.

The typical one-year and two-year deal rose by 0.31 percentage points in August, whilst the typical two-year deal rose by 0.29 percentage points.

The typical easy-access deal also rose by 0.16 percentage point. The biggest monthly gain recorded over the past 12 months.

At the top of the independent This is Money’s best buy savings tables, the rises have been more spectacular with challenger banks and building societies vying for savers cash.

At the start of August, the best one-year and two-year deal paid 2.83 per cent and 3.12 per cent respectively. Now they pay 4.1 per cent and 4.33 per cent.

This means these top rates have risen by more than 1.2 percentage points in less than two months. It previously took almost five months for the top rates to rise by that much.

The same can be said for easy-access deals. Since the start of August the best rates have risen from 1.6 per cent to as high as 2.5 per cent – courtesy of Yorkshire Building Society. 

This differs to the previous four months between April and August, when the best easy access rates available rose from 1 per cent to 1.6 per cent.

Last Thursday, the Monetary Policy Committee increased the base rate for the seventh time since December – by 0.5 percentage points to 2.25 per cent.

With inflation expected to peak at 11 per cent in October and sterling hitting record lows, many savings providers are upping rates in expectation that further rate hikes are imminent.

There has been talk this week that the base rate could even reach as high as 6 per cent next year.

Anna Bowes, co-founder of Savings Champion said: ‘The market is now expecting to see the base rate increase to more than 3.5 per cent by the end of this year and higher still in 2023. 

‘Some of this expectation may already be reflected in the best buy rates we have at the moment, but the good news for savers is that there is also quite a bit of competition between some key providers such as Smart Save, Oxbury and Close Brothers that is pushing rates up further still.’ 

What are the best rates today? 

On Tuesday, Investec and Oxbury Bank launched best buy one year fixed deals paying 3.9 per cent and 3.91 per cent respectively.

However, yesterday, Newcastle Building Society went higher – launching a new best buy one-year deal paying 4.1 per cent.  

A £5,000 deposit would earn £205 in interest. A £20,000 deposit would earn £820 interest after one year.

Those signing up to Newcastle’s deal will receive interest at the end of the 12-month term and no withdrawals are permitted until the term ends.

SmartSave Bank also launched a market leading two-year fix paying 4.33 per cent. Someone depositing £20,000 in this account would earn £1,769 after two years.

Investec is also offering a two-year fixed rate deal paying 4.25 per cent* via the savings platform Raisin UK.

Raisin UK is also offering a £30 welcome bonus to This is Money readers, but they must open a new Raisin Account via the link above.

Savers will receive the £30 when they open and fund the account on its marketplace with a minimum of £10,000. 

This means a £10,000 deposit into the two-year Investec account via Raisin could essentially result in an effective 4.4 per cent return after one year, when including the £30 bonus. This would equate to £890 of interest after two years.

Those wishing to lock their cash away for longer might wish to consider app based Zopa Bank or SmartSave bank, which have also just upped rates.

Yesterday, Zopa launched a three-year deal paying 4.3 per cent, and a market leading five-year deal paying 4.4 per cent. Savers can open an account with £1,000.

Someone depositing £10,000 in this account would earn £2,423 in interest over the five year period.

SmartSave bank then went slightly higher offering 4.31 per cent and 4.41 per cent respectively, albeit savers will require £10,000 to get started with SmartSave. 

It is worth pointing out that rates come nowhere near to matching annual inflation, which currently sits at 9.9 per cent.

Should savers wait for better rates? 

Almost everyday a new best buy savings deal hits the market. Savers may feel that by signing up to a deal today, they will be missing out on a better deal tomorrow.

For example, last Thursday – the same day the Bank of England boosted the base rate to 2.25 per cent, Atom Bank and Market Harborough Building Society launched fixed rate savings deals that broke the 4 per cent barrier.

As of today there are an additional 14 fixed rate savings deals paying 4 per cent or more.

Whether the temptation to wait for further rate hikes will negatively impact savers returns will depend on how high rates go and how fast they continue to rise. 

It will also depend on when they decide to commit, as holding off for too long may cost them.

For example, were someone to hold £10,000 for six months in an easy-access account paying 2 per cent and then fix, they would need the best fixed deal to be paying almost 6.2 per cent over the next six months to replicate the interest they would have earned in 12 months by opting for the best 4.1 per cent one-year deal now.

This suggests that for indecision to pay off, very large and sustained interest rate increases are needed.

Delay will be even more devastating for savers who have their money languishing in accounts paying 0.1 per cent or less.

According to Paragon Bank’s analysis, roughly a quarter of UK savings could be lingering in accounts paying minuscule returns.

Someone waiting for fixed rates to rise, opting to hold £10,000 for six months in an easy-access account paying 0.1 per cent will earn only £5 of interest in that time.

If they then fix, they would need the fixed deal to be paying 8.1 per cent for the next six months to replicate the interest they would have earned in 12 months by opting for the best 3.91 per cent deal now.

Of course, on the flip side, if in two months time the best one-year rate pays 5 per cent, then keeping cash in a 2 per cent easy-access deal for a short period of time could pay off.

After two months in an easy-access deal paying 2 per cent followed by the next 10 months in a one-year deal paying 5 per cent, someone will effectively earn £451 in interest. That’s £41 more than if they had opted for the best one-year fix right now.

Ultimately it is impossible to know when to time the market. 

For those who prefer to wait and see, then leaving some money in a top paying easy-access account will be to ensure their money is still earning whilst they wait for better fixed rates to appear.

Anna Bowes of Savings Champion says: ‘As there is no way of knowing whether fixed rates will rise further, the danger with waiting around is that all the time you are waiting, you are missing out on higher interest in the meantime, which means the rate you do choose will need to compensate for this loss of interest. 

‘Perhaps commit some cash now to a short term bond while leaving some in a best paying easy-access account in order to take advantage of any better rates if they come along. 

‘The key is to make sure you don’t leave your cash languishing in a poor paying high street bank current or savings account.’

Some experts suggest that rather than fully committing to one savings product now, to instead drip feed savings into the best buys as and when they are launched over the coming weeks and months.

Andrew Hagger, personal finance at MoneyComms says: ‘I always recommend a mix of easy access and fixed rate savings in order to maximise returns while maintaining enough liquidity to cover unexpected expenses.

‘Nobody knows how long the current situation will last so waiting to try and guess the top of the savings market is a tricky job.

‘Why not put some money in a one-year fixed rate now (it’s over 4 per cent) and if the rate goes up a worthwhile amount over the next two to four weeks, then open a separate one year deal and put in some more. This drip feeding strategy is worth considering during this volatile economic situation.’

How high will rates go? 

Speculating how high savings rates will go in the near future is anyone’s guess, but we asked some personal finance experts to have a crack nonetheless.

Andrew Hagger said: ‘Predicting the level of savings rates by Christmas is difficult, but with a mini budget on the horizon and further Bank of England intervention likely imminent in early November, we could see 3 per cent for easy-access and 5.5 per cent fixed on 1 year bonds come the end of the year. 

Rachel Springall, finance expert at Moneyfacts added: ‘We wouldn’t be able to speculate on how high rates could go, but anything seems possible at the moment with 4 per cent fixed bonds returning to the market from a long absence.

‘The momentum we are seeing is up. However, as interest rates continue to climb the attitude of savers may be to fix for the shorter-term or even choose easy access accounts as a temporary stop gap so they could have more flexibility to lock into even higher rates over the next twelve months or so.

‘There may well be savers out there who may sit and wait for even higher returns, but as with any deal, they are not guaranteed to last forever and if a provider fills their savings targets they can pull the account entirely. Some challenger banks are even increasing rates within the same week.’