Savings rates are at their highest level for seven years, so if you have some extra cash, save it for the rainy days to come.
It’s all been doom and gloom lately, what with mortgage deals dwindling and rates going through the roof, the bank charges scandal no nearer a conclusion and general turmoil in the financial markets. So it’s nice to be able to write about some good news for a change.
Research released this week found that the interest banks are prepared to pay out on savings accounts are 1.3% higher than the last time the Bank of England base rate was at 5% (in December 2006). If you’ve got money to save, or regularly put money away, it’s worth looking that the figures in a bit more detail.
Fixed rate bonds, the alternative of choice for those bailing out of equity ISAs, will pay out up to 7.15% - the top rate 18 months ago was just 5.85%. Similarly, rates on no-notice accounts – the nation’s favourite type of savings account – have risen 1.1%, to stand at a maximum of 6.4% today. Researchers were quick to point out that interest on these no-notice accounts has not exceeded 6% since April 2001, when the base rate was at 5.5%.
It is interesting to note that these increases in savings rates come at a time when the base rate has actually dropped. At least 94 lenders have put up their rates since May 1st, despite the fact that the Bank of England cut the base rate by 0.25% in April – the last time the Monetary Policy Committee acted on interest rates.
When you look at the bigger picture, it is easy to see why savings rates are going up, regardless of base rate moves. In simple terms, the banks need our cash to prop up their own reserves – because the credit crisis linked to sub-prime lending and defaults has closed off access to finance via the international money markets. As a spokesman for Nationwide put it (in typically oblique style): "In the current climate, it's clearly prudent to adopt a defensive balance sheet position, and clearly it's a great time to be a saver."
He means they are wary about lending us money, but happy to look after it for us, given they have next to none of their own.
In fact the ‘high street savings war’ that is now seemingly in full flow started in April, when a number of high street banks raised savings rates significantly. Not surprisingly, the rest of the market has now followed suit, as they battle for customers able to bring new money into their coffers.
That’s to say that we should let the bigger picture get in the way. Great rates are always welcome, so we should all be rushing out to take advantage. But don’t just go for the highest rate available. Think of your own circumstances first and look for any hidden catches.
Before you choose, think about how much you can save, whether you are likely to want access to the money (either in an emergency, or for planned purchases such as holidays, cars etc). It’s also worth looking at the fine print. Some savings accounts require that you open a current account at the same time, whilst others are linked to the lender’s investment products. All of these factors, in one way or another, should affect your choice of savings product.
The banks’ strategy does appear to be working, at least on one level. In April alone, savers squirreled away a record £5.8bn – in part responding to higher rates, but also recognising that saving now might be a good idea since trouble does seem to be just around the corner.
On another level, let’s hope record deposits are as good news for the money markets as the current savings rates are for anyone with money to save.
