Opportunity for Savers: Enhanced Interest Rates Amid Competitive Market

This autumn, savers may find themselves benefitting from a competitive banking environment as banks strive to attract new customers.

According to Shawbrook Bank and consultancy firm CACI, over two million fixed-rate bonds and ISAs, totaling approximately £73 billion, are set to mature by year’s end. In an effort to retain their clientele, banks may increase savings rates despite expectations of a decrease in the Bank of England’s base rate.

The base rate, which influences the interest banks pay for borrowing and impacts savings and mortgage rates, was reduced from 5.25% to 5% in August and is anticipated to decrease further in November.

Nonetheless, certain banks are counteracting this trend—the leading three-year fixed rate has risen slightly from 4.51% at the beginning of September to 4.55%, while the top five-year fixed rate improved from 4.35% to 4.4%.

Anna Bowes of the consumer platform Savings Champion remarked, “The rate cuts we’ve observed following the August base rate reduction have definitely slowed, and some banks have even raised fixed rates recently.

“Despite the expected decline in the next Bank of England rate decision, competitive dynamics and heightened demand for deposits typically result in improved rates for savers.”

Kevin Mountford, co-founder of the savings platform Raisin UK, noted, “The competitive landscape means rates can often be artificially high. With a substantial number of fixed-rate accounts maturing in the upcoming months, we can expect banks and building societies to compete aggressively for this business.”

The current wave of maturing savings deals largely originated last year, when rates soared up to 6.2%. Approximately 1.5 million of these are one-year bonds or ISAs. The remaining are two-year products initiated after the mini-budget presented by Liz Truss in September 2022, which resulted in a sharp rise in government borrowing costs, subsequently driving up mortgage and savings rates.

For instance, the best one-year bond rate jumped from 3.5% at the start of September 2022 to 4.6% in November, as per Savings Champion’s comparison data. In October 2022, savers invested £12.3 billion into fixed-rate bonds, with an additional £10.9 billion in November, according to the Bank of England.

Banks typically introduce their most attractive savings accounts during peak activity periods, such as at the end of the tax year in April when many individuals aim to maximize their annual £20,000 ISA allowance. October and November of this year are anticipated to see increased activity due to the numerous upcoming deals expiring.

Currently, the leading easy-access savings account on the market, available through Chip, offers an interest rate of 5%, a decrease from 5.07% prior to the Bank rate cut in August.

The top fixed-rate option stands at 4.95% for a one-year bond from Union Bank of India, down from 5.4% in August. While it is typically expected that longer-term commitments yield better rates, this trend may not hold due to projected declines in the Bank rate ahead.

A saver depositing £10,000 would generate £500 over one year in Chip’s easy-access account, compared to £495 from Union Bank of India’s one-year bond.

Analysts predict that banks’ efforts to attract customers will help shield savers from potential drastic rate reductions. Historical data indicates the average one-year bond rate increased by 0.09 percentage points between August and October last year and 0.04 percentage points between September and October, suggesting a similar pattern could emerge this year.

Savers can still find 4.61% on a two-year bond with UBL UK, while GB Bank offers the best three-year rate at 4.55%, which can be accessed through Raisin UK.

Additionally, GB Bank’s five-year fixed-rate of 4.4% provides a longer duration of guaranteed interest rates, insulating savers from potential future declines in the Bank rate.

What to Consider When Your Fixed Rate Matures

When your fixed deal is about to expire, your bank will contact you with options. Aldermore Bank reported that around 63% of customers whose fixed deals ceased last month opted for another deal with them, as opposed to 75% in September of the previous year. Some banks may offer preferential rates for existing customers who renew.

If you take no action, your funds might automatically transfer to a lower-yielding account, making it crucial to stay informed.

For those hesitating to open a fixed account, it’s advisable to evaluate other options instead of allowing cash to sit in a low-interest current account. Numerous easy-access savings accounts currently offer rates of 4.8% or higher, including options from Coventry Building Society and Cahoot, a subsidiary of Santander.

If you possess funds that you do not require immediate access to, locking in a portion into fixed accounts can ensure returns, given that easy access rates tend to fluctuate with the Bank rate. One could expect a scenario where the Bank rate is lowered just once by 0.25 percentage points within the next year—which, assuming banks fully apply the reduction—would lead to the 4.95% one-year bond outperforming the 5% best easy-access rate.

Adam Thrower of Shawbrook Bank emphasized the importance for savers with maturing deals to act rather than letting their funds linger in a maturity account, which would likely have a lower rate. Exploring options from lesser-known banks can also be beneficial, as they often provide comparable security and Financial Services Compensation Scheme protection up to £85,000 alongside more appealing rates.