Will the high interest savings accounts boom continue
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It has recently become more and more apparent that banks and Building societies are crying out for you to deposit your money with them. Only a year ago the best savings accounts rates offered were appox. 6.30% AER. Now, only 12 months on, some providers such as Kaupthing Edge are offering 6.55% AER with no withdrawal penalties.
The question is why has there been a sudden increase in rates banks are paying for their savings accounts? Simple, it's all to do with the infamous credit crunch. As soon as the effects of the credit crunch hit, banks instantly pulled back on their lending to each other. Consequently, the extortionate low levels of lending rates were now a thing of the past.
To overcome this cash shortage and to take advantage of the fact banks can now charge higher rates of interest when they lend, they have increased their savings accounts interest rates to encourage cash deposits. You have to take into account that banks can increase their deposit to lend ratio's by 15 times. So if a bank receives £100,000 in cash deposits it can actually lend £1.5million. If the £1.5 million is lent at 10% APR and they are only paying savers 6.55% AER on £100,000 then you can see there is a respectable profit margin.
However, these high rates of interest currently offered may be coming to an end, as banks are beginning to lend to each other again at lower rates. The London Inter Bank Offered Rate (LIBOR) is the level at which banks are lending to each other. This has been falling, and when this level falls below the rates at which banks are paying savers, the savings rates will fall with them.
Since LIBOR is on its way down it is only a matter of time before this takes effect.
The advice at the moment is to lock in the highest rate of fixed term interest possible over the longest duration possible. The best on the market is currently ICICI Bank at 7.2% AER over 1 year or 7.0% AER over 3 years.
Which4u
- Savings rates in recovery. Post Office Online Saver reaches 3.17%
The Post Office Online Saver has rebounded back to the top of the rankings for instant access savings, offering 3.17% with effect from Saturday 26th May. It’s been predominantly bad news for savers in recent weeks, with Nationwide, AA, and Virgin Money all reducing savings rates. The Post Office has bucked the trend, however, moving ahead of ING Direct (3.10%) and the Derbyshire Building Society (3.06%) in the market for instant access savings accounts. Nationwide’s Flexclusive ISA, which had set the market alight at 4.25%, was reduced by 0.75 percentage points to 3.5% AER just one month after its launch. The AA withdrew its own 3.5% cash ISA, replacing it with a taxable easy access savings account at a lower rate (and lower still for balances below £10,000). And Virgin Money, much celebrated for rekindling the no-bonus savings approach, lowered the rates on its Easy Access Saver from 2.85% to 2.60%, making it seem far less competitive than the high bonus offerings that waver on the 3% precipice. Unlike Nationwide’s 3.17% MySave Online Plus, which requires £25,000 to open and allows only one free withdrawal per year, the Post Office Online Saver requires only £1 to open and allows unlimited free withdrawals. It allows both monthly and annual interest, with the former at 3.12% AER. Savings and Bonus Rates The Post Office account carries an initial bonus of 1.52% for the first 12 months, reverting to 1.65% in its second year. Though it is advisable to consider your options at this time to maintain a headline rate, this ‘standard’ rate is as competitive as can be found in the instant-access market. ING Direct’s weighty 2.6% bonus means that returns on savings drop to just 0.5% after 12 months, while the Derbyshire Building Society account drops to 1% after 12 months. As we’ve been keen to note in our savings guides and commentary, while ‘standard’ rates are rarely brilliant, some can still be far better than others. At 1.65%, the Post Office Online Saver ensures that returns on savings are more substantial than they would otherwise be with many other providers. Those looking for an alternative account without bonus rates (see the merits of these here) might consider the Aldermore Easy Access Saver. With a £1,000 opening balance, this account currently returns 2.75% AER, which would become the stronger performing option shortly after other accounts’ bonus rates expire. The Post Office Online Saver Instant Access Account: 3.17% AER for 12 months [Joint-leading Rate]. Reverts to 1.65% in second year [Competitive]. Can be opened promptly online for just £1. Unlimited withdrawals without penalty. Apply through Which4U from Saturday and have your new instant access savings account active in just a few minutes. Mark Hornby - 37 hours ago
