Topsy-turvy finance: mortgage rates below savings rates
However, new data from Savings Champion shows that it is now possible to get a higher rate of interest on a five-year fixed rate bond than is paid on a five-year fixed rate mortgage.
It points out that HSBC is currently offering a five-year fixed rate mortgage with an interest rate of 1.59% while the best five-year fixed rate bond is paying 2.35% with Paragon Bank.
There are fees to be taken into account and there are plenty of other reasons for wanting to pay off a mortgage early, but it shows a dilemma for savers.
Given Bank of England governor Mark Carney’s comments this week, which showed that an early rise in interest rates was possible, savers may be tempted not to lock into a fixed rate bond today, but wait until rates improve. Savings Champion looked at how much the rate on an easy access account would need to improve each year, if savers use these accounts while they wait for the base rate to rise.
It found that, assuming the rates remain the same for 12 months but are switched every year, in order to get the same return as that earned on the best five-year bond, the rate on the easy access account would need to rise by approx. 0.55% every year.
Even if savers picked a series of one-year fixed rate bonds, starting at a higher rate of 1.83% (Wyelands Bank), in order to get the same return as the five-year bond, the rate would need to rise by 0.26% every year.
Anna Bowes, director of Savings Champion, said: “We would never advocate that anyone borrows against their home to raise cash for savings or put all their money into longer term fixed rate bonds. But if you don’t need access to some of your money, this strategy could prove valuable as a balanced portfolio could include a variety of fixed rate bonds in order to access the very best rates of interest currently available, while also holding some money in high interest current accounts and other best buy easy access accounts, in order to take advantage of any rise in the market, whenever that may be.”