One-year fixed rates to hit 5% soon
Savings rates have risen inexorably since the beginning of the year, and in the last month especially.
The current best buy one-year fixed rate bond is offered from Charter Savings Bank, paying 4.31% AER (minimum £5,000).
But according to Hargreaves Lansdown, it said swap rates indicate one-year fixed rates could hit 5% before long. However, there are ways to earn 5% interest without tying up your cash for years.
Tom Higham, acting head of savings at Hargreaves Lansdown, explained that looking to the interest rate swaps market gives “an indication of truer prices of money at different terms”.
He said: “Banks use these markets to manage interest rate risk by changing their exposure between floating and fixed rates, much like how individuals might use fixed rate mortgage deals to lock in a rate. Right now, the market price for 12-month swaps is close to 5%. That’s up from 3.5% at the end of August.”
However, he said for savers, this “isn’t going to happen overnight”.
This is because “no bank wants to pay more than they have to in order to attract new deposits, so they’re inching up a fraction at a time, taking it in turns to push very slightly ahead to attract more deposits”.
He added that they’re also holding back, because of demand for loans.
Higham said: “As rates rise, people will be less keen to borrow at a higher rate, so they won’t need to raise as many deposits in order to fund the lending.”
Have rates peaked and should you fix now?
Given the recent rate rises, some people will be holding back because the market is set to rise further.
According to Hargreaves Lansdown’s research, the majority of savings is held in easy access accounts.
While this is the right place for an emergency fund of three to six months’ worth of essential expenses, Sarah Coles, senior personal finance analyst said, once you hold more than this, “it’s worth at least considering tying up some of the money in return for a higher rate of interest”.
However, she said this isn’t always an easy decision to make.
“When we surveyed people in April, half of those who had opted for easy access savings said they wanted to keep all their money handy just in case, while over a quarter said they used easy access because it made them feel more comfortable. Against a backdrop of high inflation, the energy crisis and political uncertainty, it’s hardly a surprise that savers are nervous. So, we need to be promised a massive boost to our savings rates in order for a fix to feel worthwhile. On average people said they’d need 4-5% more interest to consider fixing.”
As rates approach this figure, Coles said waiting for a better fixed rate “is a perfectly reasonable approach”, as long as you have answered two questions.
“At what point will you feel rates have risen enough for it to be worth fixing? And where will your cash be in the interim?
“It’s notoriously difficult to spot when rates have peaked, until after they have done so. So, if you hang on until it’s obvious, you’ll have waited too long. Instead, it’s worth making a decision about the interest rate you would be happy to fix at.
“If it takes months before rates hit this level, and your money is languishing in an account paying a fraction of 1%, you’ll be losing far more of the spending power of your money than you need to. It’s worth considering moving into a competitive easy access account – where you can currently earn up to 2.5% – until you’re ready to fix,” she said.