You are here: Home - Saving-Banking - News - Understanding -

Savings rate rises: The calculations showing the effect of ‘waiting for a better deal’

0
Written by:
10/10/2022
Savings rates are rising at pace but if you’re sitting on the fence and waiting to see if a better deal comes along before fixing your cash, these scenarios and calculations may help.

From easy access, to bonds, to ISA, savings rates have been on the rise since the start of the year.

And in the last few weeks they’ve really ramped up.

Currently, savers can get the following rates on easy access and fixed savings products, according to Savings Champion data:

  • 2.35% on an easy access account (expected profit rate)
  • 4.31% on a one-year bond
  • 4.62% on a two-year bond
  • 4.75% on a three-year bond
  • 4.58% on a four-year bond
  • 4.61% on a five-year bond.

Savers may be surprised to see that the three-year bond (4.75%), pays more than the best buy four-year or even five-year fixed rate deal.

Anna Bowes, co-founder of Savings Champion, explained: “This indicates the markets are expecting the base rate to rise further in the shorter term, but not over the longer term”.

Indeed, interest rates are forecast to reach 6% next year, according to market consensus.

Effect of a ‘wait and see’

With the expectation that rates will rise in the short term but not for the longer term, what does this mean for you if you’re considering depositing money in a fixed rate savings account?

Bowes said that for savers who are on the fence and leave their cash in a zero interest current account, rates will need to rise “quite significantly” in order to make up the lost interest.

Savings Champion calculations reveal that £10,000 deposited into the one-year bond paying the top rate of 4.31% interest would see savers earn £431 over 12 months.

But, if you leave your cash in a current account paying nothing for one month, you are missing out on £35.92 in interest (£431 divided by 12 months).

Therefore, waiting one month would mean you would need to earn £466.92 in interest to make up the time and interest rate lag (the £431 plus £35.92) which is the equivalent to earning 4.67%.

For those who wait two months, the loss of interest is starker as you would miss out on £71.84 in interest (based on £35.92 each month).

This means waiting two months would require the saver to lock in at a rate equivalent to 5.03% to earn £502.84.

Bowes caveats this by saying: “Of course, if the money is in a best buy access account [earning interest], the rate needed down the line won’t be quite as much.”

Fixing for three years

Based on the top-paying three-year fixed rate bond (4.75%), savers depositing £10,000 would see a return of £11,483.76, assuming compound interest.

Bowes explained that if instead savers put the money in a best buy one-year deal paying 4.31% and in a year’s time the best two year is paying 6%, then savers will earn more interest over the three-year period.

However, if the rates fall or remain the same, savers will lose out.

The table below highlights these calculations:

Bowes said: “The difficultly of guessing what will happen is that often bond rates have already priced in market expectations of further base rate rises.”

She added that very few bonds allow early access “so you really do need to be confident that you can tie up your money for the term, before you commit”.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week