>
The products in this article have been independently selected by This is Money’s specialist journalists. If you open an account with links marked with an asterisk, This is Money earns an affiliate commission. This should not affect our editorial independence.
Savers reach a crossroads when it comes to deciding where to put their money.
The best fixed-rate savings deals are fast approaching 5 percent and may tempt an increasing number to take cash away from easily accessible savings accounts.
Over the past two years, savers have largely focused on keeping money within reach due to the lack of incentive to fix, with low rates.
Decision time: Depositors typically feel they need to earn between 4 and 5 percent more interest than their existing easily accessible rate to make their savings worth a year.
In July, four in five Britons held their savings in a standard easy-access deal or easy-access cash Isa, according to Paragon Bank’s analysis of more than 30 leading savings providers.
However, according to Paragon, it has seen a shift in recent months, with many more savers switching to fixed-income deals in search of higher returns.
Hargreaves Lansdown, Active savings platform* has also seen this trend develop in recent months.
Right now, about 80 percent of all new money entering the platform goes into fixed-term deposits. This is an increase from about 50 percent a year ago.
Sarah Coles, of Hargreaves Lansdown, said: ‘We are quickly reaching the turning point in the savings market.
“The gap between what we earn with our money and what we could earn in a fixed-income account is reaching the point where people say they’re willing to fix.
“The vast majority of our savings are in easily accessible accounts, and while this is the right place for an emergency fund of between three and six months’ worth of essential expenses, once you own more than this, it’s worth looking into at the very least consider capturing some of the money in exchange for a higher interest rate.’
When Does a Fixed Income Deal Become Worthwhile?
According to a survey conducted by Hargreaves Lansdown earlier this year, savers typically feel they need to earn between 4 and 5 percent more interest than their existing low-threshold rate to make their savings worth a year.
For many, with cash tied up in savings accounts that pay 0.5 percent or less, it could mean the time for a transition to a fixed rate is now.
A whopping £461 billion is dwindling in easily accessible deals that pay less than 0.5 percent, according to Paragon Bank, while another £267 billion is being stashed in checking accounts that yield no interest at all.
The best one-year fixed income deal on the market currently pays 4.15 percent, thanks to Investecwhile rural has just launched a 4.75% three-year deal.
Coles adds, “For someone whose money is languishing in an easily accessible savings account in a branch, the rates are knocking on that door.
“Most pay about 0.4 percent, so switching to the most competitive one-year fix would earn them 3.71 percent more interest. Those in Barclays Easy Saver could earn 3.95 percent more.”
However, moving from easily accessible savings to a fixed-rate deal isn’t always about the rate on offer.
Half of those who use easily accessible savings do so to have all their money on hand in case they need it, according to an analysis of Hargreaves Lansdown’s research, while a quarter stick to easy access because it gives them a feels more comfortable.
The fact that interest rates are rising almost daily will also tempt savers to take a wait and see approach, especially if fixing now could mean missing out on even better deals in the future.
Comes the hour: 80 percent of all new money that goes into Hargreaves Lansdown’s savings platform goes into fixed-term deposits. This is an increase from about 50 percent a year ago.
For those who prefer to save easily, it would be worth making sure their money is with a provider that pays a top rate.
While many of the major banks pay pitiful returns to savers, the best easily accessible savings rates have risen as high as 2.5 percent, with more than 13,300 raises on variable accounts in the past nine months alone.
Yesterday Nationwide Building Society raised the rate on its one year triple access online saver to 2.1 percent over 12 months.
This ranks it among the highest paying, easily accessible deals on the open market, surpassed only by Al Rayan Bank’s 2.35 percent deal and the Yorkshire Building Society’s 2.5 percent deal – although the latter is only on deposits to £5,000.
It’s worth pointing out that rates, whether for easily accessible or fixed-income savings, are nowhere near the annual inflation rate, which currently stands at 9.9 percent.
This means that the value of UK savings is still being eroded in real terms.
How high will the rates go?
Despite interest rates surpassing their 10-year high, many will hold back on the expectation that the market will rise further.
Swap rates suggest that one-year fixed deals will hit 5 percent in the coming months.
Swap rates are an agreement in which two counterparties, such as banks, agree to exchange one stream of future interest payments for another, based on a fixed amount.
In simpler terms, swap rates show what financial institutions think the future will bring regarding interest rates. Lenders essentially hedge their bets against what can happen to interest rates over different time periods.
As swaps rise, savings rates tend to rise. Conversely, if they fall, savings rates tend to follow suit.
Swap rates have risen dramatically over the past three months as the market assumes that rates must continue to rise to curb inflation.
Tom Higham of Hargreaves Lansdown, said: ‘We can look to the interest rate swap market for an indication of more realistic prices of money on different terms.
Banks use these markets to manage interest rate risk by changing their exposure between variable and fixed rates, just as individuals could use fixed-rate mortgage agreements to lock in a rate.
“Right now, the market price for 12-month swaps is close to 5 percent. That is still 3.5 percent at the end of August.’
Higham explains that a lot depends on the competition between challenger banks and the amount of money they have to attract from savers to fund their lending activities.
He adds: “This is not going to happen overnight. No bank wants to pay more than it takes to attract new deposits, so they increase a fraction at a time, taking turns pushing forward a tiny bit to attract more deposits.
“They also hold back, because on the other side of the equation is the demand for loans. As interest rates rise, people will be less likely to borrow at a higher interest rate, so they will have to accumulate fewer deposits to fund the loans.
“However, there are a few things that speed it up. If a bank breaks the rankings in an effort to attract significant deposits, it will encourage others to follow suit and raise rates.
Meanwhile, if a much larger bank is one of the most competitive on the market, it creates even more unrest.
“They will take up too much of available deposits, putting more pressure on those just behind it to lead the way, driving savings rates up faster.
“So looking at who at the top of the rate tables can also help indicate what’s likely to happen.”
Some links in this article may be affiliate links. If you click on it, we can earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.