The long wait’s over for savers as rates hit 5%

Savers who lock up their money for a year now can grab the best rates in more than 14 years.

Fixed-income bonds have regained momentum as interest rates continue to rise, with one-year deals surpassing 5 percent.

In recent months, savers have been faced with the dilemma of whether to repair or wait for better rates to come along. Those who waited were rewarded.

Last week, Shawbrook Bank trumped others by raising its one-year interest rate to 5.06 percent. It followed a slew of banks raising their fixed interest rates to 5 percent.

Close Brothers, Zopa Bank and United Trust Bank are now paying 5.01 percent on their one-year bonds, while Atom, Investec, Hampshire Trust Bank and Isbank through savings platform Raisin all offer 5 percent.

Savers who take out bonds today can get more than double the top rate offered 12 months ago — 2.4 percent. These are the best returns that savers have been offered in more than 14 years, according to interest rate monitor MoneyfactsCompare.

Fixed-income bonds surged after data released last week showed that inflation has remained higher than expected. Banks price their firm deals based on what they think will happen to rates over the next several years.

For example, they do not want savers to pay 5 percent interest in four years’ time if the interest rate has fallen to 2 percent. Last week’s inflation figures show that repeated Bank of England rate hikes have failed to suppress price rises.

Consumer prices rose 8.7 percent in the 12 months to April, up from 10.1 percent in March. However, financial markets had expected inflation to fall further to 8.2 percent.

Markets expect base rates to rise more than previously expected to 5.5 percent, with the next hike expected as early as next month. In response, two-year fixes have also crossed the 5 percent mark, with Close Brothers at 5.2 percent and DF Capital at 5.16 percent.

Some five-year bonds are now offering more than 5 percent, including Zopa (5.05 percent) and United Trust Bank (5.02 percent), a sign that banks expect interest rates to remain high.

Anna Bowes, of advice website Savings Champion, says savers now have a unique opportunity to secure a deal that is higher than inflation.

She says, “When prices are that high, if price increases slow down quickly, you could end up with a bond that pays nearly or even more than inflation for part or most of its life.” Experts warn that if you wait for even higher deals, you risk missing out.

Emma Wall, from Hargreaves Lansdown, says: ‘We’ve seen a lot of repricing and some really attractive fixed rates – especially in the one-year market.’

But she adds, “If you wait for better deals, you’re taking a risk. If the market overreacts, we may not see interest rates rise much in the coming months.”

Before you buy a fixed-rate bond, make sure you’re happy to commit your money and don’t need it during the term, says Ms. Bowes. You cannot withdraw money from well-paid bonds. And those who do will charge you a fine for it.

The cost is typically equivalent to 90 days of interest on a one-year bond, but can be as high as one year of interest on a five-year bond.

All the banks mentioned are covered by the Financial Services Compensation Scheme, so if one gets into trouble, investors will get back up to £85,000 or £170,000 in joint accounts.