Savings rates have been falling over the past few months, and it’s widely expected that the Bank of England will finally cut the base rate very soon.
So, before rates drop even further, is now a good time to fix your savings?
While Bank rate remains at a 16-year high of 5.25%, analysts predict that it will be cut either at the next Monetary Policy Committee meeting in June, or at the following one in August.
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Exclusive research by Moneyfactscompare.co.uk reveals that average rates on one-year fixed savings accounts have tumbled from 4.87% at the start of the year to 4.58% today. In fact, one-year rates have fallen for seven consecutive months.
Average easy-access savings rates have fared a lot better, with only a tiny fall from 3.15% on New Year’s Day to 3.12% today.
However, banks are already starting to pull their top easy-access rates, such as Metro Bank and Santander.
The best easy-access savings rate right now is 5.2%, from Ulster Bank.
But according to Sarah Coles, head of personal finance at Hargreaves Lansdown, those rates are unlikely to stick around for long.
“Rates are dropping across the easy-access market,” she tells MoneyWeek.
“We’ve seen a number of key players slash rates over the past week, because they’re forecasting a rate cut from the Bank of England, and savings flows are strong enough that they can bring rates down and still attract the cash they need. As a result, there are only a handful of rates at or above 5% - and their days are numbered.”
Coles adds that Hargreaves Lansdown is starting to see a shift towards fixing rates with Active Savings clients “taking advantage while these deals remain”.
She says the proportion of people fixing in May is up 10% compared to the average for the previous three months.
With this in mind, is it a good idea to move your money into a fixed savings account now?
Are easy-access savings rates likely to drop?
Savers have enjoyed bumper returns over the past few years as the Bank has hiked interest rates.
If you’ve proactively moved to one of the best easy-access deals, you’ll probably be earning around 5%, enjoying a decent return on your savings and the ability to withdraw cash as you like.
But the drawback with easy-access rates is that providers can change them whenever they like. In other words, get ready for your easy-access savings rate to suddenly drop.
James Hyde at Moneyfactscompare.co.uk tells MoneyWeek: “Variable savings rates have remained much more stable [than fixed-rate accounts] in recent months, but with base rate reductions expected this year this may not be the case for long. Providers tend to operate with a more short-term view regarding their variable rates, which means changes can be made very quickly on a reactive basis.”
Should I move my money into a fixed-rate savings account?
If you’re happy to tie your money up for at least six months, then it could be a wise decision. Although your money will be locked up for the duration of the term, the interest rate is guaranteed.
The best one-year savings account and best easy-access deal actually pay exactly the same interest rate at the moment, of 5.2%.
You may think the easy-access deal is a better bet, as you can access your cash easily. But against a backdrop of predicted Bank rate cuts, this rate is unlikely to still be paying 5.2% in a year’s time. In fact, it could be slashed in a matter of months, or even weeks.
In contrast, if you take out a one-year bond today you know that you’ll receive that interest rate for the full 12 months.
Hyde comments: “The certainty offered by fixed-rate bonds can make them an attractive option for consumers who wish to be sure about the amount of interest they will gain, but the lack of access to your cash means people should think carefully about their circumstances before locking into a deal.”
According to Coles, “it makes excellent sense to consider fixing, if you don’t need the money for a fixed period, so you lock in these rates for a set period – regardless of what the Bank of England does next.”
She adds: “There are still some great deals around in the fixed-rate market, including some over 5%. We can expect these rates to keep dropping, so this could be your last chance to lock in above 5%.”
What about a shorter fixed-rate account?
Most people think of one-year bonds when they think about fixed-rate savings accounts. But you can get shorter bonds, like six months and nine months.
Gatehouse bank offers the top six-month bond, at 5.22%. Interestingly, this is higher than the best easy-access or one-year savings rates.
Before the savings boom of the past two years, savers generally got a higher return, the longer they fixed for. This trend has now been turned on its head, with short-term bonds promising the best interest.
Meanwhile, ICICI Bank UK pays 5.21% on its six-month account, and Kent Reliance pays 5.16% on its six-month bond.
Coles says these shorter-term fixed rates provide the best of both worlds: a decent rate without giving up access to your cash for too long.
“Shorter-term fixed rates, over anything from three to nine months, are well worth considering if you don’t need the money immediately, but don’t want to tie it up for a year or longer.”
If you only care about getting the best rate, then an account lasting less than a year could suit you well.
For example, maybe you’re sitting on some cash to pay a tax bill or to fund home renovations, and you want to get the highest return before you spend it.
The top nine-month bond pays 5.14%, from Charter Savings Bank, according to Moneyfactscompare.co.uk.
Note that some of these deals can only be accessed on a platform, such as Hargreaves Lansdown Active Savings or Raisin UK, rather than direct with the savings provider.
Hyde adds: “A short-term fixed deal may be an appropriate option for those wishing to guarantee an attractive rate of return while keeping their options open going forward.
“It remains crucial that people continue to review their options, and be willing to act swiftly if they see a deal that works for them.”
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