Savers are sacrificing better rates available by locking into long-term accounts and are instead opting for short-term accounts.
In research published in an independent white paper covering the savings market, traffic data from Moneyfacts.co.uk found that consumers were favouring one year fixed rate bonds over those with longer fixed terms. In fact, the research revealed that one year fixed bond traffic achieve a 44% share of total website visits* for fixed rate bonds, while five year fixed bonds was just 10%.
Along with the increase in popularity of short-term bonds, our research also found that the difference in the average rate being offered on one year fixed rate bonds and five year fixed rate bonds has narrowed in the past year. As the below table shows, during January 2016 the difference in average rates between one and five year fixed rate bonds was 1.17%, while during May this year it was just 0.39%. A similar picture can be seen within the ISA market, with the difference in average rates between one and five year ISAs standing at ISAs standing at 0.94% in January 2016, while during May this year it was down to 0.42%.
Savings market analysis - average rates
|Average one-year fixed rate bond
|Average five-term fixed rate bond
|Difference between one- and five-year bonds above
|Average one-year fixed rate ISA
|Average five-term fixed rate ISA
|Difference between one- and five-year ISA above
Commenting on the research, Rachel Springall, finance expert at Moneyfacts.co.uk, said: Savers appear to be eyeing up shorter-term bonds to acquire a competitive rate of interest, guaranteed to be paid for the next twelve months, and less so eyeing up longer-term fixed deals. As it stands savers may not want to lock their money away beyond a year and in fact, interest rates on five-year fixed bonds may not be enough for them to consider.
“The difference in rate offered on one-year and five-year bonds has fallen by two thirds between January 2016 and today which is a huge change, indeed the differential rate was 1.17% but it is now 0.39%. This means there is less incentive for savers to choose a five-year bond over a one-year option.
“A similar pattern can be seen on ISAs, so those savers who turn to these tax-free vehicles year on year will see less reason to lock their cash away for five years. Indeed, the differential rate has halved compared to four years ago in January, down from 0.94% to 0.42% today.
“In light of these developments, savers may well be rushing to secure a competitive rate over the next twelve months before rates worsen, and as it stands there may be less demand for long-term bonds as the months progress.”