Savers looking to lock their money into a short-term bond will be disappointed to learn that the average rate on a one year fixed rate bond has fallen below 1% for the first time in three years.
Data from the soon to be published Moneyfacts UK Savings Trends Treasury Report shows that the average rate on a one year fixed bond stands at 0.99%, its lowest since May 2017 when it was 0.98%. As well as this, the average one year fixed ISA rate has also fallen and now stands at 0.91%, the lowest it has been since June 2017 when it was also 0.91%.
This will have a significant impact on savers who locked their money into a short-term bond during 2018 or 2019, as they will find the savings rates currently on offer to be much lower. Rachel Springall, finance expert at Moneyfacts.co.uk, explained: “Those savers who are about to come to the end of their fixed bond may wish to prepare themselves for a shock, as they will find the top rates have dropped substantially over the years. Indeed, a year ago the top one year fixed bond paid 2.20% as an expected profit rate from Bank of London and The Middle East (BLME), but today the top deal pays 1.50% from Gatehouse Bank as an expected profit rate, 0.70% less. On an investment of £20,000, that is a total interest loss of £140. In May 2015 the top five year fixed bond paid 3.09% from United Bank UK (now UBL UK), so a saver coming off this deal and is now looking to lock their money away for five years with the top deal from Gatehouse Bank, that pays 1.85% as an expected profit rate, will note a difference of 1.24%, a total loss of £1,240 on a £20,000 investment over five years.”
Falling average rates have also impacted easy access accounts, with the average easy access rate dropping to 0.40% at the start of May, from 0.51% in April. This was the biggest fall since December 2012, three months after the Funding for Lending Scheme was launched. In April, a new Funding for Lending Scheme was introduced, which together with the historic low base rate cut that took place in March, could see easy access savings rates fall further over the next few months.
Springall added: “If savers are looking for some flexibility with their cash then they may turn to an easy access account, however as these pay a variable rate the return could drop at any point. In fact, the market is already seeing a domino effect of rate cuts, with some of the top deals worsening in recent weeks. Providers are perhaps cutting rates to deter deposits due to demand or find they are much higher up the rate tables than they can cope with. Indeed, according to the Bank of England £11 billion flowed into sight deposits (such as easy access accounts) during March.”
Savings market analysis - average rates
|March 2020||April 2020||May 2020|
|Average one year fixed rate bond||1.15%||1.09%||0.99%|
|Average longer-term fixed rate bond*||1.37%||1.28%||1.18%|
|Average one year fixed rate ISA||1.14%||1.04%||0.91%|
|Average longer-term fixed rate ISA*||1.29%||1.15%||1.07%|
|Average easy access rate||0.56%||0.51%||0.40%|
|Average easy access ISA rate||0.83%||0.79%||0.63%|
|Average notice rate||1.00%||0.97%||0.89%|
|Average notice ISA rate||1.13%||1.05%||0.89%|
*Longer-term bonds or ISAs are those with terms over 550 days. Average interest rates based on a £5,000 deposit as at the start of the month. Source: Moneyfacts Treasury Reports
In addition to the fall in average rates, product competition within the savings market has also fallen. During May, the total number of savings accounts, including ISAs, was 1,548, down from 1,588 in April and from 1,768 in March. In fact, the current number of savings products available is at the lowest level since February 2017, when there were 1,525 deals.
“As we had seen last month, savings providers pulled the most deals on a month-on-month basis since our electronic records began in 2007 and while the number of products to disappear month-on-month between April and May is less, deals are still disappearing,” Springall said. “The number of savings accounts overall has now fallen to its lowest point in three years. Choice is dwindling for savers, in fact 220 deals have now vanished since the start of March, which was before the lockdown and two base rate cuts.”
Savings market analysis - product count
|Product numbers and rates||March 2020||April 2020||May 2020|
|Number of live savings account options (including ISAs)||1,768||1,588||1,548|
|Number of live ISA options||417||340||336|
Source: Moneyfacts Treasury Reports
“Uncertainty over the Coronavirus pandemic, a new Government lending scheme and two base rate cuts have resulted in a perfect storm for savers,” Springall said. “It remains to be the case that the more unfamiliar challenger banks reign supreme in the top rate tables, but as they are not immune to making cuts, savers best not sit on the fence for too long to secure the best possible return.”
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