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Challenger banks are driving rate rises

Challenger banks are driving rate rises

Category: Savings

Updated: 16/12/2015
First Published: 16/12/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Following another month of minimal activity in the savings market, our latest figures show that average rates have fallen across the majority of sectors. However, there is light at the end of the tunnel: the average notice rate is bucking the trend and has actually risen in the last month, and it's a divergence that's been wholly driven by challenger banks.

First, the bad news

Unfortunately for savers, the fixed sector of the market has seen the most significant reductions this month, and notably, it's the first time that all fixed rates have fallen since January this year. The average one-year fixed rate recorded the most substantial drop of 0.05% to 1.46%, returning to the level seen in September, while the long-term rate fell by 0.02% to stand at 2.09%.

It's a similar story in the ISA sector – the average one-year ISA rate fell by 0.01% to 1.45%, while the long-term equivalent fell by a more substantial 0.03% to 1.95%. Both ISA rates remain among the lowest seen since we first began recording this in 2007, and there's no sign of any reversal of fortune in the near-future, either, particularly with the change in tax rules set to come into force next year.

It wasn't great news in the variable sector, either: the average no notice ISA rate remained unchanged at 1.09% while the notice ISA rate fell by 0.01% to 1.20%, and the no notice (non-ISA) rate fell by the same 0.01% to 0.65%.

And now the good!

Although the rest of the market is stagnating, we do have one piece of good news, as the average notice rate has actually risen! The average has increased by a notable 0.04% this month to stand at 0.84%, reversing last month's drop and returning it to the joint-highest level recorded since May 2013 (0.86%). That's a definite improvement!

Interestingly, this increase was almost exclusively driven by providers in the challenger sector of the market: Hampshire Trust Bank and Secure Trust Bank both launched new notice accounts in the last month, while Shawbrook Bank replaced its products with new issues paying increased rates.

What's even more interesting to note is that challenger banks also raised rates in the fixed sector of the market, but it wasn't enough to outweigh the number of rate cuts that were made by mainstream providers. In this sector, high street banks dominate – they have far more fixed rate products than their challenger counterparts, so their pricing will have more of an impact.

The sheer number of rate cuts and withdrawals by mainstream providers – including Barclays, Nationwide, NatWest and Yorkshire Building Society – in the last month meant that challengers couldn't compete, with their higher rates largely insignificant on such a wide scale. However, this isn't the case in the notice sector.

Challengers taking over the notice sector

Here, challengers have the power to drive change in average rate for the simple reason that the sector is so small, and is primarily comprised of challenger banks themselves. Take a look at the best buy chart and you'll see what we mean.

In essence, challengers are keeping the notice sector going: mainstream providers aren't so active in this area, and as a result, the pricing of challenger banks is having a more noticeable, and positive, impact. They're still actively competing as they have a clear need to raise capital, something that doesn't concern mainstream banks, who are showing no appetite to attract savers' cash. It's only challenger banks that are moving in the opposite direction, and this pattern is likely to remain for the foreseeable future.

So, is it time to get in on the action? Challengers are beating the big names in just about every savings sector going, and even if they don't have the power to alter average rates, they still have the power to offer decent ones. So, next time you're searching for a savings account, make sure to consider these lesser known names, and see if you can find a better deal.

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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.