Savers looking for a haven for their cash have long turned to fixed rate bonds to get the best returns, and now they have even more reason to; these deals have improved substantially since the start of 2017, so much so that our latest figures reveal the average return on five-year fixed bonds has now breached the 2% mark for the first time since July 2016, having stormed beyond the record low seen in January 2017.
It's been a good year for long-term bonds, as the table below highlights. The average five-year rate fell to just 1.67% at the start of the year – its lowest ever recorded level – having plummeted following the base rate cut the previous August, but the tables are starting to turn. Indeed, the average has now risen by 0.08% in a single month and also marks a notable rise of 0.33% from this time a year ago, and savers can reap the rewards.
You only need to look at the best savings rates available to see how much better off savers can now be. In January, the best of the bunch paid a mere 2.05%, and it still asked you to lock your money away for half a decade. Now, you can get a long-term bond paying 2.50% for the same five-year commitment – and this ramps up to 2.55% if you're willing to tie up your cash for seven years.
As the table below shows, Paragon Bank is the leader of the pack if you've got at least £1,000 to invest, or if you've got a more substantial sum (at least £25,000), you can also secure an expected profit rate of 2.50% from BLME. Chances are, most of the names won't be that familiar to you, but don't let that put you off – high street banks rarely pay the best savings rates, so it could be time to look elsewhere.
*Note: This bank operates under Islamic finance principles, so the rate displayed represents the expected profit rate.
"Savers looking to get the best possible return over the next few years may well turn to five-year fixed bonds, as they offer some of the highest guaranteed returns," said Rachel Springall, finance expert at moneyfacts.co.uk. "While these deals are an attractive choice, some savers may hesitate to invest because interest rates are expected to rise further next year, but it's worth remembering that it's taken a decade for the Bank of England to increase base rate."
On top of this, Government lending initiatives have been dampening the savings market since 2012 – providers have been using such schemes to draw cheap money to lend to consumers in the form of mortgages, which means they've had no need to rely on savers' deposits for the same thing. Essentially, borrowers have benefited in the form of cheap mortgage rates, but the same initiatives have sent savings rates plummeting.
"Now that the Government has given the go ahead for the Bank of England to raise the size of the Term Funding Scheme (TFS), the most recent lending initiative, by £25bn, prospective borrowers will likely see competition in the mortgage market continue, with savers continuing to pay the price," said Rachel.
But that's where challengers come in. Many of these smaller banks haven't used or simply aren't eligible to draw on the Government's cheap lending stream, which means they still need savers' cash to fund their mortgage activity – and they're getting that cash by offering decent savings rates.
"Challenger banks are still keen to attract new savers and increase the amount of cash invested by existing customers, such as Atom Bank who recently announced that they are seeking millions more from investors," continued Rachel. "As we move into 2018, we can expect to see yet more decent offerings as these newer banks aim to draw in new business, with long-term fixed bonds a firm favourite.
"Indeed, due to the leap-frogging of challenger banks in the Best Buys, the average rate has now surpassed 2% for the first time since July 2016 (when it was 2.05%). Savers with £10,000 to invest can even find rates as high as 2.50%, and unsurprisingly, every deal in the top five comes from challenger banks."
However, not everyone will be inclined to invest in a five-year bond right now, with some instead opting to wait and see what the New Year brings. After all, won't savings rates continue to rise, in line with base rate?
Unfortunately, it may not be that simple. Not only have savings providers been slow to pass on the latest rate rise, but many still have huge reserves of cash from the TFS, and they have four years in which to repay those borrowed sums. This means that it could be quite some time before the savings market fully rejuvenates, and with challengers tending to withdraw their best deals as soon as they've got the necessary deposits, there's no guarantee that these top deals will remain on the market.
Rachel spells it out: "If savers wait too long, they could end up missing out on some of the best deals we have seen in over a year." So don't hang around! Check out our Best Buys or use our savings search tool to take advantage of the best savings rates out there, and see if you can find the perfect deal for your long-term needs.
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.