With rising inflation and savings rates hitting historic lows, the first seven months of 2021 has been a challenging time for savers. Saying this, 2021 is providing some optimism for savers as rates started to stabilise at the end of spring and have started to rise over the summer.
Average rates often give a good overview of what is happening in the savings market. At the start of the year, the average rate on easy access savings accounts stood at 0.18%. This fell to 0.17% in February and fell further to a historic low of 0.16% in March and remained at this rate until June. Since then, the average rate has increased slightly to stand at 0.17% in July.
Similarly, the average one year fixed bond and longer-term fixed bond rates reached historic lows earlier this year. At the start of 2021, the average one year fixed bond rate stood at 0.49% and fell to 0.46% in February. The rate continued to fall until it reached a historic low of 0.42% in April but started to rise again the next month to stand at 0.44% in May. The average rate continued to rise to stand at 0.52% in July.
Again, the average longer-term fixed bond rates reached a record low this year when it fell to 0.65% in March, where it remained in April. The average longer-term fixed bond rate stood at 0.70% in January but consistently fell in subsequent months until it reached the record low. After April the average rate began to rise, resulting in it standing at 0.77% in July.
Average rates, however, only tell part of the story as higher than average rates are available to savers. This means that to get a clearer idea of what has been happening in the savings charts this year, we’ve also compared the top rates available in January to the top saving rates currently available in the charts.
On 8 January 2021 the top easy access savings rate was 0.60% AER, which was being paid on two easy access savings account. The next best rate was 0.55% AER, again available from two easy access savings accounts. Interestingly, despite the average rate being slightly higher in January, the top two easy access savings account rates are also 0.60% AER and 0.55% AER. Skipton Building Society currently pays 0.60% AER on its Triple Access Saver Issue 1 and Online Triple Access Saver Issue 1. Meanwhile, Coventry Building Society pays the next best rate of 0.55% AER on its Limited Access Saver (Online) (5).
Along with top rates, many well-known high street lenders are continuing to offer rates from as low as 0.01% including Santander, NatWest, Nationwide Building Society and Lloyds Bank. This highlights that savers can still be missing out on better rates if they are not switching to higher paying easy access savings accounts.
Savers looking for a top paying fixed rate bond at the start of the year found that they had to lock into a seven year bond from Shawbrook Bank which paid 1.35% AER. Today, however, savers looking for the top paying fixed rate bond will be able to get a rate 0.35% higher on JN Bank’s Fixed Term Savings Account which pays 1.70% AER on a five year term.
Meanwhile, at the start of the year, the top paying one year fixed rate bond was paying just 1.00%, which came from Ahli United Bank (UK) plc. Again, the top paying one year bond rate has increased since then, but savers may still be disappointed to see that it is currently just 0.10% higher than what was available in January, with Gatehouse Bank paying an expected profit rate on the one year version of its Fixed Term Green Saver.
Although savings rates are increasing, savers will also likely have noticed that inflation has been rising as well. In February we reported that the Consumer Price Index (CPI) stood at 0.7% in January and at the time 122 savings accounts could match or beat inflation. The most recent inflation figures, however, showed that in June the Consumer Price Index (CPI) rose to 2.5% and no savings accounts can currently match or beat inflation. For savers this means that inflation could erode their savings if their money remains in accounts offering below inflation rates.
While rising inflation will be a disappointment to savers, there is the strong possibility that rates will continue to rise in the coming months as market conditions seem positive, for example, banks and building societies needing to secure funds to cope with the higher demand in mortgage lending. Derek Sprawling, savings director at Paragon Bank, explained: “We have started to see interest rates edge up over the last few weeks, which is great news for savers. This upward trend is being fuelled by challenger and mid-tier banks, which are reacting to market forces and driving prices up for savers. There are a few factors at play here.
“Firstly, the stamp duty holiday drove the number of housing transactions to a record high. Rate increases across the savings market are indicative of higher lending requirements as financial providers fulfil this record number of completions. The deadline for the £500,000 threshold has recently ended but the stamp duty holiday is still available on properties of a value up to £250,000 until the end of October, so it’s possible this trend will continue to impact the market until at least autumn.
“Our market analysis also shows that the ‘Big 6’ high street banks have been offering very low rates throughout 2021. Despite their uncompetitive position, a large amount of growth continues to sit with those banks. As ever, challengers and mid-tier providers like Paragon are tempting customers away from the biggest banks with an opportunity to more than double their returns. That seems to be working as we continue to see the most competitive rates not lasting long.
“Finally, we saw the pandemic create a nation of ‘accidental savers’ with many people pumping additional savings into easy access or current accounts. Those product categories have seen the biggest volume growth over the course of the last year. On the other hand, the fixed rate market reduced over the course of the pandemic, which will have fuelled rate increases within this product category. However, we have seen some providers have quickly repriced back down after moving up temporarily, which indicates strong take-up of the products from savers when they are at the right rate.”
It is clear that although savings rates may continue to edge up over the coming months, savers still need to act quickly to secure the best rates as banks and building societies will likely continue to see their funding limits quickly reached on their top-paying accounts.
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