Is now a good time to choose a fixed rate savings bond?
Each month, James writes a column in Around Town Magazine which goes out to 50,000 homes in Essex. This is his October article.
One of the questions I am asked most regularly is whether the time is right to put money in to a fixed rate bond. Human nature being that nobody wants to lock their money up in a fixed rate, only to find a better offer comes along just after you’ve locked yourself in.
The short answer to this question is that nobody really knows! That might sound strange coming from someone who is supposed to be an expert in this area! The reality is that if you, I or anyone could predict or know with certainty what was going to happen in the financial markets then we’d have more than enough money to be doing something else with our time as we’d be extremely wealthy.
The good news is that there are factors we can use which give us a good indication. The main ones historically being:
- What is happening to the Bank of England Base Rate
- Regulatory or political intervention in the markets
- What competition is there in the market
Taking the first one, just as there has been a correlation between the price you pay on your mortgage in relation to what the Bank of England Base Rate is, a similar trend has followed in the savings market. Interest rates on savings have broadly followed (up or down) the base rate. However, since the financial crisis of 2008, savings rates have largely decoupled from this. To give an example, in 2007 when the base rate was 5.75%, savers could earn 6.05% on a 1 Year Fixed Rate Bond with Birmingham Midshires and 5.70% on instant access – heady days!
Roll forward a decade and with base rate at 0.25%, this would imply a top rate instant access account of just under 0.25% and a best buy 1 Year Fixed Rate Bond of 0.55%. The actual best buy rates in our tables are 1.26% on Charter Savings Easy Access account and 2% on 1 Year from Bank of London & The Middle East. The intervening period has seen a break of this historic trend of savings rates to broadly follow base rate.
Will we see a Bank of England Base Rate rise this year?
The financial markets and many media commentators are expecting to see an increase in the base rate this year with the consensus being for this to be in November. While this will be of interest to all of us that have mortgages to pay, for the reasons outlined above, it is unlikely to have any positive impact on savings rates - if it happens.
Mortgage rates are at record lows and savings rates are close too. This means that many banks are seeing their net interest margin (the difference between what they pay in interest to savers and what they charge in interest to borrowers) squeezed. Therefore, it is likely that any increase in base rate will be used by many banks to increase their net interest margin by passing on the increase to borrowers but not savers.
Are there likely to be any political or regulatory interventions in the market?
In recent years, we have seen several changes in the savings market with new types of ISA (individual savings accounts), increase ISA allowances (you can now save £20,000 this tax year in ISAs) changes to taxation of savings interest (the new personal savings allowance) and the governments Funding for Lending Scheme (FLS) which has provided banks with substantial sums to lend.
This is a large amount of change and with the work going on to prepare the UK for Brexit and the fact we have a government with a small majority, it is unlikely we will see any real changes to the savings market that may impact on interest rates for savers.
So, this leaves us with competition as the hope for an improvement in savings rates.
What has the competition done for savings rates in 2017?
Competition has had a significant impact on the savings market in 2017. Since the financial crisis of 2008, we have seen over 40 new entrants to the savings market in the UK. This is a mixture of new UK banks, European Banks entering the UK market and some existing banks entering the savings market for the first time. Our best buy tables have been dominated by many of these new banks who have competed hard to attract new savers.
At the start of 2017, the best instant savings rate was 1.10% from RCI Bank (owned by French car giant Renault) whereas today it is 1.26% from Charter Savings Bank (up 15%). Atom Bank was paying 1.40% on a 1 Year Bond where today Bank of London & Middle East pay 2% (43% up). Ikano paid 2.05% for 5 Years in January and Bank of London and Middle East pay 2.50% now (22% up).
What has driven this change is the competition from these new entrants in the market. 2017 has also seen an influx of new entrants with the likes of Ford Money, PCF Bank, Wyelands Bank and Redwood Bank all join the competition for savings.
There are believed to be over 20 new banks in the regulatory process of applying for a licence so competition is only likely to increase.
So, is now a good time to lock in to a Fixed Rate Bond?
At the turn of this year, I was asked by the Daily Mail to predict what would happen this year to rates and I said that I expected savings rates to rise by 0.25 – 0.50% and 10 months in to the year that’s broadly in line with where we are. Given that it is competition, rather than other factors currently driving the market, future increases are likely to be determined by what the existing banks do and the growth in new entrants.
Given the increasing competition in the market now, and likelihood of seeing more newcomers, I wouldn’t be surprised to see similar increases in the region of 0.50% in the next 12 months. If you share my view, now is perhaps not the time to be locking away in long term fixed rate bonds. With the best 1 Year rates paying 1.80% – 2.00%, there’s a significant premium on the best instant savings rate of 1.26% so this may be a good option for those seeing to get a better return now but not wanting to miss out if rates rise in the future.
Competition Time – win a £50 restaurant voucher
- Which university do we support with scholarship funding?
- Which financial advice site interviewed us on 27th September 2017?
The winner will be announced in next month’s edition!