Moneysupermarket.com editor Clare Francis chats with savings expert Kevin Mountford about changes seen due to the current credit crunch. Banks struggle to raise funds for loans & mortgages, but meanwhile savings are becoming more attractive with higher rates...
Video Transcript
Clare Francis: Many households are struggling to cope with rising living costs at the moment, but if you have got money to spare it's a great time to be a saver.
The Bank of England cut interest rates to 5% earlier this month, but many banks and building societies are still struggling to raise funds for loans and mortgages because on-going credit crunch. Consequently they are offering some highly competitive savings deals in order to try and attract retail money in from savers like you and me.
I'm with Kevin Mountford today, who is head of savings here at moneysupermarket.com, to ask what's going on.
Q1: So Kevin, savers have really got it good at the moment haven't they?
Kevin Mountford: They certainly have, I mean we have seen a couple of base rate changes but that's not necessarily been reflected in the best buy products that are available in savings. At the moment we have got several products in easy access offering 6.5% and that is 1.5% more then bank base rate, and I don't think we have ever had a gap like that before.
Q2: So who is offering the best rates at the moment?
Kevin Mountford: Typically an easy access of 6.5% AER is the best and there are several players now offering that. Just before the last bank base rate increase then Abbey announced the fact that their account went from 6.25% AER to 6.5% AER. Alliance and Leicester have got 6.50% AER, and the Icelandic provider Kaupthing Edge previously had 6.50% AER but have actually come out and declared that fact they are not going to be changing this as a consequence of the latest reduction in base rate.
Q3: Because Alliance and Leicester hasn't yet announced its new savings rate has it, so its interest rate could fall?
Kevin Mountford: It could, and in fact quite a number of providers still haven't declared their intention. Typically what you get after a bank base rate is a series of communications, that are generally going to be implemented over the weeks up until the 1st of the following month when most of them change; but I think what we have found in recent months is that they are keeping that intention close to their chest, so we are not getting to know about changes until maybe a couple of days before they are actually applied.
Q4: Obviously we have had an interest rate cut this month, which is the third since December, and many economists are expecting further rate cuts during the course of the year. Does that mean it's a good time to be fixing your savings?
Kevin Mountford: Yes, I mean fixed rates are very strong at the moment, and basically the banks have attracted a lot of easy access money but clearly that money can leave as quickly as it comes in, so they are trying to balance the risk by having a degree of fixed-rate products available. The economic commentators are suggesting that base rate - if anything - is going to reduce even further, so its actually a good time, if you are able to, to lock some money away. We have got rates at the moment, 1 year rates pushing at nearly 7%, so again if you look at the gap between that rate and bank base rate, it really does suggest that it is a good option.
Q5: Obviously there are some amazing savings deals available at the moment but a lot of people are nervous because of the on going credit crunch and rumours about the stability of certain institutions - what advice would you give to them?
Kevin Mountford: I think it's a really good point that you raise, because pre- the northern rock situation, which was the back end of last year, I don't think anybody really worried about whether their savings were safe or not. I mean clearly that has changed, and it has been highly reported that there is concerns, especially about some of the overseas banks that are now operating in the UK, but we do have the financial services compensation scheme, which basically means that the first £35,000 of your savings are safe. What I would suggest is that if you have got more money then that you really do look to spread around, regardless of which provider and which country of origin that they come from.
Q6: And because there are so many rates above 6% at the moment presumably you can spread it around and still earn a great rate on all of your savings?
Kevin Mountford: Yes, and going back to the earlier point about getting a good return on your investment, the one thing that people often forget to consider is the impact of the tax on the interest, so your net rate is a lot lower then your headline rate. Bear in mind we have got an RPI (retail price index) at around about 4%, so a net return should at least be as much as that so I am guessing that you need to be looking at maybe 5.50% as a minimum headline return, just to turn a positive and inflation-proof your savings, but as you rightly say there is lots of options at 6% and above, so first of all I would be looking at those.
Clare Francis: Brilliant, thank you very much Kevin.
Kevin Mountford: Thank you.
