The continuing financial crisis is throwing up some great opportunities for savers. Banks and building societies are struggling to raise funds for mortgages on the wholesale markets: institutions are nervous about lending to each other in the current environment and this has resulted in a severe shortage of available money. Instead, they are striving to pull money in from savers.
The Bank of England cut the country’s official rate of interest from 5.5% to 5.25% earlier this month, yet savers can earn 6.50% – 1.25 percentage points above Bank rate – with Kaupthing Edge’s Instant Access account. When Bank rate was last at 5.25%, in February 2007, the most you could earn on an easy access account was 5.7% from Icesave, just 0.45 points above Bank rate.
In fact, there are a host of providers offering rates in excess of 6%. These include West Bromwich building society, which is paying 6.55% on its Star account, Northern Rock’s Online Tracker, which has a rate of 6.49% and ICICI Bank, which is offering a rate of 6.41% on its HiSave account. Alliance & Leicester and Abbey both have accounts paying 6.5% but you do not earn interest in any month you make a withdrawal – these accounts are therefore not suitable if you are wanting a savings account to dip in and out of.
Most providers have yet to announce changes to their savings deals following this month’s interest rate cut, so when you are comparing deals bear in mind that the rate could fall in the next few weeks.
Kaupthing Edge, an Icelandic bank that only launched into the UK savings market at the beginning of the month, has confirmed that it will not be reducing the rate on its instant access account. However, most other institutions will probably cut their rates and some will slash them by more than the 0.25 percentage point fall in Bank rate.
Banks and building societies often use interest rate changes as a chance to manipulate their margins, so savers need to be vigilant. Egg, the internet bank owned by Citibank, has cut the rate on its savings account by 0.5 points following the Bank of England announcement and others are expected to follow suit.
While savers can take advantage of some of the best rates for years, providers know that most won’t – they will just keep their money in the account it has been sitting in for years, regardless of what interest they are earning. Banks and building societies take advantage of this inertia.
Barclays cut some of its savings rates in January even though Bank rate hadn’t then changed. It will probably cut them again at the end of this month, now that the Bank of England has reduced the main rate. Other institutions including Halifax, Lloyds TSB and Natwest have employed similar strategies in the last six months.
There is no reward for loyalty in the banking game so you need to vote with your feet and move to another provider if you are not getting a good deal. This is particularly important at the moment, with such great rates available.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.