Your piggybank is bringing home the bacon
The latest rise in interest rates is not all bad news: mortgage repayments will nudge up again but savers are being offered some of the juiciest deals in years. Paul Farrow picks the best
Savings rates are at their highest for six years following the Bank of England's decision to raise the cost of borrowing to 5.5 per cent.
It was widely expected that the Bank would increase base rate by a quarter of a percentage point - a decision that will cause misery for home owners who have tracker or standard variable rate mortgages. Borrowers with the average mortgage will now be spending more than £80 extra on their monthly repayments compared with a year ago.
But the interest rate rise - the fourth since August - is a huge fillip for savers. Savings account rates are at their highest since the first quarter of 2001, according to Moneyfacts, the financial analyst.
"With some great deals to be found, as rates hover around the 6 per cent mark, savers should stand up and take notice," says Lisa Taylor at Moneyfacts.
For example, Halifax is offering a one-year fixed rate bond at 6.35 per cent gross, Stroud & Swindon at 6.25 per cent and Birmingham Midshires at 6.23 per cent. Many fixed-rate deals would already have taken into account the Bank of England's decision in recent weeks.
But it is not just fixed-rate accounts that are paying top dollar. Icesave, the Icelandic bank, has moved swiftly and will pass on the latest rate rise on Friday to its internet-based account, which will pay 5.95 per cent gross. Heritable Bank will increase the rate on its easy access account to 5.81 per cent, also on May 18.
On the tax-free cash Isa front, rates are also breaking the 6 per cent barrier. Bradford & Bingley is offering 6.15 per cent, while Egg and National Savings are paying 6.05 per cent (NS&I increased its rate by 0.25 percentage points on Thursday).
Anna Bowes at AWD Chase de Vere reckons that for those who believe that interest rates have now peaked, a fixed-interest bond is an attractive option. "To be honest, some of the best rates are so competitive that even if the rates were raised again, they would remain competitive compared with the base rate," she adds.
Bowes says that higher-rate taxpayers in particular should scour the market. With inflation (as measured by the retail price index) at 4.80 per cent, higher-rate taxpayers need to find taxable accounts paying at least 8 per cent gross to avoid losing money in real terms. "It is particularly important for higher-rate taxpayers to use their Isa allowance and invest in their partner's name [if they pay a lower rate of tax]," she says.
Index linked certificates from NS&I are one way of circumventing the inflation problem, and they are paying rates not seen for three years.
Its three-year and five-year certificates now pay 1.35 per cent plus RPI. The return is tax free - so it's a savings vehicle that you know will always provide more than inflation, which is especially valuable for higher-rate taxpayers.
Put simply, basic-rate taxpayers would have to find an account paying 7.68 per cent gross to beat it, while those on the higher rate would need to dig out an account paying 10.25 per cent gross. Of course, inflation could fall in future, so returns may not always be this attractive.
It may take a few weeks for the dust to settle; only 18 out of 700 accounts have taken on board Thursday's rate rise, so before you jump ship it may be prudent to wait until all rate rises have been passed on.
It is unlikely that everyone will play ball. Many banks and building societies have failed to keep pace with the recent interest rate increases. According to Moneyfacts, a staggering 84 per cent of variable savings accounts pay rates below 5.25 per cent. The average rate on an account that requires a balance of at least £1,000 is 3.35 per cent, while accounts that need a minimum balance of £10,000 typically pay just 3.75 per cent.
The savings account climate may get even better if predictions that rates have yet to peak are realised. Andy Brunner, the chief investment strategist at global asset manager Forsyth Partners, reckons rates will rise to 5.75 per cent before the year is out, while KPMG says this week's Bank of England Inflation Report will give a huge clue as to whether rates have peaked.
"The Bank has finally delivered the 0.25 point rate rise it first mooted back in February - but we will have to wait the Inflation Report to see whether it still thinks this will be enough to meet the inflation target in two years' time," says chief economist Andrew Smith. "It is too early to call the peak of the rate cycle."
Ray Boulger of John Charcol, the mortgage broker, agrees: "The key question now is whether 5.5 per cent will indeed prove to be the peak. The publication of the Inflation Report will provide the best guide on this and so it seems sensible to hold off on drawing too many conclusions until then."
But Boulger says there are increasing signs that the last three rate increases are having an impact on the housing market and in particular on the number of new mortgage approvals for purchases, which has fallen over the past few months.
"The market is fully pricing in another increase to 5.75 per cent and so this is already priced into most fixed-rate mortgages. As it is probably close to its peak, borrowers who don't need the security or comfort of a fixed rate are likely to get better value from a tracker mortgage, so as to benefit from any bank rate falls next year."
Melanie Bien at Savills Private Finance also has an inkling that we are nearing the top of the rate cycle and that rates will start to fall towards the end of this year and the beginning of next. "If this is the case, you would be better off on a discounted variable or tracker-rate deal as these are currently cheaper than fixed rates, plus you benefit from any reduction in rates," she adds.
Source: telegraph.co.uk
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