Savers begin to reap rewards of higher rates

29 June 2009

After months of low returns on their money, savers are starting to see an upturn in their fortunes.

A number of savings accounts are now offering interest rates as high as 5 per cent. Interest on five-year fixed rate bonds have climbed by an average of 1.13 per cent since March, and those on one-year bonds have seen an increase of 0.31 per cent during the same period.

This is despite the fact that the official base rate is glued at 0.5 per cent.

The reason for the generosity of banks and building societies is that money market ‘swap rates’, which set the cost of fixed-rate mortgages, are rising. This is not good news for borrowers as lenders tend to push up the price of mortgages, But it makes happier reading for savers as swap rates also determine the value at which fixed-rate savings accounts are set.

However, Andrew Hagger at Moneynet.co.uk warned that, though there are good deals out there, savers will have to be prepared to tie up their money away for a reasonable length of time to exploit the higher interest rates but should also be mindful that rates look as if they will continue to rise in the future.

Mr Hagger said: “To get anything really decent, you do have to take a fixed rate. I wouldn't want to lock into anything much longer than two years at the moment, because at some stage we are going to see an upturn in rates.”

Michelle Slade of Moneyfacts commented: “In this low interest rate environment, 5 per cent is extremely competitive but savers need to balance this return against expected rate rises in future years. There doesn’t seem to be any limit to how high providers are prepared to go.”