The spate of interest rate rises from the Bank of England since December 2021 has significantly impacted the economy and people’s finances. The base rate has increased from historical lows to its highest level in many years, leaving millions of borrowers feeling the impact.
Many homeowners who are not on a fixed-rate mortgage have found themselves having to pay hundreds of pounds more each month on their mortgage payments as a result of the higher rates implemented by the central bank. Those with loans and credit cards have also seen repayments increase, with lenders and economists quickly passing on rate increases.
Many people on low-rate five-year or two-year fixed mortgages have faced a sudden shock due to their fixed-rate periods ending. Others still have the shock to deal with once their fixed-rate deals end and their monthly payments rocket. This is on top of the current cost of living crisis many face.
Finding an affordable mortgage deal has become difficult, significantly impacting buyers and those looking to remortgage. Fixed-term interest rates have rocketed, so many people will now be unable to afford the stability and security of this type of mortgage. For some, a variable rate or tracker mortgage is the only option, but with interest rates now so high, even a standard variable rate mortgage has become unaffordable for many.
The Monetary Policy Committee has been increasing rates as a form of aggressive action to bring down inflation, with members of the MPC stating that there was no other choice. However, the higher interest rates have left many borrowers in a challenging position, leaving a lot of households facing a financial crisis.
What about savers?
The Bank of England’s base rate increases have had a more positive impact on savers. Many have been able to enjoy far better rates due to the increases from the BOE, and some savings accounts are now offering the best rates seen for some time. However, one thing that has been noticed is that financial institutions such as Barclays, NatWest, and other High Street banks and building societies are far slower at passing on interest rate increases on savings accounts than passing on the increases on borrowing.
This means borrowers without fixed deals have had to deal with the impact of the rate increases immediately. In contrast, savers have had to wait longer to see any positive changes to their savings rates.
Of course, the level of the rate increase and the speed at which it is implemented varies based on a range of factors. This includes the type of savings product you have, such as an easy-access savings account or ISA, and the financial institution you use for your savings.
For easy-access account holders, rate rises have been prolonged. In fact, the Financial Conduct Authority (FCA) states that between January 2022 and May 2023, nine of the biggest savings institutions only passed on 28 percent of the base rate increases to deposits made to easy-access accounts.
But reports say those using a savings product such as a one-year account could benefit from a much higher interest rate.
One thing to remember is that since the pandemic’s onset, many people saved more money because they could not go out and spend during the lockdowns. This means that many people have built up more savings over recent years, and the upward rate change should spell good news for them because they get more interest on their money. However, the speed at which financial institutions apply rate hikes is where the problem lies.
It’s not uncommon for people to feel the impact of rate hikes on both their borrowing and savings. With debts like mortgages and credit cards to consider, many people wonder how these changes will affect their financial well-being. Many have noticed that when the Bank of England announces another rate increase, the interest on their borrowing goes up almost immediately. In contrast, changes to their savings rate take far longer. So, they end up feeling the negative impact of the rate increases immediately, while they must wait to feel the positive effect of the hikes.
Even the Governor of the Bank of England, Andrew Bailey, has said that banks need to be more proactive in passing on rate increases to savers, adding that the leading banks are resilient enough to deal with any economic downturn.
Finding the best savings accounts
One thing savers can do to ensure they get the best savings accounts and interest rates is research the available options. There are many online resources to assist with this, such as the comparison tool from Moneyfacts.
It’s essential to remember the protection offered by the Financial Services Compensation Scheme for your savings, which covers up to £85,000. If you’re putting away a significant amount of money, consider spreading it across different accounts. This way, you won’t exceed any savings account’s safeguarded limit.
There are a few key factors that you need to consider when it comes to finding a suitable savings account.
The interest rate
One of the things that most people look at is the rate of interest that will be paid on the savings account before making their choice. With interest rates having risen so much in the last couple of years, you can find accounts that pay a decent rate. However, you must also be mindful of the type of account you choose in addition to the interest rate, as you must ensure that it suits your needs. So, make sure you look at the interest rate before you make any commitment. Also, consider other aspects of the account relating to suitability for your specific needs.
Access to your money
Another crucial factor you need to consider when choosing a suitable savings account is how easy it is to access your money. Some people can afford to go for an account where the money is tied up for a specified period, such as one year, and this is great because it often means you can get higher interest rates. However, if you need more flexibility when accessing your money, use an easy-access account. Of course, the downside to this is the lower rate of interest you get.
So, before you make your choice, consider how easily you will need to access your cash and choose an account accordingly.
Terms and conditions of the account
Before you make up your mind, take the time to carefully go through the terms and conditions of the savings account. Pay special attention to how your interest rate could change if you make a withdrawal or if there are limits on how many withdrawals you can make. These details will give you important insights to decide if the account suits your needs. While many people tend to skip over the fine print, it’s a good practice to read everything thoroughly before you invest your hard-earned money in any savings account.
Some popular savings account options
If you are looking to open a savings account and optimise your personal finance to make the most of your money, there are many options for you to consider including:
Easy access accounts
An easy-access account is a good idea for those who want to access their money whenever they want without any issues or penalties. However, it is essential to remember that the interest paid on these accounts is often considerably lower than on many other accounts, even with the many rate hikes we have seen over the past couple of years. You can find these accounts easily through High Street banks and building societies, as well as through online providers and the Post Office.
Regular savings account
If you can commit to saving a minimum amount each month for a specified period, a regular savings account could be the right choice for you. This is an excellent idea if you want to get into the habit of putting money aside, and you will find that the rate of interest paid is often higher than with a standard easy-access account. However, you might not be able to deposit larger lump sums into these accounts, so you could miss out on the full benefits of the higher interest rate.
Notice savings accounts
Some people want to reduce the risk of withdrawing money unnecessarily, and one of the ways in which they do this is by choosing a notice savings account. You must give notice as specified in the account’s terms to gain access to your money. This could be 30 days or 90 days, for example. A notice savings account can pay higher interest rates because you commit to locking your savings away for longer. However, it can be an issue if you need to get hold of your money in an emergency.
With a fixed-rate bond, you put money into savings for a specified period and know immediately what you will get back at the end of the term. Because you are locking your money into savings, you can benefit from higher interest rates with this type of account. You also have the peace of mind that comes with knowing you won’t be impacted if interest rates fall. However, the financial penalties can be hefty if you dip into your savings before the bond matures.
A Cash ISA (Individual Savings Account) allows you to enjoy the benefits of tax-free savings and a secure and convenient way to save. You can save up to £20,000 per year tax-free with this type of account, which is ideal for those that want to avoid tax burdens on their savings. However, you might find that interest rates paid on your savings are relatively low compared to other options.
High-interest savings accounts
As the name suggests, these savings accounts pay a higher interest rate on your savings. These are perfect if you want to make your hard-earned money work for you rather than stagnating with minimal interest.
Interest rates vary between accounts
As you can see from the above examples of savings account products, interest rates can be higher with some types of accounts than with others. Typically, accounts that require you to make more of a commitment with regard to locking your money away are the ones that pay higher rates of interest.
It is crucial to ensure you research before making any decisions regarding the savings account you choose. This way, you can find one that suits your needs and pay a reasonable interest rate on your savings.
In the meantime, it remains to be seen whether lenders will start to pass on any further rate increases to savers with greater speed.